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Rule No. 424(b)(3)
Registration No. 333-08461
PROSPECTUS SUPPLEMENT
FULTON BANCORP, INC.
FULTON SAVINGS BANK, FSB
RETIREMENT TRUST
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the Fulton Savings Bank, FSB Retirement Trust (the
"Plan" or the "401(k) Plan") of participation interests and shares of Fulton
Bancorp, Inc. common stock, par value $.01 per share (the "Common Stock"), as
set forth herein.
In connection with the proposed conversion of Fulton Savings Bank, FSB (the
"Savings Bank" or "Employer") from a federally chartered mutual savings bank to
a federally chartered stock savings bank, a holding company, Fulton Bancorp,
Inc. (the "Holding Company"), has been formed. The simultaneous conversion of
the Savings Bank to stock form, the issuance of the Savings Bank's common stock
to the Holding Company and the offer and sale of the Holding Company's Common
Stock to the public are herein referred to as the "Conversion." The Board of
Directors of the Savings Bank has amended the 401(k) Plan to permit a one-time
investment of the Plan assets in Common Stock of the Holding Company. The Plan
will permit Participants to direct the trustee of the Plan to purchase Common
Stock with amounts in the Plan attributable to such Participants to a maximum of
50% of a Participant's vested account balance at December 31, 1995. This
Prospectus Supplement relates to the election of a Participant to direct the
purchase of Common Stock in connection with the Conversion.
The Prospectus dated September 6, 1996 of the Holding Company (the
"Prospectus") which is attached to this Prospectus Supplement includes detailed
information with respect to the Conversion, the Common Stock and the financial
condition, results of operation and business of the Savings Bank and the Holding
Company. This Prospectus Supplement, which provides detailed information with
respect to the Plan, should be read only in conjunction with the Prospectus.
Terms not otherwise defined in this Prospectus Supplement are defined in the
Plan or the Prospectus.
A PARTICIPANT'S ELIGIBILITY TO PURCHASE COMMON STOCK IN THE CONVERSION
THROUGH THE PLAN IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE
SHARES OF COMMON STOCK IN THE CONVERSION AND THE MAXIMUM AND MINIMUM LIMITATIONS
SET FORTH IN THE PLAN OF CONVERSION. SEE "THE CONVERSION" AND "--LIMITATIONS ON
PURCHASES OF SHARES" IN THE PROSPECTUS.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT
SUPERVISION ("OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC") OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus Supplement is September 6, 1996.
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No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Savings Bank or the Plan since the date
hereof, or that the information herein contained or incorporated by reference is
correct as of any time subsequent to the date hereof. This Prospectus
Supplement should be read only in conjunction with the Prospectus that is
attached herein and should be retained for future reference.
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TABLE OF CONTENTS
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PAGE
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The Offering
Securities Offered...................................................... S-4
Election to Purchase Common Stock in the Conversion..................... S-4
Value of Participation Interests........................................ S-4
Method of Directing Transfer............................................ S-4
Time for Directing Transfer............................................. S-4
Irrevocability of Transfer Direction.................................... S-5
Purchase Price of Common Stock.......................................... S-5
Nature of a Participant's Interest in the Holding Company Common Stock.. S-5
Voting and Tender Rights of Common Stock................................ S-5
Description of the Plan
Introduction............................................................ S-5
Eligibility and Participation........................................... S-6
Contributions Under the Plan............................................ S-6
Limitations and Contributions........................................... S-7
Investments of Contributions............................................ S-8
Benefits Under the Plan................................................. S-9
Withdrawals and Distributions from the Plan............................. S-9
Administration of the Plan.............................................. S-10
Reports to Plan Participants............................................ S-10
Plan Administrator...................................................... S-10
Amendment and Termination............................................... S-10
Merger, Consolidation or Transfer....................................... S-11
Federal Income Tax Consequences......................................... S-11
Restrictions on Resale.................................................. S-13
Legal Opinions............................................................... S-13
Investment Form.............................................................. S-14
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and
up to 12,000 shares, at the actual purchase price of $10.00 per share, of Common
Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operations and business of
the Savings Bank and the Holding Company is contained in the attached
Prospectus. The address of the principal executive office of the Savings Bank
is 410 Market Street, P.O. Box 700, Fulton, Missouri 65251-0700. The Savings
Bank's telephone number is (573) 642-6618.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Savings Bank's Conversion, the Savings Bank has
amended the 401(k) Plan to permit each Participant to direct the trustees of the
Plan ("Trustees") to permit the creation of an Employer Stock Fund (the
"Employer Stock Fund") and authorized, at the election of a Participant,
transfer up to 50% of a Participant's vested beneficial interest in the assets
of the Plan at December 31, 1995 to the Employer Stock Fund and to use such
funds to purchase Common Stock issued in connection with the Conversion.
Amounts transferred will include salary deferral, Employer Matching and profit
sharing contributions. The Employer Stock Fund will consist of investments in
the Common Stock made on or after the effective date of the Conversion. Funds
not transferred to the Employer Stock Fund will remain in the other investment
pool of the Plan (the "General Fund") as directed by an investment committee
authorized by the Board of Directors of the Savings Bank. A PARTICIPANT'S
ABILITY TO TRANSFER FUNDS TO THE EMPLOYER STOCK FUND IN THE CONVERSION IS
SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE SHARES OF COMMON
STOCK IN THE CONVERSION. FOR GENERAL INFORMATION AS TO THE ABILITY OF THE
PARTICIPANTS TO PURCHASE SHARES IN THE CONVERSION, SEE "THE CONVERSION -- THE
SUBSCRIPTION, DIRECT COMMUNITY AND PUBLIC OFFERINGS" IN THE ATTACHED PROSPECTUS.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on an
annual basis. This value represents the market value of past contributions to
the Plan by the Savings Bank and by the Participants and earnings thereon, less
previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund (the "Investment Form"). If a Participant
wishes to transfer up to 50% of the Participant's vested beneficial interest in
the assets of the Plan at December 31, 1995 to the Employer Stock Fund to
purchase Common Stock issued in connection with the Conversion, the Participant
should indicate that decision in Part 2 of the Investment Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
TIME FOR DIRECTING TRANSFER
THE DEADLINE FOR SUBMITTING A DIRECTION TO TRANSFER AMOUNTS TO THE EMPLOYER
STOCK FUND IN ORDER TO PURCHASE COMMON STOCK ISSUED IN CONNECTION WITH THE
CONVERSION IS SEPTEMBER 23, 1996. The Investment Form should be returned to
Bonnie Smith at the Savings Bank no later than the close of business on such
date.
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IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below. Special restrictions may apply to transfers directed
by those Participants who are executive officers, directors and principal
shareholders of the Holding Company who are subject to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
NATURE OF A PARTICIPANT'S INTEREST IN THE HOLDING COMPANY STOCK
The Holding Company Stock purchased for an account of a Participant will be
held in the name of the Trustee of the Plan in the Employer Stock Fund. Any
earnings, losses or expenses with respect to the Holding Company Stock,
including dividends and appreciation or depreciation in value, will be credited
or debited to the account and will not be credited to or borne by any other
accounts.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
INTRODUCTION
On December 22, 1992, the Savings Bank adopted the Plan, which amended and
restated an earlier retirement plan established on January 1, 1990. The Plan
was amended in August 1996 to permit participants to direct the investment of
Plan assets in the Employer Stock Fund. The Plan is a cash or deferred
arrangement established in accordance with the requirement under Section 401(a)
and Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code").
The Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Savings
Bank will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury Regulations.
The Savings Bank has received a determination from the Internal Revenue Service
("IRS") that the Plan is qualified under Section 401(a) of the Code and that it
satisfies the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
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EMPLOYEE RETIREMENT INCOME SECURITY ACT. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Title IV of ERISA nor the plan termination
insurance provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER
TERMINATION OF EMPLOYMENT.
REFERENCE TO FULL TEXT OF PLAN. THE FOLLOWING STATEMENTS ARE SUMMARIES OF
CERTAIN PROVISIONS OF THE PLAN. THEY ARE NOT COMPLETE AND ARE QUALIFIED IN
THEIR ENTIRETY BY THE FULL TEXT OF THE PLAN, WHICH IS FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT FILED WITH THE SEC. COPIES OF THE PLAN ARE AVAILABLE TO
ALL EMPLOYEES BY FILING A REQUEST WITH THE PLAN ADMINISTRATOR. EACH EMPLOYEE IS
URGED TO READ CAREFULLY THE FULL TEXT OF THE PLAN.
ELIGIBILITY AND PARTICIPATION
Any employee of the Savings Bank is eligible to participate and will become
a Participant in the Plan on first day of the month coinciding with or next
following completion of a minimum of 1,000 hours of service with the Savings
Bank within a consecutive 12 month period of employment and the attainment of
age 19. The Plan fiscal year is the calendar year ("Plan Year"). Directors who
are not employees of the Savings Bank are not eligible to participate in the
Plan.
During 1995, approximately 22 employees participated in the Plan.
CONTRIBUTIONS UNDER THE PLAN
PARTICIPANT CONTRIBUTIONS. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's "Deferral
Contributions Account." For purposes of the Plan, "Compensation" means a
Participant's total amount of earnings reportable W-2 wages for federal income
tax withholding purposes plus a Participant's elective deferrals pursuant to a
salary reduction agreement under the Plan or any elective deferrals to a Section
125 plan. Due to statutory changes, effective January 1, 1994, the annual
Compensation of each Participant taken into account under the Plan is limited to
$150,000 (adjusted for cost of living as permitted by the Code). A Participant
may elect to modify the amount contributed to the Plan under the participant's
salary reduction agreement during the Plan Year. Deferral contributions are
generally transferred by the Savings Bank to the Trustee of the Plan on a
periodic basis.
EMPLOYER CONTRIBUTIONS. The Savings Bank currently makes a discretionary
matching contribution to the Plan in an amount equal to a percentage of each
Participant's annual salary reduction contributions.
DISCRETIONARY CONTRIBUTIONS. The Savings Bank may also make discretionary
nonmatching contributions to the Plan for each Plan Year. Participants who are
in service on the last day of the Plan Year and have completed
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1,000 hours of service during the Plan Year are eligible to share in the
allocation of the discretionary contributions (if any) for the Plan Year. The
Savings Bank's discretionary contributions are allocated among Participants
eligible to share in the allocation according to the relationship of each such
Participant's Compensation for the Plan Year to the Total Compensation of all
such Participants for such Plan Year. In addition, the Savings Bank may make
discretionary contributions on behalf of certain non-highly compensated
employees to the extent necessary to satisfy the Code's nondiscrimination
requirements (see below).
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000
(adjusted for increases in cost of living as permitted by the Code). A
Participant's "Section 415 Compensation" is a Participant's Compensation,
excluding any amount contributed to the Plan under a compensation reduction
agreement or any employer contribution to the Plan or to any other plan or
deferred compensation or any distributions from a plan of deferred compensation.
In addition, annual additions shall be limited to the extent necessary to
prevent the limitations for the combined plans of the Savings Bank from being
exceeded. To the extent that these limitations would be exceeded by reason of
excess annual additions to the Plan with respect to a Participant, such excess
will be reallocated to the remaining Participants who are eligible for an
allocation of Employer contributions for the Plan Year.
LIMITATION ON 401(K) PLAN CONTRIBUTIONS. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $7,000, adjusted for increases in
the cost of living as permitted by the Code (the limitation for 1996 is $9,500).
Contributions in excess of this limitation ("excess deferrals") will be included
in the Participant's gross federal income tax purposes in the year they are
made. In addition, any such excess deferral will again be subject to federal
income tax when distributed by the Plan to the Participant, unless the excess
deferral (together with any income allocable thereto) is distributed to the
Participant not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Participant in the
taxable year in which the excess deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a Plan Year (i.e.,
----
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of Deferral Contributions credited to the
Deferral Contributions Account of such eligible employee by such employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual deferred percentage of all other
eligible employees, or (b) the lesser of (i) 200% of the actual deferred
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for a Plan Year (i.e., the average
----
of the ratios calculated separately for each eligible employee in each group, by
dividing the amount of employer contributions credited to the Matching
Contributions Account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contributions percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
----
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combines voting power of all stock of the
Employer),
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(2) received compensation from the Employer is excess of $100,000, (3) received
compensation from the Employer in excess of $66,000 and was in the group
consisting of the top 20% of employees when ranked on the basis of compensation
paid during the Plan Year, or (4) was at any time an officer of the Employer and
received compensation in excess of $60,000 (a "Highly Compensated Employee").
These dollar amounts subject to adjustment annually by the IRS. Such amounts
are adjusted annually to reflect increase in the cost of living. If the
employer does not have at least one officer whose annual compensation is in
excess of $60,000, then the highest paid officer of the Employer will be treated
as a Highly Compensated Employee.
In order to prevent disqualification of the plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Savings Bank will be subject to
a 10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Savings
Bank with respect to any excess aggregate contributions, unless such amounts,
plus any income allocable thereto, are distributed within 2 1/2 months following
the close of the Plan Year in which they arose.
TOP-HEAVY PLAN REQUIREMENTS. If, for any Plan Year, the Plan is a Top-
Heavy Plan (as defined below), then (i) the Savings Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined plan maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees"
generally include any employee, who at any time during the Plan Year or any
other the four preceding Plan Years, if (1) an officer of the Savings Bank
having annual compensation in excess of $60,000 who is in administrative or
policy-making capacity, (2) one of the ten employees having annual compensation
in excess of $30,000 and owing, directly or indirectly , the largest interest in
the employer, (3) a 5% owner of the employer (i.e., owns directly or indirectly
----
more than 5% of the stock of the employer, or stock possessing more than 5% of
the total combined voting power of all stock of the employer), or (4) a 1% of
owner of the employer having compensation in excess of $150,000.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' account under the Plan are held in
the Trust which is administered by the Trustees. The Trustees are appointed by
the Savings Bank's Board of Directors.
The net gain (or loss) in the account from investments other than the
Employer Stock Fund (including interest payments, dividends, realized and
unrealized gains and losses on securities, and expenses paid from the trust) are
determined annually at the end of the Plan Year.
In connection with the Conversion, Participants in the Plan may make a one-
time election to invest up to 50% of the vested portion of their account balance
at December 31, 1995 in Common Stock. If an account is invested in Common
Stock, the shares will be held in the Employer Stock Fund as a separate
investment. Any earnings, losses or expenses with respect to the Holding
Company Stock held in the account, including, without limitation, dividends and
appreciation or depreciation of the value of the shares, will be credited or
debited to the account and will not be credited to or borne by any other account
of any other Participants. Any cash dividends and other cash distributions paid
on any Common Stock will be reinvested by the trustees as directed by each
Participant
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under the Plan, and may not be reinvested in additional Common Stock. A
Participant may at any time direct the Trustees to sell all or any of the shares
of Common Stock held in his or her Plan accounts. If Common Stock is sold, the
proceeds will be credited to the account from which the shares were sold and
thereafter invested by the Trustees as part of the remainder of the general fund
under the Plan. Accounts which are invested in Common Stock will continue to be
invested in such shares until the Participant directs the Trustees to sell the
shares.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Following the Conversion, the Board of the Holding Company may
consider a policy of paying dividends on the Common Stock, however, no decision
has been made by the Board of the Holding Company regarding the amount or timing
of dividends, if any.
As of the date of the Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS
ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE HOLDING COMPANY. FOR A
DISCUSSION OF THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
VESTING. A Participant, has at all times a fully vested, nonforfeitable
interest in all of his or her Deferred Contributions and the earnings thereon
under the Plan. A Participant is 100% vested in his or her Matching
Contributions Account and employer discretionary contributions after the
completion of seven years of service under the Plan's seven-year-graded vesting
schedule (20% per year beginning after three years of service).
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK.
DISTRIBUTION UPON RETIREMENT, DISABILITY OR TERMINATION OF EMPLOYMENT.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an in-
kind distribution of Common Stock of the Holding Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefits payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; or (iii) tenth anniversary of commencement of participation in the Plan;
but in no event later than April 1 following the calendar year in which the
Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds $3,500, no distribution shall be made
from the Plan prior to the Participant's attaining age 65 unless the Participant
consents to an earlier distribution. Special restrictions may apply to the
distribution of Common Stock of the Holding Company to those Participants who
are executive officers, directors and principal shareholders of the Holding
Company who are subject to the provisions of Section 16(b) of the Exchange Act.
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DISTRIBUTION UPON DEATH. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of
a married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
TRUSTEES. The Trustees with respect to the Plan are currently Kermit D.
Gohring, Richard W. Gohring and Bonnie K. Smith, all of whom are officers of the
Savings Bank.
The Trustees must render periodic reports to the Savings Bank and to the
Participants in such form and containing information that the Trustees deems
necessary.
REPORTS TO PLAN PARTICIPANTS
The administrator will furnish to each Participant a statement at least
semiannually showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan Administrator is the Savings
Bank. A committee of the Savings Bank has been designated by the Board of
Directors of the Savings Bank to act on the Savings Bank's behalf as the Plan
Administrator. The name, address and telephone number of the current Plan
Administrator is Fulton Savings Bank, FSB, 410 Market Street, P.O. Box 700,
Fulton, Missouri 65251-0700. The Savings Bank's telephone number is (573) 642-
6618. The Administrator is responsible for the administration of the Plan,
interpretation of the provisions of the Plan, prescribing procedures for filing
applications for benefits, preparation and distribution of information
explaining the Plan, maintenance of plan records, books of account and all other
data necessary for the proper administration of the Plan, and preparation and
filing of all returns and reports relating to the Plan which are required to be
filed with the U.S. Department of Labor and the IRS, and for all disclosures
required to be made to Participants, beneficiaries and others under Sections 104
and 105 of ERISA.
AMENDMENT AND TERMINATION
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time
to time, any amendment or amendments to the Plan which do not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
S-10
<PAGE>
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN. THE
SUMMARY IS NECESSARILY GENERAL IN NATURE AND DOES NOT PURPORT TO BE COMPLETE.
MOREOVER, STATUTORY PROVISIONS ARE SUBJECT TO CHANGE, AS ARE THEIR
INTERPRETATIONS, AND THEIR APPLICATION MAY VARY IN INDIVIDUAL CIRCUMSTANCES.
FINALLY, THE CONSEQUENCES UNDER APPLICABLE STATE AND LOCAL INCOME TAX LAWS MAY
NOT BE THE SAME AS UNDER THE FEDERAL INCOME TAX LAWS.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) The sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) Earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will
be submitted to the IRS for a determination that the Plan, as amended, continues
to qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualified as a "Lump Sum Distribution" (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
LUMP SUM DISTRIBUTION. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance to the
credits of the Participant under the Plan and all other profit sharing plans, if
any, maintained by the Savings Bank. The portion of any Lump Sum Distribution
that is required to be included in the Participant's or beneficiary's taxable
income for federal income tax purposes (the "total taxable amount") consists of
the entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Participant to any other profit sharing plans
maintained by the Savings Bank which is included in such distribution.
S-11
<PAGE>
AVERAGING RULES. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, for distributions
occurring prior to January 1, 2000, a Participant who has completed at least
five years of participation in the Plan before the taxable year in which the
distribution is made, or a beneficiary who receives a Lump Sum Distribution on
account of the Participant's death (regardless of the period of the
Participant's participation in the Plan or any other profit sharing plan
maintained by the Employer), may elect to have the ordinary income portion of
such Lump Sum Distribution taxed according to a special averaging rule ("five-
year averaging"). The election of the special averaging rules may apply only to
one Lump Sum Distribution received by the Participant or beneficiary, provided
such amount is received on or after the Participant turns 59 1/2 and the
recipient elects to have any other Lump Sum Distribution from a qualified plan
received in the same taxable year taxed under the special averaging rule. The
special five-year averaging rule has been repealed for distributions occurring
after December 31, 1999. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule (if available) or the prior law ten-year
averaging rule. Such individuals also may elect to have that portion of the
Lump Sum Distribution attributable to the Participant's pre-1974 participation
in the Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN OR
TO AN IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan of to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
----
nonrecognition of net unrealized appreciation, discussed earlier.
ADDITIONAL TAX ON EARLY DISTRIBUTIONS. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled or onto an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually)
S-12
<PAGE>
made for the life (or life expectancy) of the Participant or the joint lives (or
joint life expectancies) of the Participant and his or her beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Savings Bank or the Holding Company as the term "affiliate"
is used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Savings Bank) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Savings Bank having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Savings Bank of the Holding Company may wish to consult
with counsel before transferring any Common Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of the
reporting and short-swing profit liability rules of Section 16 of the Exchange
Act which may affect the purchase and sale of the Common Stock where acquired
under the Plan, or other sales of the Common Stock.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon
by Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel
for the Holding Company in connection with the Savings Bank's Conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and the concurrent formation of the Holding Company.
S-13
<PAGE>
Investment Form
(Employer Stock Fund)
FULTON SAVINGS BANK, FSB
RETIREMENT TRUST
Name of Participant:
----------------------------------------------------------
Social Security Number:
-------------------------------------------------------
1. Instructions. In connection with the proposed conversion of
Fulton Savings Bank, FSB (the "Savings Bank") to a stock capital savings bank
and the simultaneous formation of a holding company (the "Conversion"),
participants in the Fulton Savings Bank, FSB Retirement Trust (the "Plan") may
make a one-time election to direct the investment of up to 50% of the vested
portion of their December 31, 1995 account balances into the Employer Stock Fund
(the "Employer Stock Fund"). Amounts transferred at the direction of
Participants into the Employer Stock Fund will be used to purchase shares of
common stock of Fulton Bancorp, Inc. (the "Common Stock"), the proposed holding
company for the Savings Bank. A PARTICIPANT'S ELIGIBILITY TO PURCHASE SHARES OF
COMMON STOCK IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE
SHARES OF COMMON STOCK IN THE CONVERSION AND THE MAXIMUM AND MINIMUM LIMITATIONS
SET FORTH IN THE PLAN CONVERSION. SEE THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to be used to purchase Common Stock in the
Conversion. To direct such a transfer to the Employer Stock Fund, you should
complete this form and return it to Bonnie Smith at the Savings Bank, no later
than the close of business on September 23, 1996. The Savings Bank will keep a
copy of this form and return a copy to you. (If you need assistance in
completing this form, please contact Bonnie Smith.
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $10) from the vested portion of my Plan
account balance as of December 31, 1995 (not in excess of 50% of your vested
account balance at December 31, 1995) to the Employer Stock Fund.
3. Effectiveness of Direction. I understand that this Investment
Form shall be subject to all of the terms and conditions of the Plan and the
terms and conditions of the Conversion. I acknowledge that I have received a
copy of the Prospectus and the Prospectus Supplement.
- ------------------------------------- ---------------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Transfer Direction Form was
received by the Plan Administrator and will become effective on the date noted
below.
- ------------------------------------- ---------------------------------------
Plan Administrator Date
S-14
<PAGE>
PROSPECTUS
[FULTON BANCORP, INC. LOGO APPEARS HERE]
(PROPOSED HOLDING COMPANY FOR FULTON SAVINGS BANK, FSB)
UP TO 1,495,000 SHARES OF COMMON STOCK
Fulton Bancorp, Inc. (the "Holding Company"), a Delaware corporation, is
offering between 1,105,000 and 1,495,000 shares of its common stock, $.01 par
value per share (the "Common Stock"), in connection with the conversion of
Fulton Savings Bank, FSB (the "Savings Bank") from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank and
the simultaneous issuance of the Savings Bank's capital stock to the Holding
Company. The simultaneous conversion of the Savings Bank to stock form, the
issuance of the Savings Bank's capital stock to the Holding Company and the
offer and sale of the Common Stock by the Holding Company are being undertaken
pursuant to a plan of conversion ("Plan" or "Plan of Conversion") and are
referred to herein as the "Conversion."
Pursuant to the Plan of Conversion, nontransferable rights to subscribe for
the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Savings Bank
as of December 31, 1994 ("Eligible Account Holders"), (ii) the Savings Bank's
employee stock ownership plan ("ESOP"), a tax-qualified employee benefit plan,
(iii) depositors with $50.00 or more on deposit at the Savings Bank as of June
30, 1996 ("Supplemental Eligible
(cover continued on following page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (573) 642-0215.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT
BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"),
THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL AGENCY
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR
ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
ESTIMATED UNDERWRITING
PURCHASE COMMISSIONS AND ESTIMATED NET
PRICE(1) OTHER FEES AND EXPENSES(2) PROCEEDS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Price Per Share... $10.00 $0.49 $9.51
- -------------------------------------------------------------------------------
Midpoint Price Per Share.. $10.00 $0.42 $9.58
- -------------------------------------------------------------------------------
Maximum Price Per Share... $10.00 $0.36 $9.64
- -------------------------------------------------------------------------------
Maximum Price Per Share,
as adjusted(3)........... $10.00 $0.32 $9.68
- -------------------------------------------------------------------------------
Minimum Total(4).......... $11,050,000 $542,000 $10,508,000
- -------------------------------------------------------------------------------
Midpoint Total(5)......... $13,000,000 $542,000 $12,458,000
- -------------------------------------------------------------------------------
Maximum Total(6).......... $14,950,000 $542,000 $14,408,000
- -------------------------------------------------------------------------------
Maximum Total, as
adjusted(3)(7)........... $17,192,500 $542,000 $16,650,500
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") as of July 12, 1996, which states that the
estimated aggregate pro forma market value of the Holding Company and the
Savings Bank as converted ranged from $11,050,000 to $14,950,000, with a
midpoint of $13,000,000 ("Estimated Valuation Range"). RP Financial's
appraisal is based upon estimates and projections that are subject to
change, and the valuation must not be construed as a recommendation as to
the advisability of purchasing such shares or that a purchaser will
thereafter be able to sell such shares at or above the Purchase Price. See
"THE CONVERSION--Stock Pricing and Number of Shares to be Issued."
(2) Includes estimated costs to the Holding Company and the Savings Bank
arising from the Conversion, including fees to be paid to Trident
Securities in connection with the Offerings. Such fees may be deemed to be
underwriting fees and Trident Securities may be deemed to be an
underwriter. The Holding Company and the Savings Bank have agreed to
indemnify Trident Securities against certain liabilities, including
liabilities that may arise under the Securities Act of 1933, as amended
("Securities Act"). See "USE OF PROCEEDS" and "THE CONVERSION--Plan of
Distribution for the Subscription, Direct Community and Syndicated
Community Offerings."
(3) Gives effect to the sale of up to an additional 15% of the shares offered,
without the resolicitation of subscribers or any right of cancellation,
due to an increase in the pro forma market value of the Holding Company
and the Savings Bank as converted. The ESOP shall have a first priority
right to subscribe for such additional shares up to an aggregate of 8% of
the Common Stock issued in the Conversion. See "THE CONVERSION--Stock
Pricing and Number of Shares to be Issued."
(4) Assumes the issuance of 1,105,000 shares at $10.00 per share.
(5) Assumes the issuance of 1,300,000 shares at $10.00 per share.
(6) Assumes the issuance of 1,495,000 shares at $10.00 per share.
(7) Assumes the issuance of 1,719,250 shares at $10.00 per share.
TRIDENT SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 6, 1996.
<PAGE>
(continued from preceding page)
Account Holders"), and (iv) depositors of the Savings Bank as of September 3,
1996 ("Voting Record Date") and borrowers of the Savings Bank with loans
outstanding as of April 15, 1995 which continue to be outstanding as of the
Voting Record Date ("Other Members"), subject to the priorities and purchase
limitations set forth in the Plan of Conversion ("Subscription Offering").
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 OFFICE OF THRIFT SUPERVISION ("OTS") OR ANOTHER
AGENCY OF THE U.S. GOVERNMENT. THE SUBSCRIPTION OFFERING WILL EXPIRE AT 4:30
P.M., CENTRAL TIME, ON OCTOBER 4, 1996 ("EXPIRATION DATE"), UNLESS EXTENDED BY
THE SAVINGS BANK AND THE HOLDING COMPANY FOR UP TO 24 DAYS TO OCTOBER 28,
1996. SUCH EXTENSION MAY BE GRANTED WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS.
See "THE CONVERSION--The Subscription, Direct Community and Syndicated
Community Offerings" and "--Limitations on Purchases of Shares."
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale to members of the general public through a direct
community offering ("Direct Community Offering") with preference being given
to natural persons and trusts of natural persons who are permanent residents
of Boone or Callaway Counties of Missouri ("Local Community"), subject to the
right of the Holding Company to accept or reject orders in the Direct
Community Offering in whole or in part. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering. The Direct Community
Offering may terminate on or after the Expiration Date, but not later than
November 18, 1996 (or December 12, 1996 if the Subscription Offering is fully
extended), unless further extended with the consent of the OTS. It is
anticipated that shares of Common Stock not subscribed for or purchased in the
Subscription and Direct Community Offerings will be offered to eligible
members of the general public on a best efforts basis by a selling group of
broker-dealers managed by Trident Securities, Inc. ("Trident Securities") in a
syndicated offering ("Syndicated Community Offering") (the Subscription
Offering, Direct Community Offering and Syndicated Community Offering are
referred to collectively as the "Offerings").
With the exception of the ESOP, which is expected to purchase 8% of the
shares of Common Stock issued in the Conversion, NO PERSON OR ENTITY MAY
PURCHASE SHARES WITH AN AGGREGATE PURCHASE PRICE OF MORE THAN $150,000 (OR
15,000 SHARES BASED ON THE PURCHASE PRICE); AND NO PERSON OR ENTITY, TOGETHER
WITH ASSOCIATES OF AND PERSONS ACTING IN CONCERT WITH SUCH PERSON OR ENTITY,
MAY PURCHASE IN THE AGGREGATE SHARES WITH AN AGGREGATE PURCHASE PRICE OF MORE
THAN $200,000 (OR 20,000 SHARES BASED ON THE PURCHASE PRICE). Under certain
circumstances, the maximum purchase limitation may be increased or decreased
at the sole discretion of the Savings Bank and the Holding Company subject to
any required regulatory approval. See "THE CONVERSION--The Subscription,
Direct Community and Syndicated Community Offerings," "--Limitations on
Purchases of Shares" and "--Procedure for Purchasing Shares in the
Subscription and Direct Community Offerings" for other purchase and sale
limitations. The minimum order is 25 shares.
The Holding Company must receive a properly completed and signed stock order
form ("Order Form") and certification along with full payment (or appropriate
instructions authorizing a withdrawal of the full payment from a deposit
account at the Savings Bank) of $10.00 per share for all shares subscribed for
or ordered. Funds so received will be placed in a segregated account created
for this purpose at the Savings Bank, and interest will be paid at the Savings
Bank's passbook rate from the date payment is received until the Conversion is
consummated or terminated; these funds will be otherwise unavailable to the
depositor until such time. Payments authorized by withdrawals from deposit
accounts will continue to earn interest at the contractual rate until the
Conversion is consummated or terminated, although such funds will be
unavailable for withdrawal until the Conversion is consummated or terminated.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR MODIFIED WITHOUT THE
CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY. The Holding Company is
not obligated to accept orders submitted on photocopied or telecopied Order
Forms. If the Conversion is not consummated within 45 days after the last day
of the Subscription Offering (which date will be no later than December 12,
1996) 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
orders. Such extensions may not go beyond October 15, 1998.
The Savings Bank and the Holding Company have engaged Trident Securities as
their financial advisor and sales agent to assist the Holding Company in the
sale of the Common Stock in the Offerings. In addition, in the event the
Common Stock is not fully subscribed for in the Subscription and Direct
Community Offerings, Trident Securities will manage the Syndicated Community
Offering. Neither Trident Securities nor any other registered broker-dealer is
obligated to take or purchase any shares of Common Stock in the Offerings. The
Holding Company and the Savings Bank reserve the right, in their absolute
discretion, to accept or reject, in whole or in part, any or all orders in the
Direct Community or Syndicated Community Offerings either at the time of
receipt of an order or as soon as practicable following the termination of the
Offerings. See "THE CONVERSION--Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings."
Prior to the Offerings, the Holding Company has not issued any capital stock
and accordingly there has been no market for the shares offered hereby. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be maintained. The Holding Company
has received conditional approval to have its Common Stock listed on the
Nasdaq SmallCap Market under the symbol "FTNB." Trident Securities has agreed
to act as a market maker for the Common Stock following consummation of the
Conversion. See "RISK FACTORS--Absence of Active Market for the Common Stock"
and "MARKET FOR COMMON STOCK."
2
<PAGE>
FULTON SAVINGS BANK, FSB
FULTON, MISSOURI
[map of state of Missouri with enlargement of
Callaway and Boone Counties appears here]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE SAVINGS BANK'S PLAN OF
CONVERSION BY ITS ELIGIBLE VOTING MEMBERS, THE SALE OF AT LEAST 1,105,000 SHARES
OF COMMON STOCK PURSUANT TO THE PLAN OF CONVERSION, AND RECEIPT OF ALL
REGULATORY APPROVALS.
<PAGE>
- -------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
- -------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See
"RISK FACTORS."
FULTON BANCORP, INC.
The Holding Company is a Delaware corporation organized in May 1996 at the
direction of the Savings Bank to acquire all of the capital stock that the
Savings Bank will issue upon its conversion from the mutual to stock form of
ownership. The Holding Company has not engaged in any significant business to
date. The Holding Company has received the approval of the OTS to become a
savings and loan holding company and to acquire 100% of the capital stock of the
Savings Bank. Immediately following the Conversion, the only significant assets
of the Holding Company will be the capital stock of the Savings Bank, that
portion of the net proceeds of the Offerings permitted by the OTS to be retained
by the Holding Company and a note receivable from the ESOP evidencing a loan
from the Holding Company to fund the Savings Bank's ESOP. The Holding Company
has received approval from the OTS to retain 50% of the net proceeds of the
Offerings. Funds retained by the Holding Company will be used for general
business activities, including a loan by the Holding Company directly to the
ESOP to enable the ESOP to purchase 8% of the Common Stock issued in the
Conversion. See "USE OF PROCEEDS." Upon Conversion, the Holding Company will
be classified as a unitary savings and loan holding company subject to
regulation by the OTS. See "REGULATION -- Savings and Loan Holding Company
Regulations." Management believes that the holding company structure and
retention of proceeds may facilitate the expansion and diversification of its
operations, should it decide to do so. The holding company structure will also
enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions and waiting periods.
There are no present plans, arrangements, agreements, or understandings, written
or oral, regarding any such activities or repurchases. The main office of the
Holding Company is located at 410 Market Street, Fulton, Missouri 65251, and its
telephone number is (573) 642-6618.
FULTON SAVINGS BANK, FSB
The Savings Bank, founded in 1912, is a federally chartered mutual savings
bank located in Fulton, Missouri. The Savings Bank amended its charter from
that of a state-chartered mutual savings bank to become a federal mutual savings
bank in April 1995. In connection with the Conversion, the Savings Bank will
convert to a federally chartered capital stock savings bank and will become a
subsidiary of the Holding Company. The Savings Bank is regulated by the OTS,
its primary federal regulator, and the FDIC, the insurer of its deposits. The
Savings Bank's deposits are insured by the FDIC's Savings Association Insurance
Fund ("SAIF") and have been federally insured since 1965. The Savings Bank has
been a member of the Federal Home Loan Bank ("FHLB") System since 1942. At
April 30, 1996, the Savings Bank had total assets of $85.5 million, total
deposits of $70.3 million and retained earnings of $9.1 million on a
consolidated basis.
The Savings Bank is a community oriented financial institution that engages
primarily in the business of attracting deposits from the general public and
using those funds to originate residential and commercial mortgage loans within
the Savings Bank's market area. The Savings Bank generally sells all of the
fixed-rate and some of the adjustable-rate residential mortgage loans that it
originates while retaining the servicing rights on such loans. At April 30,
1996, one- to four-family residential mortgage loans totalled $46.7 million, or
59.6% of the Savings Bank's total gross loans. The Savings Bank also originates
multi-family, commercial real estate, construction, land
(i)
<PAGE>
and consumer and other loans. The Savings Bank frequently sells participation
interests in the non-residential mortgage loans it originates. At April 30,
1996, multi-family and commercial real estate loans accounted for 16.0% of the
Savings Bank's total gross loans, construction loans accounted for 9.8% of total
gross loans and consumer and other loans accounted for 12.7% of total gross
loans. The main office of the Savings Bank is located at 410 Market Street,
Fulton, Missouri 65251, and its telephone number is (573) 642-6618. The Savings
Bank has a branch office located in Holts Summit, Missouri.
THE CONVERSION
The Savings Bank is in the process of converting from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank and, in
connection with the Conversion, has formed the Holding Company. As part of the
Conversion, the Savings Bank will issue all of its capital stock to the Holding
Company in exchange for 50% of the net proceeds of the Offerings.
Simultaneously, the Holding Company will sell its Common Stock in the Offerings.
The Conversion is subject to the approval of the OTS, as well as the Savings
Bank's members at a special meeting to be held on October 15, 1996. AFTER
CONSUMMATION OF THE CONVERSION, DEPOSITORS AND BORROWERS OF THE SAVINGS BANK
WILL HAVE NO VOTING RIGHTS IN THE HOLDING COMPANY UNLESS THEY BECOME
STOCKHOLDERS.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Savings Bank as converted. RP Financial has advised the Savings Bank that in
its opinion, at July 12, 1996, the aggregate estimated pro forma market value of
the Holding Company and the Savings Bank as converted ranged from $11,050,000 to
$14,950,000. The appraisal of the pro forma market value of the Holding Company
and the Savings Bank as converted is based on a number of factors and should not
be considered a recommendation to buy shares of the Common Stock or any
assurance that after the Conversion shares of Common Stock will be able to be
resold at or above the Purchase Price. The appraisal will be updated or
confirmed prior to consummation of the Conversion.
The Board of Directors and management believe that the Conversion is in the
best interests of the Savings Bank's members and its communities. The
Conversion is intended: (i) to improve the competitive position of the Savings
Bank in its market area and support possible future expansion and
diversification of operations (currently, there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities);
(ii) to afford members of the Savings Bank and others the opportunity to become
stockholders of the Holding Company and thereby participate more directly in,
and contribute to, any future growth of the Holding Company and the Savings
Bank; and (iii) to provide future access to capital markets. See "THE
CONVERSION."
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
The Holding Company is offering up to 1,495,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. In the event the
number of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the Savings Bank's 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 issued in the Offerings.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR MODIFIED WITHOUT THE
CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY. Any shares of Common Stock
not subscribed for in the Subscription Offering may be offered in the Direct
Community Offering to the general public with preference being given to natural
persons and trusts of natural persons who are permanent residents of the Local
Community. The Savings Bank has engaged Trident Securities to consult with and
advise the Holding Company and the Savings Bank in the Offerings, and Trident
Securities has agreed to use its best efforts to assist the Holding Company with
the solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Trident Securities is not obligated to take or purchase any
shares of Common Stock in the Offerings. If all shares of Common Stock to be
issued in the Conversion are not sold through the Subscription
(ii)
<PAGE>
and Direct Community Offerings, then the Holding Company expects to offer the
remaining shares in a Syndicated Community Offering managed by Trident
Securities, which would occur as soon as practicable following the close of the
Subscription and Direct Community Offerings. All shares of Common Stock will be
sold at the same price per share in the Syndicated Community Offering as in the
Subscription and Direct Community Offerings. See "USE OF PROCEEDS," "PRO FORMA
DATA" and "THE CONVERSION -- Stock Pricing and Number of Shares to be Issued."
The Subscription Offering will expire at 4:30 p.m., Central Time, on the
Expiration Date, unless extended by the Savings Bank and the Holding Company for
up to 24 days. The Direct Community Offering and Syndicated Community Offering,
if any, may terminate on the Expiration Date or on any date thereafter, however,
in no event later than 45 days after the expiration of the Subscription
Offering, unless further extended with the consent of the OTS.
BENEFITS OF THE CONVERSION TO MANAGEMENT
ESOP. In connection with the Conversion, the Savings Bank will adopt the
ESOP, a tax-qualified employee benefit plan for officers and employees of the
Holding Company and the Savings Bank, which intends to purchase 8% of the shares
of Common Stock issued in the Offerings (119,600 shares at the maximum of the
Estimated Valuation Range). In the event the number of shares offered in the
Conversion is increased above the maximum of the Estimated Valuation Range, the
Savings Bank's 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 issued in the Offerings. In the event that the ESOP's
subscription is not filled in its entirety, the ESOP may purchase additional
shares in the open market or may purchase additional authorized but unissued
shares with cash contributed to it by the Savings Bank. For additional
information concerning the ESOP, see "MANAGEMENT OF THE SAVINGS BANK -- Benefits
- -- Employee Stock Ownership Plan." As a result of the adoption of the ESOP, the
Holding Company will recognize compensation expense in an amount equal to the
fair market value of the ESOP shares when such shares are committed to be
released to participants' accounts. See "PRO FORMA DATA."
MRP. The Holding Company expects to seek approval of the Management
Recognition Plan and Trust ("MRP") at a meeting of stockholders occurring no
earlier than six months following consummation of the Conversion. The MRP,
which will be funded with a number of shares equal to 4% of the number of shares
issued in the Conversion, is a non-tax-qualified restricted stock plan intended
for the benefit of key employees and directors of the Holding Company and the
Savings Bank. If stockholder approval of the MRP is obtained, it is expected
that shares of Common Stock of the Holding Company will be awarded pursuant to
such plan to key employees and directors of the Holding Company and the Savings
Bank (which shares will be awarded at no cost to such recipients). Subject to
approval by stockholders and vesting provisions, key employees and directors are
initially intended to be granted 59,800 restricted shares of Common Stock under
the MRP (based on the issuance of Common Stock at the maximum of the Estimated
Valuation Range), with an aggregate value of $598,000 based on the Purchase
Price of $10.00 per share. For additional information concerning the MRP, see
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition Plan." As
a result of the adoption of the MRP, the Holding Company will recognize
compensation expense in the amount of the fair market value of the Common Stock
at the date of the grant to the recipient during the years in which the shares
vest. See "PRO FORMA DATA."
STOCK OPTION PLAN. The Holding Company expects to seek approval of the
1996 Stock Option Plan ("Stock Option Plan"), which will reserve a number of
shares equal to 10% of the number of shares issued in the Conversion, at a
meeting of stockholders occurring no earlier than six months following
consummation of the Conversion. If stockholder approval of the Stock Option
Plan is obtained, it is expected that options to acquire up to 149,500 shares of
Common Stock of the Holding Company will be awarded to key employees and
directors of the Holding Company and the Savings Bank (based on the issuance of
Common Stock at the maximum of the Estimated Valuation Range). The exercise
price of such options will be 100% of the fair market value of the Common Stock
on the date the option is granted. Options granted to officers and directors
are valuable only to the extent that such options are exercisable and the market
price for the underlying share of Common Stock is in excess of the exercise
price. An option effectively eliminates the market risk of holding the
underlying security since no consideration is paid for the option until it is
exercised. Therefore, the recipient may, within the limits of the term of the
option, wait to exercise
(iii)
<PAGE>
the option until the market price exceeds the exercise price. For additional
information concerning the Stock Option Plan, see "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- 1996 Stock Option Plan."
EMPLOYMENT AGREEMENTS. In connection with the Conversion, the Holding
Company and the Savings Bank have agreed to enter into employment agreements
with the Chief Executive Officer and certain members of management that provide
certain benefits in the event of their termination following a change in control
of the Holding Company or the Savings Bank. Assuming a change of control
occurred as of April 30, 1996, the aggregate amount payable under these
agreements would have been approximately $452,000. See "MANAGEMENT OF THE
SAVINGS BANK -- Executive Compensation -- Employment Agreements."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS --
Antitakeover Effects of Governing Documents, Delaware and Federal Law, Control
by Insiders and Employment Agreements -- Voting Control by Insiders."
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Conversion, no person or entity may
purchase shares with an aggregate purchase price of more than $150,000 (or
15,000 shares based on the Purchase Price); and no person or entity, together
with associates of and persons acting in concert with such person or entity, may
purchase in the aggregate shares with an aggregate purchase price of more than
$200,000 (or 20,000 shares based on the Purchase Price). THIS MAXIMUM PURCHASE
LIMITATION MAY BE INCREASED OR DECREASED AS CONSISTENT WITH OTS REGULATIONS IN
THE SOLE DISCRETION OF THE HOLDING COMPANY AND THE SAVINGS BANK SUBJECT TO ANY
REQUIRED REGULATORY APPROVAL.
The term "associate" of a person is defined in the Plan to mean: (i) any
corporation or organization (other than the Savings Bank or a majority-owned
subsidiary of the Savings Bank) 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
Savings Bank or any of its parents or subsidiaries. The term "acting in
concert" is defined in the Plan 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
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. The Holding Company and the
Savings Bank may presume that certain persons are acting in concert based upon,
among other things, joint account relationships and the fact that such persons
have filed joint Schedules 13D with the SEC with respect to other companies.
The minimum purchase is 25 shares. In addition, stock orders received
either through the Direct Community Offering or the Syndicated Community
Offering, if held, may be accepted or rejected, in whole or in part, at the
discretion of the Holding Company and the Savings Bank. See "THE CONVERSION --
Limitations on Purchases of Shares." If an order is rejected in part, the
purchaser does not have the right to cancel the remainder of the order. In the
event of an oversubscription, shares will be allocated in accordance with the
Plan of Conversion. See "THE CONVERSION -- The Subscription, Direct Community
and Syndicated Community Offerings."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
The Purchase Price in the Subscription Offering is a uniform price for all
subscribers, including members of the Holding Company's and the Savings Bank's
Boards of Directors, their management and tax-qualified employee plans, and was
set by the Board of Directors. The number of shares to be offered at the
Purchase Price is based upon an independent appraisal of the aggregate pro forma
market value of the Holding Company and the Savings Bank as converted. The
aggregate pro forma market value was estimated by RP Financial to range from
$11,050,000
(iv)
<PAGE>
to $14,950,000 as of July 12, 1996. See "THE CONVERSION -- Stock Pricing and
Number of Shares to be Issued." The appraisal of the pro forma value of the
Holding Company and the Savings Bank as converted will be updated or confirmed
at the completion of the Offerings. The maximum of the Estimated Valuation Range
may be increased by up to 15% and the number of shares of Common Stock to be
issued in the Conversion may be increased to 1,719,250 shares due to material
changes in the financial condition or performance of the Savings Bank or changes
in market conditions or general financial and economic conditions. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless the gross proceeds from the sale
of the Common Stock are less than the minimum or more than 15% above the maximum
of the current Estimated Valuation Range. THE APPRAISAL IS NOT INTENDED TO BE
AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING COMMON STOCK IN THE OFFERINGS NOR CAN ASSURANCE BE
GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE OFFERINGS WILL BE ABLE TO SELL
SUCH SHARES AFTER CONSUMMATION OF THE CONVERSION AT A PRICE THAT IS EQUAL TO OR
ABOVE THE PURCHASE PRICE. Furthermore, the pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock are estimated to range
from $10.5 million to $14.4 million, or to $16.7 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Savings Bank to
be issued in the Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately $5.3
million to $7.2 million of the net proceeds, or up to $8.3 million if the
Estimated Valuation Range is increased by 15%, and the Savings Bank receiving an
equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including increased
local lending. The Savings Bank may also use a portion of the funds contributed
to it to retire outstanding FHLB advances. Pending deployment of funds, the
Savings Bank plans initially to invest the net proceeds in short- to
intermediate-term U.S. Treasury and agency securities with laddered maturities
up to two years. Shares of Common Stock may be purchased with funds on deposit
at the Savings Bank, which will reduce deposits by the amounts of such
purchases. As a result, the net amount of funds available to the Savings Bank
for investment following receipt of the Conversion proceeds will be reduced by
the amount of deposit withdrawals used to fund stock purchases.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the Savings Bank's ESOP to enable it to
purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($1,196,000 at the
maximum of the Estimated Valuation Range) and would be repaid principally from
the Savings Bank's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The Holding Company expects to lend a portion of
the net proceeds retained by it to the Savings Bank to be utilized for general
corporate purposes, including increased local lending. The remaining proceeds
retained by the Holding Company initially will be invested in cash and cash
equivalents and short- to intermediate-term U.S. Government and agency
securities with laddered maturities up to two years. Such proceeds will be
available for additional contributions to the Savings Bank in the form of debt
or equity, to support future growth and diversification activities, as a source
of dividends to the stockholders of the Holding Company and for future
repurchases of Common Stock (including possible repurchases to fund the MRP or
to provide shares to be issued upon exercise of stock options) to the extent
permitted under Delaware law and OTS regulations. Currently, as discussed below
under "USE OF PROCEEDS," there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any of such activities.
(v)
<PAGE>
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq SmallCap Market under the symbol "FTNB." Trident Securities has agreed
to act as a market maker for the Holding Company's Common Stock following
consummation of the Conversion. No assurance can be given that an active and
liquid trading market for the Common Stock will develop. Further, no assurance
can be given that purchasers will be able to sell their shares at or above the
Purchase Price after the Conversion. See "RISK FACTORS -- Absence of Active
Market for the Common Stock" and "MARKET FOR COMMON STOCK."
DIVIDENDS
The Board of Directors of the Holding Company intends to adopt a policy of
paying regular cash dividends following consummation of the Conversion.
However, no decision has been made as to the amount or timing of such dividends.
Declarations and payments of dividends by the Board of Directors will depend
upon a number of factors, including the amount of the net proceeds retained by
the Holding Company, capital requirements, regulatory limitations, the Savings
Bank's and the Holding Company's financial condition and results of operations,
tax considerations and general economic conditions. In order to pay such cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Offerings and retained by the Holding Company,
dividends received from the Savings Bank or earnings on Holding Company assets.
There are certain limitations on the payment of dividends from the Savings Bank
to the Holding Company. See "REGULATION -- Federal Regulation of Savings
Associations -- Limitations on Capital Distributions." In addition, from time
to time in an effort to manage capital to a reasonable level, the Board of
Directors may determine to pay periodic special cash dividends. Periodic
special cash dividends, if paid, may be paid in addition to, or in lieu of,
regular cash dividends. As with regular cash dividends, there can be no
assurance that periodic special cash dividends will be paid or that, if paid,
will continue to be paid. No assurances can be given that any dividends will be
declared or, if declared, what the amount of dividends will be or whether such
dividends, once declared, will continue. See "DIVIDEND POLICY."
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
Officers and directors (including directors emeriti) of the Savings Bank
(11 persons) are expected to subscribe for an aggregate of approximately 128,000
shares of Common Stock, or 11.6% and 8.6% of the shares based on the minimum and
the maximum of the Estimated Valuation Range, respectively. See "SHARES TO BE
PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS." In addition,
purchases by the ESOP, allocations under the MRP, and the exercise of stock
options issued under the Stock Option Plan, will increase the number of shares
beneficially owned by officers, directors and employees. Assuming (i) the
receipt of stockholder approval for the MRP and the Stock Option Plan, (ii) the
open market purchase of shares on behalf of the MRP, (iii) the purchase by the
ESOP of 8% of the Common Stock sold in the Offerings, and (iv) the exercise of
stock options equal to 10% of the number of shares of Common Stock issued in the
Conversion, directors, officers and employees of the Holding Company and the
Savings Bank would have voting control, on a fully diluted basis, of 30.5% and
27.8% of the Common Stock, based on the issuance of Common Stock at the minimum
and maximum of the Estimated Valuation Range, respectively. See "RISK FACTORS -
- - Antitakeover Effects of Governing Documents, Delaware and Federal Law, Control
by Insiders and Employment Agreements -- Voting Control by Insiders." The MRP
and Stock Option Plan are subject to approval by the stockholders of the Holding
Company at a meeting to be held no earlier than six months following
consummation of the Conversion.
RISK FACTORS
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.
(vi)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Savings Bank
and its subsidiary at the dates and for the periods indicated. This information
is qualified in its entirety by reference to the detailed information contained
in the Consolidated Financial Statements and Notes thereto presented elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
At April 30,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................... $85,496 $79,351 $73,620 $73,622 $72,345
Cash........................................... 2,924 4,189 5,322 8,152 10,434
U.S. Government and federal agency
obligations available for sale................ 3,216 4,201 -- -- --
U.S. Government and federal agency
obligations held to maturity.................. -- -- 4,260 4,840 2,703
Mortgage-backed securities available for sale.. -- 1 -- -- --
Mortgage-backed securities held to maturity.... -- -- 1,196 1,689 1,986
Loans receivable, net.......................... 73,893 67,805 60,282 56,323 54,104
Loans held for sale............................ 2,306 574 -- -- 434
Deposits....................................... 70,316 65,205 64,630 65,235 64,870
FHLB advances.................................. 5,000 4,500 -- -- --
Retained earnings, substantially restricted.... 9,117 8,484 7,933 7,052 6,055
Year Ended April 30,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................................ $ 6,172 $ 5,355 $ 5,413 $ 5,997 $ 6,438
Interest expense............................... 3,781 2,944 2,671 3,345 4,066
------- ------- ------- ------- -------
Net interest income............................ 2,391 2,411 2,742 2,652 2,372
Provision for loan losses...................... 44 118 48 160 201
------- ------- ------- ------- -------
Net interest income
after provision for loan losses............... 2,347 2,293 2,694 2,492 2,171
Other income................................... 485 360 413 426 393
Other expense.................................. 1,849 1,809 1,741 1,625 1,388
------- ------- ------- ------- -------
Income before income taxes..................... 983 844 1,366 1,293 1,176
Income taxes................................... 363 301 485 505 457
------- ------- ------- ------- -------
Income before cumulative effect
of accounting change.......................... 620 543 881 788 719
Cumulative effect of accounting change(1)...... -- -- -- 209 --
------- ------- ------- ------- -------
Net income..................................... $ 620 $ 543 $ 881 $ 997 $ 719
======= ======= ======= ======= =======
</TABLE>
- -------------
(1) Reflects adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(vii)
<PAGE>
<TABLE>
<CAPTION>
At April 30,
-------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding.. 2,659 2,519 2,445 2,423 2,444
Deposit accounts............... 9,691 9,166 8,683 8,805 9,153
Full-service offices........... 2 2 2 2 2
</TABLE>
<TABLE>
<CAPTION>
At or For the
Year Ended April 30,
-------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on assets (1)............. 0.75% 0.72% 1.12% 1.07% 1.03%
Return on equity (2)............. 7.00 6.55 11.92 12.13 12.58
Retained earnings to assets (3).. 10.70 10.93 10.06 8.82 8.21
Interest rate spread (4)......... 2.60 2.96 3.58 3.39 3.18
Net interest margin (5).......... 3.02 3.33 3.90 3.75 3.59
Average interest-earning assets
to average interest-bearing
liabilities.................... 108.84 109.15 108.64 107.71 106.64
Noninterest expense as a
percent of average total
assets.......................... 2.23 2.39 2.37 2.21 2.00
Asset Quality Ratios:
Nonaccrual and 90 days or more
past due loans as a percent
of loans receivable, net....... 0.43 0.23 1.53 0.44 1.72
Nonperforming assets as a
percent of total assets........ 0.60 0.20 1.53 0.72 1.86
Allowance for losses as a
percent of gross loans
receivable..................... 1.02 1.10 1.09 1.26 1.17
Allowance for losses as a
percent of nonperforming loans. 245.44 498.05 72.18 291.78 68.78
Net charge-offs to average
outstanding loans............... 0.03 0.03 0.17 0.14 0.05
</TABLE>
- ------------------
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average retained earnings divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(viii)
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for the
Savings Bank at July 31, 1996 and April 30, 1996, selected operating data for
the Savings Bank for the three months ended July 31, 1996 and 1995 and selected
financial ratios for the Savings Bank at and for the three months ended July 31,
1996 and 1995. The selected financial and operating data and financial ratios
at and for the three months ended July 31, 1996 and 1995 are derived from the
unaudited consolidated financial statements of the Savings Bank, which, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation. This information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At
July 31, April 30,
1996 1996
------------ -----------
(Unaudited)
(In Thousands)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................. $90,384 $85,496
Cash......................................... 3,092 2,924
Investment securities available for sale..... 3,206 3,216
Loans receivable, net........................ 77,969 73,893
Loans held for sale.......................... 2,521 2,306
Deposits..................................... 71,605 70,316
FHLB advances................................ 8,000 5,000
Retained earnings, substantially restricted.. 9,337 9,117
<CAPTION>
Three Months
Ended July 31,
-------------------
1996 1995
------- -------
(Unaudited)
(In Thousands)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income.............................. $ 1,719 $ 1,473
Interest expense............................. 1,013 910
------- -------
Net interest income.......................... 706 563
Provision for loan losses.................... 25 --
------- -------
Net interest income after provision
for loan losses........................... 681 563
Other income................................. 162 109
Other expense................................ 482 445
------- -------
Income before income taxes................... 361 227
Income taxes................................. 132 83
------- -------
Net income................................... $ 229 $ 144
======= =======
</TABLE>
(ix)
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended July 31,
------------------
1996 1995
------- ---------
<S> <C> <C>
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on assets (1)(2)............................ 1.04% 0.71%
Return on equity (1)(3)............................ 9.92 6.69
Retained earnings to assets (4).................... 10.49 10.66
Interest rate spread (1)(5)........................ 2.98 2.51
Net interest margin (1)(6)......................... 3.37 2.93
Average interest-earning assets to
average interest-bearing liabilities.............. 108.06 108.81
Noninterest expense as a
percent of average total assets (1)............... 2.19 2.21
Asset Quality Ratios:
Nonaccrual and 90 days or more past due loans
as a percent of loans receivable, net............. 0.36 0.09
Nonperforming assets as a percent of total assets.. 0.54 0.16
Allowance for losses as a percent of total assets.. 0.88 0.92
Allowance for losses as a percent of
nonperforming loans............................... 276.43 1,207.28
- ------------------
</TABLE>
(1) Ratios for the three-month periods are annualized.
(2) Net income divided by average total assets.
(3) Net income divided by average retained earnings.
(4) Average retained earnings divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
COMPARISON OF FINANCIAL CONDITION AT JULY 31, 1996 AND APRIL 30, 1996
The Savings Bank's total assets increased by $4.9 million to $90.4 million
at July 31, 1996 from $85.5 million at April 30, 1996. Cash and investment
securities increased slightly to $6.3 million at July 31, 1996 from $6.1 million
at April 30, 1996. Loans receivable increased by $4.1 million to $78.0 million
at July 31, 1996 from $73.9 million at April 30, 1996 as a result of strong loan
demand. The increase in the loan portfolio was funded with FHLB advances, which
increased to $8.0 million from $5.0 million, and deposits, which increased $1.3
million to $71.6 million from $70.3 million as the Savings Bank continued to
price savings certificates more aggressively.
Nonperforming loans decreased to $289,000, or 0.36% of net loans
receivable, at July 31, 1996 from $319,000, or 0.43% of net loans receivable, at
April 30, 1996. Real estate owned at July 31, 1996 remained unchanged from
April 30, 1996.
At July 31, 1996, the Savings Bank's tangible, core and risk-based capital
ratios were 10.32%, 10.32% and 17.75%, respectively. For definitions and
further information relating to the Savings Bank's regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements." See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for
the Savings Bank's capital levels at April 30, 1996 and pro forma capital levels
as a result of the Offerings.
(x)
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JULY 31, 1996 AND
1995
NET INCOME. Net income increased $85,000, or 59.0%, to $229,000 for the
three months ended July 31, 1996 from $144,000 for the three months ended July
31, 1995. The increase in net income was primarily the result of increased net
interest income and the receipt of a liquidation payment from the Savings Bank's
data processor.
NET INTEREST INCOME. Net interest income increased by $143,000, or 25.4%,
to $706,000 for the three months ended July 31, 1996 from $563,000 for the three
months ended July 31, 1995. Interest income increased by $246,000 to $1.7
million for the three months ended July 31, 1996 from $1.5 million for the
comparable period in 1995. Interest income on loans increased by $304,000
between the periods while interest income on investment securities and interest-
bearing deposits decreased by $57,000. Interest income on loans increased as a
result of a larger average balance in 1996 and an increase in the average yield
on loans. Interest expense increased $103,000 to $1.0 million for the three
months ended July 31, 1996 from $910,000 for the comparable period in 1995.
Interest expense on FHLB advances increased $27,000 between the periods as a
result of a larger average balance during the three months ended July 31, 1996.
Interest expense on deposits increased $76,000, also as a result of a larger
average balance during the three months ended July 31, 1996. The Savings Bank's
interest rate spread increased to 2.98% for the three months ended July 31, 1996
from 2.51% for the three months ended July 31, 1995.
PROVISION FOR LOAN LOSSES. The Savings Bank's provision for loan losses
was $25,000 for the three months ended July 31, 1996. There was no provision
for loan losses during the three months ended July 31, 1995. The provision was
larger in 1996 because of the increase in the size of the loan portfolio and
charge-offs taken during the quarter. Charge-offs during the three months ended
July 31, 1996 totalled $9,000, while recoveries totalled $2,000. Accordingly,
the Savings Bank's allowance for loan losses increased from $782,000, or 1.02%
of total loans, at April 30, 1996 to $800,000, or 0.98% of total loans, at July
31, 1996.
OTHER INCOME. Other income increased to $162,000 for the three months
ended July 31, 1996 from $109,000 for the three months ended July 31, 1995. The
increase was due to the receipt of a $41,000 payment in connection with the
liquidation of the Savings Bank's data processor and an increase of $12,000 in
service charges and other fees as a result of the growth of the loan servicing
portfolio.
OTHER EXPENSE. Other expense increased $37,000, or 8.3%, to $482,000 for
the three months ended July 31, 1996 from $445,000 for the three months ended
July 31, 1995. The increase was primarily the result of a $15,000 increase in
employee compensation and benefits expense and a $13,000 increase in occupancy
costs.
INCOME TAXES. The provision for income taxes increased to $132,000 for the
three months ended July 31, 1996 from $83,000 for the comparable period in 1995
as a result of higher taxable earnings.
(xi)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
matters discussed elsewhere in this Prospectus.
DECREASE IN RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Holding Company's post-
Conversion return on equity will be less than the average return on equity for
publicly traded thrift institutions and their holding companies because of the
increase in consolidated equity of the Holding Company that will result from the
net proceeds of the Offerings. See "SELECTED CONSOLIDATED FINANCIAL
INFORMATION" for numerical information regarding the Savings Bank's historical
return on equity and "CAPITALIZATION" for a discussion of the Holding Company's
estimated pro forma consolidated capitalization as a result of the Conversion.
In addition, the expenses associated with the ESOP and the MRP (see "PRO FORMA
DATA"), along with increased expenses associated with operating as a public
company, are expected to contribute initially to reduced return on equity. The
Savings Bank intends to deploy the net proceeds of the Offerings to increase
earnings per share, without assuming undue risk, with the goal of achieving a
return on equity comparable to the average for publicly traded thrift
institutions and their holding companies. This goal likely will take a number
of years to achieve and no assurances can be given that this goal can be
attained. Consequently, for the foreseeable future, investors should not expect
a return on equity that will meet or exceed the average return on equity for
publicly traded thrift institutions or their holding companies.
RISKS OF DEPENDENCE ON LOCAL ECONOMY
The Savings Bank has been and intends to continue to operate as a
community-oriented financial institution, with a focus on servicing customers in
Callaway and Boone, and to a lesser extent, Cole and Audrain Counties, Missouri.
Callaway and Boone Counties have an estimated combined population of 159,000, of
which 35,000 live in Callaway County. Although the Savings Bank has experienced
strong loan demand in recent years, because the Savings Bank operates in a
market area with a small population and limited growth prospects, the Savings
Bank's ability to achieve loan and deposit growth may be limited. Future growth
opportunities for the Savings Bank depend largely on market area growth and the
Savings Bank's ability to compete effectively within its market area. At April
30, 1996, most of the Savings Bank's loan portfolio consisted of loans made to
borrowers and collateralized by properties located in its market area. As a
result of this concentration, a downturn in the economy of the Savings Bank's
market area could increase the risk of loss associated with the Savings Bank's
loan portfolio.
COMPETITION WITHIN MARKET AREA
The Savings Bank faces intense competition both in originating loans and
attracting deposits. The Savings Bank's competition comes primarily from
commercial banks and other savings institutions in the Savings Bank's market
area and, to a lesser extent, from credit unions and other financial
institutions. In recent years, the Savings Bank has experienced an increased
level of competition for deposits from securities firms, insurance companies and
other investment vehicles, such as money market and mutual funds. This
competition could adversely affect the Savings Bank's future growth prospects.
CERTAIN LENDING RISKS
Multi-family and commercial real estate lending has been a constant part of
the Savings Bank's lending strategy in recent years. For the year ended April
30, 1996, the Savings Bank originated $4.5 million of multi-family real estate
loans and $4.4 million of commercial real estate loans. All of the properties
securing these loans are located in Missouri. At April 30, 1996, the Savings
Bank's loan portfolio included multi-family real estate loans totalling $3.8
million, or 4.9% of total loans, and commercial real estate loans totalling $8.7
million, or 11.1% of
1
<PAGE>
total loans. Multi-family and commercial real estate loans are generally
viewed as exposing the lender to greater credit risk than one- to four-family
residential loans and typically involve higher loan principal amounts.
Repayment of multi-family and commercial real estate loans is dependent,
in large part, on sufficient income from the property to cover operating
expenses and debt service. Economic events and government regulations,
which are outside the control of the borrower or lender, could impact the
value of the security for such loans or the future cash flow of the affected
properties. To reduce the risk associated with such loans and to provide
funds for lending activities, the Savings Bank frequently sells participation
interests in the larger multi-family and commercial loans that it originates.
The Savings Bank retains the servicing rights on such loans and generally
retains 10% or 20% of the loan balance. During the year ended April 30, 1996,
the Savings Bank sold $1.6 million of multi-family and $5.9 million of
commercial real estate loans. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
At April 30, 1996, consumer and other loans totalled $9.9 million, or 12.7%
of total gross loans. Consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of consumer 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. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans. At April 30, 1996, the Savings Bank had no
material delinquencies in its consumer loan portfolio.
The Savings Bank also originates mortgage loans secured by non-owner-
occupied one- to four-family homes. At April 30, 1996, out of $46.7 million of
loans secured by one- to four-family homes, loans secured by non-owner-occupied
residences totalled $19.5 million. Loans secured by non-owner-occupied
residences generally involve greater risks than loans secured by owner-occupied
residences. As with loans secured by multi-family properties, payments on loans
secured by non-owner-occupied residences are often dependent on the successful
operation or management of the properties. Repayment of such loans may be
subject to a greater extent to adverse conditions in the local real estate
market or the economy generally.
DEPENDENCE ON KEY PERSONNEL
Mr. Kermit D. Gohring, President of the Savings Bank, has made significant
policy decisions and has been instrumental in implementing the policies and
procedures and directing the lending strategy of the Savings Bank for over 32
years. The Board of Directors believes that the Savings Bank's growth and
profitability is dependent in large part upon the Savings Bank's maintaining and
furthering the lending relationships established by management, especially Mr.
Kermit Gohring. Although the Board of Directors believes that the other
officers of the Savings Bank are experienced and fully capable, the loss of Mr.
Kermit Gohring could have an adverse impact on the operations of the Savings
Bank. Neither the Savings Bank nor the Holding Company has obtained, or expects
to obtain, a "key man" life insurance policy for Mr. Kermit Gohring. The
Holding Company and the Savings Bank intend to enter into a three-year
employment agreement with Mr. Kermit Gohring. See "MANAGEMENT OF THE SAVINGS
BANK -- Executive Compensation -- Employment Agreements." In addition, subject
to the approval of the MRP and Stock Option Plan at a meeting of stockholders
occurring no earlier than six months following consummation of the Conversion,
the Holding Company anticipates granting stock options and restricted stock to
Mr. Kermit Gohring. Such options and restricted stock grants will vest over a
period of five years in accordance with the terms of such plans. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option Plan" and "--
Management Recognition Plan."
2
<PAGE>
ANTITAKEOVER EFFECTS OF GOVERNING DOCUMENTS, DELAWARE AND FEDERAL LAW, CONTROL
BY INSIDERS AND EMPLOYMENT AGREEMENTS
PROVISIONS IN THE HOLDING COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE AND
FEDERAL LAW. Certain provisions included in the Holding Company's Certificate
of Incorporation and in the Delaware General Corporation Law ("DGCL") might
discourage potential proxy contests and other potential takeover attempts,
particularly those that have not been negotiated with the Board of Directors.
As a result, these provisions might preclude takeover attempts that certain
stockholders may deem to be in their best interest and might tend to perpetuate
existing management. These provisions include, among other things, a provision
limiting voting rights of beneficial owners of more than 10% of the Common
Stock, supermajority voting requirements for certain business combinations,
staggered terms for directors, non-cumulative voting for directors, the removal
of directors without cause only upon the vote of holders of 80% of the
outstanding voting shares, limitations on the calling of special meetings, and
specific notice requirements for stockholder nominations and proposals. Certain
provisions of the Certificate of Incorporation of the Holding Company cannot be
amended by stockholders unless an 80% stockholder vote is obtained. The
existence of these anti-takeover provisions could result in the Holding Company
being less attractive to a potential acquiror and in stockholders receiving less
for their shares than otherwise might be available in the event of a takeover
attempt. Furthermore, federal regulations prohibit for three years after
consummation of the Conversion the ownership of more than 10% of the Savings
Bank or the Holding Company without prior OTS approval. Federal law also
requires OTS approval prior to the acquisition of "control" (as defined in OTS
regulations) of an insured institution. For a more detailed discussion of these
provisions, see "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
VOTING CONTROL BY INSIDERS. Directors (including directors emeriti) and
officers of the Savings Bank and the Holding Company expect to purchase 128,000
shares of Common Stock, or 11.6% and 8.6% of the shares issued in the Offerings
at the minimum and the maximum of the Estimated Valuation Range, respectively.
Directors and officers are also expected to control indirectly the voting of
approximately 8% of the shares of Common Stock issued in the Conversion through
the ESOP (assuming shares have been allocated under the ESOP). Under the terms
of the ESOP, the unallocated shares will be voted by the ESOP trustees in the
same proportion as the votes cast by participants with respect to the allocated
shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company expects to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Savings Bank. Assuming the receipt of stockholder
approval, the Holding Company expects to acquire common stock of the Holding
Company on behalf of the MRP in an amount equal to 4% of the Common Stock issued
in the Conversion, or 44,200 and 59,800 shares at the minimum and the maximum of
the Estimated Valuation Range, respectively. These shares will be acquired
either through open market purchases or from authorized but unissued shares of
Common Stock. Under the terms of the MRP, the MRP committee or the MRP trustees
will have the power to vote unallocated and unvested shares. The Holding
Company also intends to seek approval of the Stock Option Plan at a meeting of
stockholders to be held no earlier than six months following the consummation of
the Conversion. The Holding Company intends to reserve for future issuance
pursuant to the Stock Option Plan a number of authorized shares of Common Stock
equal to 10% of the Common Stock issued in the Conversion (110,500 and 149,500
shares at the minimum and the maximum of the Estimated Valuation Range,
respectively).
Assuming (i) the receipt of stockholder approval for the MRP and the Stock
Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii)
the purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and
(iv) the exercise of stock options equal to 10% of the number of shares of
Common Stock issued in the Conversion, directors, officers and employees of the
Holding Company and the Savings Bank would have voting control, on a fully
diluted basis, of 30.5% and 27.8% of the Common Stock, based on the issuance of
Common Stock at the minimum and maximum of the Estimated Valuation Range,
respectively. Management's potential voting control alone, as well as together
with additional stockholder support, might preclude or make more
3
<PAGE>
difficult takeover attempts that certain stockholders deem to be in their best
interest and might tend to perpetuate existing management.
SEVERANCE PAYMENTS UPON CHANGE IN CONTROL. The proposed employment
agreements with the Chief Executive Officer and certain members of management
provide for cash severance payments in the event of a change in control of the
Holding Company or the Savings Bank. Such agreements also provide for the
continuation of certain employee benefits following the change in control.
Assuming a change in control occurred as of April 30, 1996, the aggregate
amounts payable under these agreements would have been approximately $452,000.
These provisions may have the effect of increasing the cost of acquiring the
Holding Company, thereby discouraging future attempts to take over the Holding
Company or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE
HOLDING COMPANY."
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Effective January 1, 1996, the FDIC substantially reduced deposit insurance
premiums for well-capitalized, well-managed financial institutions that are
members of the Bank Insurance Fund ("BIF"). Under the new assessment schedule,
approximately 92% of BIF members pay the statutory minimum annual assessment of
$2,000. With respect to SAIF member institutions, the FDIC has retained the
existing rate schedule of 23 to 31 basis points. The Savings Bank is, and after
the Conversion will remain, a member of the SAIF rather than the BIF. SAIF
premiums may not be reduced for several years because the SAIF has lower
reserves than the BIF. Because deposit insurance premiums are often a
significant component of noninterest expense for insured depository
institutions, the reduction in BIF premiums may place the Savings Bank at a
competitive disadvantage since BIF-insured institutions (such as most commercial
banks) may be able to offer more attractive loan rates, deposit rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions like the Savings
Bank to pay a one-time assessment to increase SAIF's reserves to $1.25 per $100
of deposits. Such assessment is expected to be approximately 80 basis points on
the amount of deposits held by a SAIF-member institution. The payment of a one-
time fee would have the effect of immediately reducing the capital and pre-tax
earnings of SAIF-member institutions by the amount of the fee. Based on the
Savings Bank's assessable deposits of $68.6 million at April 30, 1996, a one-
time assessment of 80 basis points would equal approximately $549,000 on a pre-
tax basis, or $345,000 after tax. This charge, if incurred, would represent, on
a pro forma basis, a decrease in book value per share at April 30, 1996 of $0.31
based upon the sale of shares at the minimum of the Estimated Valuation Range
and of $0.23 based upon the sale of shares at the maximum of the Estimated
Valuation Range. Management cannot predict whether any legislation imposing
such a fee will be enacted, or, if enacted, the amount or timing of any one-time
fee, or whether ongoing SAIF premiums will be reduced to a level equal to that
of BIF premiums. See "REGULATION."
INTEREST RATE RISK EXPOSURE
The financial condition and operations of the Savings Bank, and of savings
institutions in general, are influenced significantly by general economic
conditions, by the related monetary and fiscal policies of the federal
government and by the regulations of the OTS and the FDIC. The Savings Bank's
profitability, like that of most financial institutions, is dependent to a large
extent on its net interest income, which is the difference between its interest
income on interest-earning assets, such as loans and investments, and its
interest expense on interest-bearing liabilities, such as deposits and
borrowings. At April 30, 1996, 79.5% of the Savings Bank's total gross loans
were adjustable-rate loans and 78.8% of the Savings Bank's deposits were
certificate accounts. The interest earned by the Savings Bank on such loans and
paid by the Savings Bank on such accounts are significantly impacted by market
interest rates. Accordingly, the Savings Bank's results of operations are
significantly influenced by movements in market interest rates and the Savings
Bank's ability to manage its assets and liabilities in response to such
movements. As a result of the prevailing interest rate environment, during its
three most recent fiscal years, the
4
<PAGE>
Savings Bank has experienced a decrease in its interest rate spread and net
interest margin. The Savings Bank's interest rate spread, which is the
difference between the weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities, decreased from 3.58% for
the year ended April 30, 1994 to 2.96% for the year ended April 30, 1995 to
2.60% for the year ended April 30, 1996. Further changes in interest rates could
result in further decreases in the Savings Bank's interest rate spread, which
would have an adverse effect on the Savings Bank's net interest income. The
Savings Bank's net interest margin, which is net interest income as a percentage
of average interest-earning assets, decreased from 3.90% for the year ended
April 30, 1994 to 3.33% for the year ended April 30, 1995 to 3.02% for the year
ended April 30, 1996.
The Savings Bank will continue to be affected by general changes in levels
of interest rates and other economic factors beyond its control. To better
manage the impact of changes in interest rates, the Savings Bank has sought to
improve the match between asset and liability maturities or repricing periods
and rates by emphasizing the origination of adjustable-rate mortgage ("ARM")
loans and shorter term consumer loans, offering certificates of deposit with
terms of up to six years and maintaining an investment portfolio with laddered
maturities of up to two years. At April 30, 1996, out of total gross loans of
$78.4 million, the Savings Bank had $62.3 million of ARM loans in its loan
portfolio. The Savings Bank's ARM loans contain periodic and lifetime interest
rate adjustment limits which, in a rising interest rate environment, may prevent
such loans from repricing to market interest rates. While management
anticipates that the Savings Bank's ARM loans will better offset the adverse
effects of an increase in interest rates as compared to fixed-rate mortgages,
the increased mortgage payments required of ARM borrowers in a rising interest
rate environment could potentially cause an increase in delinquencies and
defaults. The Savings Bank has not historically had an increase in such
delinquencies and defaults on ARM loans, but no assurance can be given that such
delinquencies or defaults would not occur in the future. The marketability of
the underlying property also may be adversely affected in a high interest rate
environment. Moreover, the Savings Bank's ability to originate ARM loans may be
affected by changes in the level of interest rates and by market acceptance of
the terms of such loans. For further information regarding the Savings Bank's
asset and liability management, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
Changes in the level of interest rates also affect the amount of loans
originated by the Savings Bank and, thus, the amount of loan and commitment
fees, as well as the market value of the Savings Bank's investment securities
and other interest-earning assets. Changes in interest rates also can affect
the average life of loans. Decreases in interest rates may result in increased
prepayments of loans, as borrowers refinance to reduce borrowing costs. Under
these circumstances, the Savings Bank is subject to reinvestment risk to the
extent that it is not able to reinvest such prepayments at rates that are
comparable to the rates on the maturing loans or securities. Moreover,
volatility in interest rates also can result in disintermediation, or the flow
of funds away from savings institutions into direct investments, such as U.S.
Government and corporate securities and other investment vehicles which, because
of the absence of federal insurance premiums and reserve requirements, generally
pay higher rates of return than savings institutions.
The Savings Bank's results of operations are also dependent on loan
servicing fees. At April 30, 1996, 1995 and 1994, the Savings Bank serviced
$84.4 million, $73.8 million and $71.9 million, respectively, of loans for
others. Loan servicing fees for the years ended April 30, 1996, 1995 and 1994
totalled $281,000, $255,000 and $262,000, respectively. A decreasing interest
rate environment may result in a higher volume of prepayments as borrowers
refinance their loans, which may reduce the size and adversely impact the income
received from the loan servicing portfolio. See "BUSINESS OF THE SAVINGS BANK -
- - Lending Activities -- Loan Servicing."
ABSENCE OF ACTIVE MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq SmallCap
Market under the symbol "FTNB," there can be no assurance that the Holding
Company will meet Nasdaq SmallCap Market listing requirements, which include a
minimum market capitalization, at least two
5
<PAGE>
market makers and a minimum number of holders of record. While Trident
Securities has agreed to act as a market maker and will use its best efforts to
assist the Holding Company in encouraging another market maker to establish and
maintain a market in the Common Stock, there can be assurance that another
market maker will make a market in the Common Stock. Making a market in
securities involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
The development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Holding Company, the Savings Bank or any market maker. Accordingly, there can be
no assurance that an active and liquid trading market for the Common Stock will
develop, or once developed, will continue. Furthermore, there can be no
assurance that purchasers will be able to sell their shares at or above the
Purchase Price. See "MARKET FOR COMMON STOCK."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
At a meeting to be held no earlier than six months following consummation
of the Conversion, the Holding Company intends to seek stockholder approval of
the MRP. If approved, the MRP intends to acquire an amount of Common Stock of
the Holding Company equal to 4% of the shares issued in the Conversion. Such
shares of Common Stock of the Holding Company may be acquired by the Holding
Company in the open market or from authorized but unissued shares of Common
Stock of the Holding Company. In the event that the MRP acquires authorized but
unissued shares of Common Stock from the Holding Company, the voting interests
of existing stockholders will be diluted and net income per share and
stockholders' equity per share will be decreased. See "PRO FORMA DATA" and
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition Plan."
At a meeting to be held no earlier than six months following consummation
of the Conversion, the Holding Company intends to seek stockholder approval of
the Stock Option Plan. If approved, the Stock Option Plan will provide for
options for up to a number of shares of Common Stock of the Holding Company
equal to 10% of the shares issued in the Conversion. Such shares may be
authorized but unissued shares of Common Stock of the Holding Company and, upon
exercise of the options, will result in the dilution of the voting interests of
existing stockholders and may decrease net income per share and stockholders'
equity per share. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock
Option Plan."
If the ESOP is not able to purchase 8% of the shares of Common Stock issued
in the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income) to those Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members who receive
and/or exercise the Subscription Rights in an amount equal to such value.
Additionally, the Savings Bank could be required to recognize a gain for tax
purposes on such distribution. Whether Subscription Rights are considered to
have ascertainable value is an inherently factual determination. The Savings
Bank has been advised by RP Financial that such rights have no value; however,
RP Financial's conclusion is not binding on the Internal Revenue Service
("IRS"). See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Tax Effects."
6
<PAGE>
POTENTIAL OPERATIONAL RESTRICTIONS ASSOCIATED WITH REGULATORY OVERSIGHT
The Savings Bank is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Savings Bank is a member of the FHLB System and is subject to certain
limited regulations promulgated by the Board of Governors of the Federal Reserve
System ("Federal Reserve"). As the holding company of the Savings Bank, the
Holding Company also will be subject to regulation and oversight by the OTS.
Such regulation and supervision govern the activities in which an institution
can engage and is intended primarily for the protection of the insurance fund
and depositors. Regulatory authorities have been granted extensive discretion
in connection with their supervisory and enforcement activities which are
intended to strengthen the financial condition of the banking industry,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC or Congress, could have a material impact on the Holding
Company, the Savings Bank and their respective operations. See "REGULATION."
Legislation proposing a comprehensive reform of the banking and thrift
industries has recently been discussed in the United States Congress. Under
such legislation, (i) the BIF and the SAIF would be merged, at which time
thrifts and banks would pay the same deposit insurance premiums, (ii) federal
savings associations would be required to convert to a national bank or a state-
chartered bank or thrift, (iii) all savings and loan holding companies would
become bank holding companies and (iv) the OTS would be merged with the Office
of the Comptroller of the Currency. It is uncertain when or if such legislation
may be passed and, if passed, in what form such legislation may be passed.
FULTON BANCORP, INC.
The Holding Company was organized as a Delaware corporation at the
direction of the Savings Bank in May 1996 to acquire all of the outstanding
capital stock of the Savings Bank to be issued in the Conversion. The Holding
Company has received the approval of the OTS to become a savings and loan
holding company and to acquire 100% of the capital stock of the Savings Bank.
Prior to the Conversion, the Holding Company will not engage in any material
operations. After the Conversion, the Holding Company will be classified as a
unitary savings and loan holding company subject to regulation by the OTS, and
its principal business will be the ownership of the Savings Bank. Immediately
following the Conversion, the only significant assets of the Holding Company
will be the capital stock of the Savings Bank, that portion of the net proceeds
of the Offerings to be retained by the Holding Company and a note receivable
from the ESOP evidencing a loan from the Holding Company to fund the Savings
Bank's ESOP. See "BUSINESS OF THE HOLDING COMPANY."
The holding company structure will permit the Holding Company to expand the
financial services currently offered through the Savings Bank. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings will, should it decide to do so, facilitate the
expansion and diversification of its operations. The holding company structure
also will enable the Holding Company to repurchase its stock without adverse tax
consequences. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulations."
FULTON SAVINGS BANK, FSB
The Savings Bank, founded in 1912, is a federally chartered mutual savings
bank located in Fulton, Missouri. The Savings Bank amended its charter from
that of a state-chartered mutual savings bank to become a federal mutual savings
bank in April 1995. In connection with the Conversion, the Savings Bank will
convert to a federally chartered capital stock savings bank and will become a
subsidiary of the Holding Company. The Savings Bank is regulated by the OTS,
its primary federal regulator, and the FDIC, the insurer of its deposits. The
Savings Bank's deposits are insured by the SAIF and have been federally insured
since 1965. The Savings Bank has been
7
<PAGE>
a member of the FHLB System since 1942. At April 30, 1996, the Savings Bank had
total assets of $85.5 million, total deposits of $70.3 million and retained
earnings of $9.1 million on a consolidated basis.
The Savings Bank is a community oriented financial institution that engages
primarily in the business of attracting deposits from the general public and
using those funds to originate residential and commercial mortgage loans within
the Savings Bank's market area. The Savings Bank generally sells all of the
fixed-rate and some of the adjustable-rate residential mortgage loans that it
originates while retaining the servicing rights on such loans. At April 30,
1996, one- to four-family residential mortgage loans totalled $46.7 million, or
59.6% of the Savings Bank's total gross loans. The Savings Bank also originates
multi-family, commercial real estate, construction, land and consumer and other
loans. The Savings Bank frequently sells participation interests in the non-
residential mortgage loans it originates. At April 30, 1996, multi-family and
commercial real estate loans accounted for 16.0% of the Savings Bank's total
gross loans, construction loans accounted for 9.8% of total gross loans and
consumer and other loans accounted for 12.7% of total gross loans. The Savings
Bank has a branch office located in Holts Summit, Missouri.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $10.5 million to $14.4 million, or up to $16.7 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 the approval of the OTS to purchase all of the capital stock of the
Savings Bank to be issued in the Conversion in exchange for 50% of the net
proceeds of the Offerings. This will result in the Holding Company retaining
approximately $5.3 million to $7.2 million of net proceeds, or up to $8.3
million if the Estimated Valuation Range is increased by 15%, and the Savings
Bank receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including increased
local lending. The Savings Bank may also use a portion of the funds contributed
to it to retire outstanding FHLB advances. Pending deployment of funds, the
Savings Bank plans initially to invest the net proceeds in short- to
intermediate-term U.S. Treasury and agency securities with laddered maturities
up to two years. Shares of Common Stock may be purchased with funds on deposit
at the Savings Bank, which will reduce deposits by the amount of such purchases.
As a result, the net amount of funds available to the Savings Bank for
investment following receipt of the Conversion proceeds will be reduced by the
amount of deposit withdrawals used to fund stock purchases.
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 $884,000 to $1,196,000 based on the sale to the
ESOP of 88,400 shares (at the minimum of the Estimated Valuation Range) and
119,600 shares (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 1,719,250 shares, are sold in the Conversion, the Holding Company's loan to
the ESOP would be approximately $1.4 million. It is anticipated that the ESOP
loan will have a ten-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 Savings Bank's contributions to the
ESOP and from any dividends paid on shares of Common Stock held by the ESOP.
The Holding Company expects to lend a portion of the net proceeds to the
Savings Bank to be utilized for general corporate purposes, including increased
local lending. The remaining proceeds retained by the Holding Company initially
will be invested in cash and equivalents and short- to intermediate-term U.S.
Government and agency securities with laddered maturities up to two years. Such
proceeds will be available for additional
8
<PAGE>
contributions to the Savings Bank 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 permitted under Delaware law and federal regulations.
Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any diversification activities.
Following consummation of the Conversion, the Board of Directors will have
the authority to adopt plans for repurchases of Common Stock or other returns of
capital to stockholders, 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 may 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 or return of capital will be subject to a
determination by the Board of Directors that both the Holding Company and the
Savings Bank will be capitalized in excess of all applicable regulatory
requirements after any such repurchases or return of capital and that capital
will be adequate, taking into account, among other things, the level of
nonperforming and classified assets, the Holding Company's and the Savings
Bank's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
See "THE CONVERSION -- Restrictions on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
The Board of Directors of the Holding Company intends to adopt a policy of
paying regular cash dividends following consummation of the Conversion.
However, no decision has been made as to the amount or timing of such dividends.
Declarations or payments of dividends 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 Savings Bank to the Holding Company discussed below. In addition, from time
to time in an effort to manage capital to a reasonable level, the Board of
Directors may determine to pay periodic special cash dividends. Periodic
special cash dividends, if paid, may be paid in addition to, or in lieu of,
regular cash dividends. Under Delaware law, the Holding Company will be
permitted to pay cash dividends after the Conversion either out of surplus or,
if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. In order to pay such
cash dividends, however, the Holding Company must have available cash either
from the net proceeds raised in the Offerings and retained by the Holding
Company, dividends received from the Savings Bank 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, once declared, will continue.
CURRENT REGULATORY RESTRICTIONS
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Savings Bank because the Holding Company initially will have
no source of income other than dividends from the Savings Bank and earnings from
the investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require the Savings Bank 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
9
<PAGE>
payment of dividends to the Holding Company. The OTS imposes certain
limitations on the payment of dividends from the Savings Bank to the Holding
Company which utilizes a three-tiered approach that permits various levels of
distributions based primarily upon a savings association's capital level. In
addition, the Savings Bank 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
Savings Bank below the amount required for the liquidation account to be
established pursuant to the Savings Bank'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 Savings Bank -- Liquidation Account" and Note O
of Notes to the Consolidated Financial Statements included elsewhere herein.
The Savings Bank 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.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Savings Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Savings Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note G of Notes to the Consolidated Financial
Statements included elsewhere herein. The Holding Company does not contemplate
any distribution by the Savings Bank that would result in a recapture of the
Savings Bank's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq SmallCap
Market under the symbol "FTNB," there can be no assurance that the Holding
Company will meet Nasdaq SmallCap Market listing requirements, which include a
minimum market capitalization, at least two market makers and a minimum number
of record holders. Trident Securities has agreed to make a market for the
Holding Company's Common Stock following consummation of the Conversion and will
assist the Holding Company in seeking to encourage at least one additional
market maker to establish and maintain a market in the Common Stock. Making a
market involves maintaining bid and ask quotations and being able, as principal,
to effect transactions in reasonable quantities at those quoted prices, subject
to various securities laws and other regulatory requirements. While the Holding
Company has attempted to obtain commitments from broker-dealers to act as market
makers, and anticipates that prior to the completion of the Conversion it will
be able to obtain the commitment from at least one additional broker-dealer to
act as market maker for the Common Stock, there can be no assurance there will
be two or more market makers for the Common Stock. Additionally, the
development of a liquid public market depends on the existence of willing buyers
and sellers, the presence of which is not within the control of the Holding
Company, the Savings Bank or any market maker. There can be no assurance that
an active and liquid trading market for the Common Stock will develop or that,
if developed, it will continue. The number of active buyers and sellers of the
Common Stock at any particular time may 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 Purchase Price or that quotations will be available
on the Nasdaq SmallCap Market as contemplated.
10
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at April 30, 1996, 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 set forth
below in the Conversion at the minimum, midpoint and maximum of the Estimated
Valuation Range, and based on the sale of 1,719,250 shares (representing the
shares that would be issued in the Conversion after giving effect to an
additional 15% increase in the maximum valuation in the Estimated Valuation
Range, subject to receipt of an updated appraisal confirming such valuation and
OTS approval). A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
MAY MATERIALLY AFFECT PRO FORMA CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1,105,000 1,300,000 1,495,000 1,719,250
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
April 30, 1996 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
-------------- ------------ ------------ ------------ ------------
(In Thousands)
Deposits(3)......................... $70,316 $70,316 $70,316 $70,316 $70,316
FHLB advances and other borrowings.. 5,000 5,000 5,000 5,000 5,000
----------- ---------- ---------- ---------- ----------
Total deposits and
borrowed funds..................... $75,316 $75,316 $75,316 $75,316 $75,316
=========== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01
par value per share,
authorized; none issued
or outstanding................. $ -- $ -- $ -- $ -- $ --
Common Stock:
6,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4)................. -- 11 13 15 17
Additional paid-in capital....... -- 10,497 12,445 14,393 16,633
Retained earnings(5)............. 9,117 9,117 9,117 9,117 9,117
Less:
Common Stock acquired
by ESOP(6)................... -- (884) (1,040) (1,196) (1,375)
Common Stock to be acquired
by MRP(7).................... -- (442) (520) (598) (688)
----------- ---------- ---------- ---------- ----------
Total stockholders' equity.......... $ 9,117 $ 18,299 $ 20,015 $ 21,731 $ 23,704
=========== ========== ========== ========== ==========
</TABLE>
(footnotes on following page)
11
<PAGE>
_______________
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or performance of the
Savings Bank or changes in market conditions or general financial and
economic 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 Savings Bank'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) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank 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 Savings Bank'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 Savings Bank -- Liquidation Account."
Amount shown does not reflect the possible payment of a one-time assessment
to recapitalize the SAIF. See "RISK FACTORS -- Recapitalization of SAIF and
its Impact on SAIF Premiums." Based on assessable deposits of $68.6 million
at April 30, 1996, the payment of a one-time assessment of 80 basis points
would reduce retained earnings by $345,000, after tax.
(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.
In accordance with generally accepted accounting principles ("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 will be reflected in the consolidated
financial statements of the Holding Company. See "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at the Purchase Price, 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 of Holding Company Common Stock would dilute the voting and
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 SAVINGS
BANK -- 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.
12
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro forma
capital position relative to its capital requirements at April 30, 1996. The
amount of capital infused into the Savings Bank for purposes of the following
table is 50% of the net proceeds of the Offerings. For purposes 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 are 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 Savings Bank, see "REGULATION -- Federal Regulation
of Savings Associations -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT APRIL 30, 1996
----------------------------------------------------------------------------------
15% above
Midpoint of Maximum of Maximum of
Minimum of Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
-------------------- -------------------- ------------------- -----------------
1,719,250 Shares
1,105,000 Shares 1,300,000 Shares 1,495,000 Shares at $10.00 Per
April 30, 1996 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share Share
------------------ -------------------- -------------------- ------------------- -----------------
Percent Percent
Percent Percent Percent of Total of Total
of Total of Total of Total Assets Assets
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount (1) Amount (1)
------ ---------- -------- ---------- -------- ---------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............... $9,117 10.66% $13,045 14.45% $13,786 15.12% $14,527 15.77% $15,379 16.51%
Tangible capital........... $9,096 10.64% $13,024 14.43% $13,765 15.10% $14,506 15.75% $15,358 16.49%
Tangible capital
requirement............... 1,282 1.50 1,354 1.50 1,368 1.50 1,381 1.50 1,397 1.50
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $7,814 9.14% $11,670 12.93% $12,397 13.60% $13,125 14.25% $13,961 14.99%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital............... $9,096 10.64% $13,024 14.43% $13,765 15.10% $14,506 15.75% $15,358 16.49%
Core capital
requirement(2)............ 2,564 3.00 2,709 3.00 2,736 3.00 2,762 3.00 2,793 3.00
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $6,532 7.64% $10,315 11.43% $11,029 12.10% $11,744 12.75% $12,565 13.49%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Total capital(3)........... $9,486 18.46% $13,414 25.62% $14,155 26.95% $14,896 28.26% $15,748 29.76%
Risk-based
capital requirement....... 4,111 8.00 4,188 8.00 4,202 8.00 4,217 8.00 4,233 8.00
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $5,375 10.46% $ 9,226 17.62% $ 9,953 18.95% $10,679 20.26% $11,515 21.76%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
___________________
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as percentage of total adjusted assets. Risk based
capital levels are shown as a percentage of risk-weighted assets.
(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.
13
<PAGE>
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 Savings
Bank as converted, based upon an independent valuation. The Estimated Valuation
Range as of July 12, 1996 is from a minimum of $11,050,000 to a maximum of
$14,950,000 with a midpoint of $13,000,000 or, at a price per share of $10.00, a
minimum number of shares of 1,105,000, a maximum number of shares of 1,495,000
and a midpoint number of shares of 1,300,000. 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 management fee of
$157,500; (ii) all of the Common Stock will be sold in the Subscription and
Direct Community Offerings; and (iii) Conversion expenses, excluding the fees
paid to Trident Securities, will total approximately $384,500. 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, Direct Community and
Syndicated Community Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the year ended
April 30, 1996 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 Savings Bank had been invested at 6.40% at the beginning
of the period, which represents the arithmetic average of the Savings Bank's
yield on interest-earning assets and interest-bearing deposits as of April 30,
1996. As discussed under "USE OF PROCEEDS," the Holding Company expects to
retain 50% of the net proceeds of the Offerings from which it will fund the ESOP
loan. A pro forma after-tax return of 4.02% is used for both the Holding
Company and the Savings Bank for the period, after giving effect to an
incremental combined federal and state tax rate of 37.12%. 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 April 30, 1996, but
without any adjustment of per share historical or pro forma stockholders' equity
to reflect the earnings on the estimated net proceeds.
The following table summarizes the historical net income and retained earnings
of the Savings Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the period and at the date indicated, 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. 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 SAVINGS BANK -- Benefits -- 1996 Stock Option Plan" and "THE
CONVERSION -- Stock Pricing and Number of Shares Issued." Shares of Common
Stock may be purchased with funds on deposit at the Savings Bank, which will
reduce deposits by the amounts of such purchases. Accordingly, the net amount
of funds available for investment will be reduced by the amount of deposit
withdrawals used to fund stock purchases.
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.
14
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended April 30, 1996
--------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ----------- ---------- ----------------
1,105,000 1,300,000 1,495,000 1,719,250(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ----------- ---------- ----------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 11,050 $ 13,000 $ 14,950 $ 17,193
Less: estimated expenses............................ 542 542 542 542
---------- ----------- ---------- -----------
Estimated net proceeds.............................. 10,508 12,458 14,408 16,651
Less: Common Stock acquired by ESOP................. (884) (1,040) (1,196) (1,375)
Less: Common Stock to be acquired by MRP............ (442) (520) (598) (688)
---------- ----------- ---------- -----------
Net investable proceeds........................... $ 9,182 $ 10,898 $ 12,614 $ 14,588
========== =========== ========== ==========
Consolidated net income:
Historical.......................................... $ 620 $ 620 $ 620 $ 620
Pro forma income on net proceeds(2)................. 370 439 508 587
Pro forma ESOP adjustments(3)....................... (56) (65) (75) (86)
Pro forma MRP adjustments(4)........................ (56) (65) (75) (86)
---------- ----------- ---------- -----------
Pro forma net income............................... $ 878 $ 929 $ 978 $ 1,035
========== =========== ========== ==========
Consolidated net income per share (5)(6):
Historical.......................................... $ 0.60 $ 0.51 $ 0.45 $ 0.39
Pro forma income on net proceeds.................... 0.36 0.36 0.37 0.37
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..................... $ 0.86 $ 0.77 $ 0.72 $ 0.66
========== =========== ========== ==========
Consolidated stockholders' equity (book value):
Historical.......................................... $ 9,117 $ 9,117 $ 9,117 $ 9,117
Estimated net proceeds.............................. 10,508 12,458 14,408 16,651
Less: Common Stock acquired by ESOP................. (884) (1,040) (1,196) (1,375)
Less: Common Stock to be acquired by MRP(4)......... (442) (520) (598) (688)
---------- ----------- ---------- -----------
Pro forma stockholders' equity(7).................. $ 18,299 $ 20,015 $ 21,731 $ 23,705
========== =========== ========== ==========
Consolidated stockholders' equity per share(6)(8):
Historical(6)....................................... $ 8.25 $ 7.01 $ 6.10 $ 5.30
Estimated net proceeds.............................. 9.51 9.58 9.64 9.68
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)........ $ 16.56 $ 15.39 $ 14.54 $ 13.78
========== =========== ========== ==========
Purchase Price as a multiple of pro forma
net income per share................................ 11.63x 12.99x 13.89x 15.15x
Purchase Price as a percentage of pro forma
stockholders' equity per share...................... 60.39% 64.98% 68.78% 72.57%
</TABLE>
(footnotes on following page)
15
<PAGE>
___________________
(1) Gives effect to the sale of an additional 224,250 shares in the Conversion,
which may be issued to cover an increase in the pro forma market value of
the Holding Company and the Savings Bank as converted, without the
resolicitation of subscribers or any right of cancellation. The issuance of
such additional shares will be conditioned on a determination of the
independent appraiser that such issuance is compatible with its
determination of the estimated pro forma market value of the Holding Company
and the Savings Bank 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.
(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 8.25%) from the net proceeds from the
Offerings 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 Savings Bank 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 Savings Bank's payment of the ESOP debt is based upon equal installments
of principal over a ten-year period, assuming a combined federal and state
tax rate of 37.12%. 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. Interest income earned by the Holding Company on the
ESOP debt offsets the interest paid by the Savings Bank on the ESOP loan.
No reinvestment is assumed on proceeds contributed to fund the ESOP. The
ESOP expense reflects adoption of Statement of Position ("SOP") 93-6, which
will require recognition of expense based upon shares committed to be
released and the exclusion of unallocated shares 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 SAVINGS BANK -- Benefits --
Employee Stock Ownership Plan."
(4) Gives effect to the MRP expected to be adopted by the Holding Company
following the Conversion. If the MRP is approved by stockholders, the MRP
intends to acquire an amount of Common Stock equal to 4% of the shares of
Common Stock issued in the Conversion either through open market purchases
or from authorized but unissued shares of Common Stock. 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 Purchase
Price and that 20% of the amount contributed was an amortized expense during
such period. The issuance of authorized but unissued shares of the Common
Stock instead of open market purchases would dilute the voting and ownership
interests of existing stockholders by approximately 3.85% and pro forma net
income per share would be $0.84, $0.75, $0.69 and $0.64 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range
for the year ended April 30, 1996, respectively, and pro forma stockholders'
equity per share would be $16.31, $15.19, $14.36 and $13.64 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range
at April 30, 1996. Shares issued under the MRP vest over a five-year period
at 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
of stockholder approval of 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 $88,000, $104,000, $120,000 and $138,000 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range
for the year ended April 30, 1996, respectively. No effect has been given
to the shares reserved for issuance under the proposed Stock Option Plan.
If stockholders approve the Stock Option Plan following the Conversion, the
Holding Company will have reserved for issuance under the Stock Option Plan
authorized but unissued shares of Common Stock representing an amount of
shares equal to 10% of the shares sold in the Conversion. If all of the
options were to be exercised utilizing these authorized but unissued shares
rather than treasury shares which could be acquired, the voting and
ownership
16
<PAGE>
interests of existing stockholders would be diluted by approximately 9.1%.
Assuming stockholder approval of the Stock Option Plan and that all options
were exercised at the end of the period at an exercise price of $10.00 per
share, pro forma net earnings per share would be $0.77, $0.70, $0.64 and
$0.59, respectively, and pro forma stockholders' equity per share would be
$15.96, $14.91, $14.12 and $13.44, respectively, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option Plan" and
"-- Management Recognition Plan" and "RISK FACTORS --Possible Dilutive
Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 1,025,440, 1,206,400,
1,387,360, 1,595,464 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended April 30, 1996,
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. Amounts shown do not reflect the possible payment of a
one-time assessment to recapitalize the SAIF. See "RISK FACTORS --
Recapitalization of SAIF and its Impact on SAIF Premiums." Based on
assessable deposits of $68.6 million at April 30, 1996, a one-time
assessment of 80 basis points would reduce net income by $345,000 (after
tax), or $0.34, $0.29, $0.25 and $0.22 per share, respectively, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range.
(7) "Book value" represents the difference between the stated amounts of the
Savings Bank'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
Savings Bank'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
Savings Bank" 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. Amounts shown do not reflect the possible
payment of a one-time assessment to recapitalize the SAIF. See "RISK
FACTORS -- Recapitalization of SAIF and its Impact on SAIF Premiums." Based
on assessable deposits of $68.6 million at April 30, 1996, a one-time
assessment of 80 basis points would reduce book value by $345,000 (after
tax), or $0.31, $0.27, $0.23 and $0.20 per share, respectively, at the
minimum, midpoint, maximum, and 15% above the maximum of the Estimated
Valuation Range.
(8) Per share amounts are based upon shares outstanding of 1,105,000, 1,300,000,
1,495,000 and 1,719,250 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.
17
<PAGE>
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 director emeritus) and executive
officer of the Savings Bank, including their associates, as defined by
applicable regulations. No individual has entered into a binding agreement with
respect to such intended purchases. Directors and officers of the Savings Bank
and their associates may not purchase in excess of 34% of the shares sold in the
Conversion and, therefore, actual purchases could be more or less than indicated
below. For purposes of the following table, it has been assumed that sufficient
shares will be available to satisfy subscriptions in all categories. Directors,
officers and employees will pay the same price for the shares for which they
subscribe as the price that will be paid by all other subscribers.
<TABLE>
<CAPTION>
Percent of Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares Purchased Amount Purchased Valuation Range Valuation Range
- ------------------------------ --------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Dennis J. Adrian 20,000 $ 200,000 1.81% 1.34%
Director
Billy M. Conner 20,000 200,000 1.81 1.34
Director
Kermit D. Gohring 20,000 200,000 1.81 1.34
President, Chief Executive
Officer and Director
Richard W. Gohring 7,500 75,000 0.68 0.50
Executive Vice President
and Director
Clifford E. Hamilton 20,000 200,000 1.81 1.34
Director
Bonnie K. Smith 10,000 100,000 0.90 0.67
Senior Vice President,
Secretary-Treasurer
and Director
David W. West 20,000 200,000 1.81 1.34
Director
Virgil A. Johnson 4,000 40,000 0.36 0.26
Director Emeritus
Millard F. Stewart 2,500 25,000 0.23 0.16
Director Emeritus
Cecil M. Stock 3,000 30,000 0.27 0.20
Director Emeritus
Marcia Lamons 1,000 10,000 0.09 0.07
Vice President
------- ---------- ----- ----
128,000 $1,280,000 11.58% 8.56%
======= ========== ===== ====
- --------------
</TABLE>
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of the
number of shares to be purchased by the ESOP and issued or reserved under
the MRP and Stock Option Plan, see "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan," "-- Benefits -- 1996 Stock
Option Plan" and "-- Benefits -- Management Recognition Plan."
18
<PAGE>
FULTON SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Fulton Savings Bank, FSB
and Subsidiary for the fiscal years ended April 30, 1996, 1995 and 1994 have
been audited by Moore, Horton & Carlson, P.C., Mexico, Missouri, 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.
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Mortgage loans....................... $4,914,438 $4,264,882 $4,351,093
Consumer and other loans............. 774,757 648,032 536,980
Investment securities................ 297,716 334,147 387,849
Interest-earning deposits............ 184,777 108,381 136,679
---------- ---------- ----------
6,171,688 5,355,442 5,412,601
Interest Expense:
Deposits............................. 3,463,533 2,746,790 2,670,677
Advances from Federal Home Loan
Bank of Des Moines.................. 317,497 197,451 --
---------- ---------- ----------
3,781,030 2,944,241 2,670,677
---------- ---------- ----------
Net interest income................ 2,390,658 2,411,201 2,741,924
Provision for loan losses.............. 44,242 118,000 48,214
---------- ---------- ----------
Net interest income after
provision for loan losses......... 2,346,416 2,293,201 2,693,710
Other Income (Loss):
Loan servicing fees.................. 280,525 255,386 261,600
Service charges and other fees....... 129,588 117,469 117,586
Income from foreclosed assets........ 10,282 24,783 25,216
Loss on sale of investment - Note B.. -- (55,290) (11,496)
Other................................ 65,113 17,260 20,100
---------- ---------- ----------
485,508 359,608 413,006
Other Expense:
Employee salaries and benefits....... 878,770 884,224 864,547
Occupancy costs...................... 222,514 197,101 184,824
Advertising.......................... 31,751 78,403 42,739
Data processing...................... 152,755 178,193 145,743
Federal insurance premiums........... 153,182 148,711 149,810
Directors' fees...................... 87,223 56,875 49,200
Other................................ 322,653 265,067 304,304
---------- ---------- ----------
Total noninterest expense.......... 1,848,848 1,808,574 1,741,167
---------- ---------- ----------
Income before income taxes......... 983,076 844,235 1,365,549
Income Taxes - Note G.................. 363,000 301,500 484,500
---------- ---------- ----------
Net income......................... $ 620,076 $ 542,735 $ 881,049
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
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 Savings Bank. 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 business of the Savings Bank consists principally of attracting
deposits from the general public and using such deposits to originate mortgage
loans secured primarily by one- to four-family residences. The Savings Bank
also originates multi-family, commercial real estate, construction, land,
consumer and other loans. The Savings Bank plans to continue to fund its assets
primarily with deposits, although FHLB advances may continue to be used as a
supplemental source of funds.
The Savings Bank'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. 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 Savings Bank's profitability is
also affected by the level of other income and expenses. Other income consists
primarily of loan servicing fees and service charges and other fees. Other
expenses include employee salaries and benefits, occupancy costs, deposit
insurance premiums, data processing expenses and other operating costs. The
Savings Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and policies concerning monetary and fiscal
affairs, housing and financial institutions and the attendant actions of the
regulatory authorities.
The Savings Bank strives to operate a conservative, well capitalized,
profitable thrift dedicated to providing quality service to its customers. The
Savings Bank believes that it has successfully implemented its strategy by: (i)
maintaining a strong capital level; (ii) maintaining a high level of asset
quality; (iii) limiting its exposure to fluctuations in market interest rates;
(iv) enhancing net income by developing a portfolio of loans serviced for others
as a means of generating current income through loan servicing fees; (v)
emphasizing local loan origination; and (vi) emphasizing high quality customer
service with a competitive fee structure. The Savings Bank has attempted to
limit its interest rate risk by matching the interest rate sensitivity of its
interest-earning assets with its funding sources. The Savings Bank has pursued
this objective by selling substantially all of the fixed-rate mortgage loans
that it originates, retaining ARM loans for portfolio, and promoting transaction
accounts and certificates of deposit with terms up to five years.
RESULTS OF OPERATIONS
The earnings of the Savings Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Savings
Bank's interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is a function of the Savings Bank's interest
rate spread, which is the difference between the yield earned on interest-
earning assets and the rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to the
average balance of interest-bearing liabilities. The Savings Bank operates as a
community oriented financial institution, with a focus on servicing customers in
Boone and Callaway Counties in Missouri. Because the Savings Bank serves a
limited growth market area with a relatively small population base, the Savings
Bank's ability to achieve loan and deposit growth is limited. Moreover, a
downturn in the economy of the Savings Bank's market area could have an adverse
effect on the quality
20
<PAGE>
of the Savings Bank's loan portfolio. See "RISK FACTORS -- Risks of Dependence
on Local Economy" and "--Competition Within Market Area" and "BUSINESS OF THE
SAVINGS BANK -- Market Area."
COMPARISON OF FINANCIAL CONDITION AT APRIL 30, 1996 AND 1995
Total assets increased to $85.5 million at April 30, 1996 from $79.4
million at April 30, 1995. Cash, including interest-bearing deposits, decreased
to $2.9 million at April 30, 1996 from $4.2 million at April 30, 1995, and
investment securities decreased to $3.2 million from $4.2 million as these funds
were used to originate loans. Loans receivable increased to $73.9 million at
April 30, 1996 from $67.8 million at April 30, 1995 as a result of strong loan
demand in fiscal 1996, and loans held for sale increased to $2.3 million from
$573,000. Deposits increased to $70.3 million at April 30, 1996 from $65.2
million at April 30, 1995 as the Savings Bank priced its savings certificates
more aggressively in order to take advantage of lower market interest rates.
FHLB advances increased slightly to $5.0 million from $4.5 million as the
Savings Bank continued to use FHLB advances as a supplemental source of lendable
funds. Total equity increased to $9.1 million at April 30, 1996 from $8.5
million at April 30, 1995 as a result of retained earnings.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
NET INCOME. Net income increased $77,000, or 14.3%, to $620,000 for the
year ended April 30, 1996 from $543,000 for the year ended April 30, 1995.
Income before taxes increased $139,000, or 16.4%. Net interest income decreased
slightly between the periods as a result of a smaller interest rate margin as
the Savings Bank's yield on interest-earning assets increased less than its cost
of interest-bearing liabilities. A decrease in the provision for loan losses of
$74,000, an increase in other income of $126,000 and an increase in other
expenses of $40,000 accounted for the change in income before taxes. The
Savings Bank's return on equity for fiscal 1996 was 7.00% compared with 6.55%
for fiscal 1995.
NET INTEREST INCOME. Net interest income decreased $21,000 to $2.4 million
for the year ended April 30, 1996. Total interest income increased $816,000, or
15.2%, to $6.2 million for the year ended April 30, 1996 from $5.4 million for
the year ended April 30, 1995. Although total interest income increased from
fiscal 1995 to fiscal 1996, this increase was offset by a greater increase in
total interest expense as the Savings Bank's interest rate spread decreased to
2.60% for fiscal 1996 from 2.96% for fiscal 1995. Interest income on loans
receivable increased $776,000 between the periods primarily as a result of an
increase in the average balance of loans to $71.4 million in fiscal 1996 from
$64.9 million in fiscal 1995. An increase in the average yield on loans to
7.97% in fiscal 1996 from 7.57% in fiscal 1995, as interest rates moved up
slightly and adjustable-rate loans adjusted upwards, also contributed to the
increase in interest income on loans. Interest income on investment securities
decreased $36,000 primarily due to the elimination of the Savings Bank's
mortgage-backed securities portfolio. The Savings Bank began liquidating its
remaining mortgage-backed securities portfolio in fiscal 1995 after receiving
significant principal repayments in fiscal 1994 and 1993 so that the funds could
be invested in higher yielding loans. The decrease in interest income from
mortgage-backed securities was partially offset by an increase in interest
income on U.S. Government and federal agency obligations, which resulted from an
increase in the average yield on such securities despite a reduction in the
average balance from fiscal 1995 to fiscal 1996. Interest income on interest-
bearing deposits increased $76,000 between the periods as a result of an
increase in the average balance to $3.1 million in fiscal 1996 from $2.2 million
in fiscal 1995, as the Savings Bank increased its liquidity in connection with
increased loan originations and sales, and an increase in the average yield to
5.90% from 4.89%, which was due to higher market interest rates. Total interest
expense increased $837,000, or 28.4%, to $3.8 million for the year ended April
30, 1996 from $2.9 million for the year ended April 30, 1995. Interest paid on
deposits increased $717,000 between the periods, while interest paid on FHLB
advances increased $120,000. Interest paid on deposits increased due to a
larger average balance of deposits in fiscal 1996 and an increase in the average
rate paid. Though the average balance of NOW, money market, and passbook
accounts decreased to $14.7 million in fiscal 1996 from $17.1 million in fiscal
1995, the average balance of certificates of deposit increased to $53.3 million
from $47.2 million. This shift from lower paying transaction accounts to higher
paying certificate accounts together with an increase in market interest rates
caused the average rate paid on deposits to increase to 5.09% in fiscal 1996
from 4.27% in fiscal 1995.
21
<PAGE>
Interest paid on FHLB advances increased primarily as a result of higher average
balances in fiscal 1996 despite a decrease in the average rate paid on such
advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated loan 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, specific impaired loans and economic conditions. The provision for
loan losses decreased to $44,000 for the year ended April 30, 1996 from $118,000
for the year ended April 30, 1995. The provision for loan losses was
significantly larger in fiscal 1995 as the allowance was increased that year in
response to higher than normal net charge-offs in fiscal 1994 and the increase
in the size of the loan portfolio.
OTHER INCOME. Other income increased $126,000, or 35.0%, to $486,000 for
the year ended April 30, 1996 from $360,000 for the year ended April 30, 1995.
Loan servicing fees increased $25,000 to $281,000 as a result of an increase in
the amount of loans serviced for others. Service charges and fees increased
$12,000 as a result of a larger number of accounts. Income from foreclosed
assets decreased $15,000 as a result of the sale of such properties. In fiscal
1995, the Savings Bank incurred a loss of $55,000 on the sale of mortgage-backed
securities as the Savings Bank liquidated its mortgage-backed securities
portfolio. There were no comparable losses in fiscal 1996. In fiscal 1996, the
Savings Bank received a patronage dividend of $57,000 from the Savings Bank's
data processor.
OTHER EXPENSE. Other expense increased $40,000 to $1.8 million for the
year ended April 30, 1996. Employee salaries and benefits were essentially
unchanged between fiscal 1996 and fiscal 1995. Occupancy costs increased
$25,000, or 12.9%, between the periods due in part to the expansion of the
Savings Bank's main office. Advertising costs decreased $47,000, or 59.5%, due
to an effort to reduce expenses. Data processing costs decreased $25,000, or
14.3%, as a result of entering into a five-year contract. Directors' fees
increased $30,000 as three directors took emeritus status and three new
directors were appointed. The Savings Bank anticipates that other expense will
increase in fiscal 1997 as the result of increased costs associated with
operating as a public company and increased compensation expense as result of
adoption of the ESOP.
INCOME TAXES. The provision for income taxes increased to $363,000 in
fiscal 1996 from $302,000 in fiscal 1995 as a result of greater taxable income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED APRIL 30, 1995 AND 1994
NET INCOME. Net income decreased $338,000, or 38.4%, to $543,000 for the
year ended April 30, 1995 from $881,000 for the year ended April 30, 1994.
Income before taxes decreased $521,000, or 38.2%. Operating results were
primarily influenced by the rise in short-term interest rates, which resulted in
a decrease in the Savings Bank's interest rate spread to 2.96% for the year
ended April 30, 1995 from 3.58% for the year ended April 30, 1994. An increase
in the provision for loan losses of $70,000, a decrease in other income of
$53,000 and an increase in other expenses of $67,000 also contributed to the
decrease in net income. The Savings Bank's return on equity for the year ended
April 30, 1995 was 6.55% compared to 11.92% for the year ended April 30, 1994.
NET INTEREST INCOME. Net interest income decreased $331,000, or 12.1%, to
$2.4 million for the year ended April 30, 1995, from $2.7 million for the year
ended April 30, 1994. The decrease in net income was primarily the result of
the decrease in the Savings Bank's interest rate spread to 2.96% in fiscal 1995
from 3.58% in fiscal 1994. Total interest income decreased $57,000 to $5.4
million for the year ended April 30, 1995. Interest income on loans receivable
decreased $25,000 between the periods as the increase in the average balance of
loans to $64.9 million in fiscal 1995 from $59.2 million in fiscal 1994 was
offset by the decrease in the average yield on loans receivable to 7.57% from
8.26%. The average yield on loans receivable decreased as a result of a decline
in the index used for the Savings Bank's ARM loans. Interest income on
investment securities decreased $54,000 primarily as a result of a decrease in
the average balance of mortgage-backed securities to $370,000 in fiscal 1995
from $1.5 million in fiscal 1994. The decrease in interest income from
mortgage-backed securities was partially offset by an increase
22
<PAGE>
in interest income from U.S. Government and federal agency obligations, which
increased due to a higher average yield. Interest income on interest-bearing
deposits decreased $28,000 a result of a decrease in the average balance of such
deposits to $2.2 million in fiscal 1995 from $4.4 million in fiscal 1994 that
was partially offset by an increase in the average yield to 4.89% from 3.12%.
Total interest expense increased $274,000, or 10.2%, to $2.9 million for the
year ended April 30, 1995 from $2.7 million for the year ended April 30, 1994.
Interest expense on deposits increased $76,000 between the periods as a result
of an increase in the average rate paid on deposits to 4.27% in fiscal 1995 from
4.13% in fiscal 1994, which was partially offset by a decrease in the average
balance of deposits. In fiscal 1995, the Savings Bank had interest expense of
$197,000 on FHLB advances with no such expense in fiscal 1994. In fiscal 1995,
the Savings Bank began using FHLB advances as a supplemental source of lendable
funds.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $118,000 in
the year ended April 30, 1995 compared to $48,000 in the year ended April 30,
1994. The provision for loan losses was larger in fiscal 1995 as the allowance
was increased in response to higher than normal net charge-offs in fiscal 1994
and the greater risk of loss associated with the increase in the size of the
loan portfolio. Net charge-offs totalled $102,000 in fiscal 1994 primarily due
to $51,000 of charge-offs with respect to 17 consumer loans and $40,000 of
charge-offs with respect to several multi-family loans to one borrower.
OTHER INCOME. Other income decreased $53,000, or 12.9%, to $360,000 for
the year ended April 30, 1995 from $413,000 for the year ended April 30, 1994.
The decrease was primarily due to an increase in the loss on sale of investments
to a loss of $55,000 in fiscal 1995 from a loss of $11,000 in fiscal 1994. Loan
servicing fees decreased $6,000 between the periods while service charges and
other fees and income from foreclosed assets were unchanged between the periods.
OTHER EXPENSE. Other expense increased $67,000, or 3.9%, to $1.8 million
for the year ended April 30, 1995 from $1.7 million for the year ended April 30,
1994. Employee salaries and benefits increased $20,000, or 2.3%, between the
periods primarily due to ordinary salary increases. Occupancy costs increased
$12,000, or 6.6%. Advertising costs increased $36,000, or 83.4%, as the Savings
Bank sought to increase lending activity during a period of low interest rates.
INCOME TAXES. The provision for income taxes decreased to $302,000 for the
year ended April 30, 1995 from $485,000 for the year ended April 30, 1994 due to
a lower level of taxable earnings.
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 monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ------------------------- -------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)........... $71,380 $5,689 7.97% $64,942 $4,913 7.57% $59,206 $4,888 8.26%
Mortgage-backed securities
available for sale............... 1 -- 9.18 370 44 11.92 -- -- --
Mortgage-backed securities
held to maturity................. -- -- -- -- -- -- 1,530 121 7.87
U.S. Government and federal agency
securities available for sale.... 3,895 253 6.48 4,335 240 5.54 -- -- --
U.S. Government and federal agency
securities held to maturity...... -- -- -- -- -- -- 4,503 218 4.85
FHLB stock.......................... 628 45 7.17 616 50 8.07 622 49 7.92
Interest-bearing deposits........... 3,133 185 5.90 2,216 108 4.89 4,381 137 3.12
------- ------ ------- ------ ------- ------
Total interest-earning assets..... 79,037 6,172 7.81 72,479 5,355 7.39 70,242 5,413 7.71
Noninterest-earning assets............ 3,695 3,308 3,248
------- ------- -------
Total average assets.............. $82,732 $75,787 $73,490
======= ======= =======
Interest-bearing liabilities:
NOW, money market and passbook
accounts......................... $14,728 387 2.62 $17,090 485 2.84 $17,906 485 2.71
Certificates of deposit............. 53,273 3,077 5.78 47,237 2,262 4.79 46,752 2,186 4.68
------- ------ ------- ------ ------- ------
Total average deposits............ 68,001 3,464 5.09 64,327 2,747 4.27 64,658 2,671 4.13
FHLB advances....................... 4,616 317 6.88 2,077 197 9.51 -- -- --
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities...................... 72,617 3,781 5.21 66,404 2,944 4.43 64,658 2,671 4.13
------ ------ ------
Noninterest-bearing liabilities....... 1,261 1,097 1,442
------- ------- -------
Total average liabilities......... 73,878 67,501 66,100
Average retained earnings............. 8,854 8,286 7,390
------- ------- -------
Total liabilities and retained
earnings......................... $82,732 $75,787 $73,490
======= ======= =======
Net interest income................... $2,391 $2,411 $2,742
====== ====== ======
Interest rate spread.................. 2.60 2.96 3.58
Net interest margin................... 3.02% 3.33% 3.90%
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 108.84% 109.15% 108.64%
- ---------------------------
</TABLE>
(1) Average loans receivable includes nonaccruing loans. Interest income does
not include interest on loans 90 days or more past due.
24
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth (on a consolidated basis) for the periods
and at the date indicated the weighted average yields earned on the Savings
Bank's assets and the weighted average interest rates paid on the Savings Bank's
liabilities, together with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
Year Ended April 30,
At April 30, -----------------------------
1996 1996 1995 1994
------------- ------ ------- -------
<S> <C> <C> <C> <C>
Weighted average yield earned on:
Loans receivable, net.................. 7.76% 7.97% 7.57% 8.26%
Mortgage-backed securities
available for sale.................. -- 9.18 11.92 --
Mortgage-backed securities
held to maturity.................... -- -- -- 7.87
U.S. Government and federal agency
obligations available for sale...... 6.08 6.48 5.54 --
U.S. Government and federal agency
obligations held to maturity........ -- -- -- 4.85
FHLB stock............................. 6.71 7.17 8.07 7.92
Interest-bearing deposits.............. 3.42 5.90 4.89 3.12
All interest-earning assets............ 7.61 7.81 7.39 7.71
Weighted average rate paid on:
NOW, money market and
passbook accounts................... 2.63 2.62 2.84 2.71
Certificate accounts................... 5.80 5.78 4.79 4.68
FHLB advances.......................... 6.75 6.88 9.51 --
All interest-bearing liabilities....... 5.23 5.21 4.43 4.13
Interest rate spread (spread between
weighted average yield earned on all
interest-earning assets and weighted
average rate paid on all interest-
bearing liabilities)................... 2.38 2.60 2.96 3.58
Net interest margin (net interest income
as a percentage of average
interest-earning assets)............... n/a 3.02 3.33 3.90
</TABLE>
25
<PAGE>
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of the Savings Bank. Information is
provided with respect to: (i) effects attributable to changes in rate (changes
in rate multiplied by prior volume); (ii) effects attributable to changes in
volume (changes in volume multiplied by prior rate); and (iii) effects
attributable to changes in rate/volume (changes in rate multiplied by changes in
volume).
<TABLE>
<CAPTION>
Year Ended April 30, Year Ended April 30,
1996 Compared to Year 1995 Compared to Year
Ended April 30, 1995 Ended April 30, 1994
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------- ------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
----- ------ ------ ----- ----- ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net.............. $263 $487 $ 26 $776 $(409) $474 $ (40) $ 25
Mortgage-backed securities......... (10) (44) 10 (44) 62 (91) (47) (76)
U.S. Government and federal
agency obligations.............. 41 (25) (4) 12 31 (8) (1) 22
FHLB stock......................... (5) 1 -- (4) 1 (1) -- --
Interest-bearing deposits.......... 22 45 9 76 78 (68) (38) (28)
---- ---- ---- ---- ----- ---- ----- -----
Total net change in income..........
on interest-earning assets....... 311 464 41 816 (237) 306 (126) (57)
Interest expense:...................
NOW, money market and
passbook accounts................ (36) (67) 5 (98) 23 (22) (1) --
Certificates of deposit............ 466 289 60 815 53 23 -- 76
FHLB advances...................... (54) 241 (67) 120 -- -- 198 198
---- ---- ---- ---- ----- ---- ----- -----
Total net change in expense.........
on interest-bearing liabilities.. 376 463 (2) 837 76 1 197 274
---- ---- ---- ---- ----- ---- ----- -----
Net change in net interest..........
income........................... $(65) $ 1 $ 43 $(21) $(313) $305 $(323) $(331)
==== ==== ==== ==== ===== ==== ===== =====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Savings Bank's principal financial objective is to achieve long-
term profitability while reducing its exposure to fluctuating interest rates.
The Savings Bank has sought to reduce 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 Savings
Bank's interest-earning assets by retaining for its portfolio loans with
interest rates subject to periodic adjustment to market conditions and selling
substantially all of its fixed-rate one- to four-family mortgage loans. The
Savings Bank 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. As part of its interest rate risk management strategy,
the Savings Bank promotes certificates of deposit with longer maturities (up to
five years) to reduce the interest sensitivity of its interest-bearing
liabilities.
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk ("IRR") component
into the risk-based capital rules. Using data from the Savings Bank's quarterly
reports to the OTS, the Savings Bank receives a report which measures interest
rate risk by modeling the change in Net Portfolio Value ("NPV") 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-
26
<PAGE>
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 proposed
OTS regulations, an institution with a greater than "normal" level of interest
rate risk will be subject to a deduction from total capital for purposes of
calculating its risk-based capital. 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 Savings Bank meets these
qualifications and therefore is exempt. Assuming this proposed rule was in
effect at April 30, 1996 and the Savings Bank was not exempt from the rule, the
Savings Bank's level of interest rate risk would not 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 illustrates the change
in NPV at March 31, 1996, 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 counter the effect of that interest rate
movement.
<TABLE>
<CAPTION>
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(3)
- ------------------------- -------- ----------- --------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 $ 8,925 $(2,611) (23)% 10.77% (234) bp
300 9,795 (1,742) (15) 11.61 (150) bp
200 10,572 (964) (8) 12.33 (78) bp
100 11,189 (347) (3) 12.86 (25) bp
0 11,537 -- -- 13.11 --
(100) 11,566 30 -- 13.04 (7) bp
(200) 11,385 (152) (1) 12.77 (34) bp
(300) 11,211 (325) (3) 12.50 (61) bp
(400) 11,241 (296) (3) 12.43 (68) bp
</TABLE>
- --------------------
(1) Represents the increase (decrease) 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.
27
<PAGE>
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 March 31, 1996, the change in NPV as a percentage of portfolio value of total
assets is negative 1.10%, which is less than negative 2.0%, indicating that the
Savings Bank has a "normal" level of interest rate risk.
<TABLE>
<CAPTION>
At At At
March 31, December 31, March 31,
1996 1995 1995
---------- ------------- ----------
<S> <C> <C> <C>
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets.. 13.11% 12.41% 13.03%
Exposure Measure: Post-Shock NPV Ratio......... 12.33 11.95 11.90
Sensitivity Measure: Change in NPV Ratio....... (78) bp (45) bp (113) bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of Assets.............. (1.10)% (0.72)% (1.49)%
Interest Rate Risk Capital Component (1)........ -- -- --
- ------------------------
</TABLE>
(1) No amounts are shown on the IRR capital component line because the Savings
Bank is exempt from the IRR capital component.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as 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 likely
deviate significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's primary sources of funds are customer deposits, proceeds
from principal and interest payments on loans, proceeds from sales of loans and
loan participations, maturing securities and FHLB advances. While maturities
and scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Savings Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Savings Bank generally maintains sufficient cash and short-
term investments to meet short-term liquidity needs. At April 30, 1996, cash
(including interest-bearing deposits) totalled $2.9 million, or 3.4% of total
assets, and investment securities that matured in one year or less totalled $2.5
million, or 2.9% of total assets. All of the Savings Bank's investment
securities are classified as available for sale. In addition, the Savings Bank
maintains a credit facility with the FHLB-Des Moines, which provides for
immediately available advances. Advances under this credit facility totalled
$5.0 million at April 30, 1996.
The OTS requires a savings institution to maintain an average daily balance
of liquid assets (cash and eligible investments) equal to at least 5.0% of the
average daily balance of its net withdrawable deposits and short-
28
<PAGE>
term borrowings. In addition, short-term liquid assets currently must
constitute 1.0% of the sum of net withdrawable deposit accounts plus short-term
borrowings. The Savings Bank's actual short- and long-term liquidity ratios at
April 30, 1996 were 5.08% and 6.60%, respectively. The Savings Bank
consistently maintains liquidity levels in excess of regulatory requirements,
and believes this is an appropriate strategy for proper asset and liability
management.
The primary investing activity of the Savings Bank is the origination of
mortgage loans. During the years ended April 30, 1996, 1995 and 1994, the
Savings Bank originated loans in the amounts of $51.3 million, $35.7 million,
and $43.1 million, respectively. At April 30, 1996, the Savings Bank had loan
commitments and undisbursed equity lines of credit totalling $4.1 million and
undisbursed loans in process totalling $3.7 million. The Savings Bank
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificates of deposit that are scheduled to
mature in less than one year from April 30, 1996 totalled $34.0 million.
Historically, the Savings Bank has been able to retain a significant amount of
its deposits as they mature. In addition, management of the Savings Bank
believes that it can adjust the offering rates of savings certificates to retain
deposits in changing interest rate environments. In the event that a
significant portion of these deposits are not retained by the Savings Bank, the
Savings Bank anticipates that it would utilize FHLB advances to fund deposit
withdrawals, which would result in a decrease in net interest income to the
extent that the average rate paid on such advances exceeds the average rate paid
on deposits of similar duration.
Proposed federal legislation to recapitalize the SAIF would require savings
associations like the Savings Bank to pay a one-time assessment to increase the
SAIF's reserves to $1.25 per $100 of deposits. Such assessment is expected to
be approximately 80 basis points on the amount of deposits held by a SAIF-member
institution. Based on the Savings Bank's assessable deposits of $68.6 million
at April 30, 1996, a one-time assessment of 80 basis points would equal
approximately $549,000 on a pre-tax basis, or $345,000 after tax. The Savings
Bank believes that it has adequate resources to pay such assessment from cash
and other liquid investments, including short-term investment securities.
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of April 30, 1996, the Savings Bank was in
compliance with all regulatory capital requirements which were effective as of
such date with tangible, core and risk-based capital ratios of 10.64%, 10.64%
and 18.46%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements." See also "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. In May 1993, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," which became effective for the Savings Bank for the fiscal year
beginning May 1, 1995. This statement requires a lender to consider a loan to
be impaired if the lender believes it is probable that it will be unable to
collect all principal and interest due according to the contractual terms of the
loan. If a loan is impaired, the lender will be required to record a loan
valuation allowance equal to the present value of the estimated future cash
flows discounted at the loan's effective rate or at the loan's observable market
price or fair value of the collateral. This accounting change will
significantly change the accounting by lenders presently allowed under SFAS No.
15. In October 1994, FASB issued SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income on impaired loans and eliminates the income recognition provisions in
SFAS No. 114. SFAS No. 118 also requires disclosure of certain information
about the recorded investment in impaired loans and how the creditor recognizes
interest income related to impaired loans. SFAS No. 118 became effective for
the Savings Bank for the fiscal year beginning May 1, 1995. The adoption of
these statements did not have a material effect on the Savings Bank's financial
condition or results of operations at April 30, 1996.
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. In November 1993, the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount
29
<PAGE>
equal to the fair value of shares committed to be released to employees from an
employee stock ownership plan and to exclude unallocated shares from earnings
per share computations. The effect of SOP 93-6 on net income and book value per
share in 1996 and future periods cannot be predicted due to the uncertainty of
the fair value of the shares at the time they will be committed to be released.
DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. In December
1994, the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure
of Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities.
The disclosure requirements in SOP 94-6 focus primarily on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements in the near-term functioning of the reporting entity. The
risks and uncertainties discussed in SOP 94-6 stem from the nature of the
entity's operations, from the necessary use of estimates in the preparation of
the entity's financial statements and from significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Savings Bank.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. In March 1995, the
FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The statement does not apply to financial instruments, long-term
customer relationships of a financial institution (core deposits), mortgage and
other servicing rights and deferred tax assets. SFAS No. 121 requires the
review of long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances include, for example, a significant
decrease in market value of an asset, a significant change in use of an asset,
or an adverse change in a legal factor that could effect the value of an asset.
If such an event occurs and it is determined that the carrying value of the
asset may not be recoverable, an impairment loss should be recognized as
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Fair value can be determined by a current transaction,
quoted market prices or present value of estimated expected future cash flows
discounted at the appropriate rate. The statement is effective for fiscal years
beginning after December 15, 1995. The Holding Company does not anticipate that
implementation of SFAS No. 121 will have a material impact on its results of
operations or financial position.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. In May 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122
eliminates distinctions between servicing rights that were purchased and those
that were retained upon the sale of loans. The statement requires mortgage
servicers to recognize as separate assets rights to service loans, no matter how
the rights were acquired. Institutions that sell loans and retain the servicing
rights will be required to allocate the total cost of the loans to servicing
rights and loans based on their relative fair values if that value can be
estimated. SFAS No. 122 is effective for fiscal years beginning after December
15, 1995. Furthermore, SFAS No. 122 requires that all capitalized mortgage
servicing rights be periodically evaluated for impairment based upon the current
fair value of these rights. The Holding Company anticipates that adoption of
this statement beginning May 1, 1996 will not have a material impact on its
results of operations or financial position.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation," establishing 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
30
<PAGE>
awards granted in their first fiscal year beginning after December 15, 1994.
Management of the Savings Bank has not completed an analysis of the potential
effects of this statement on its financial condition or results of operations.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control. Under the financial components 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. This statement supersedes SFAS No. 122 and is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996. Management of the Savings Bank has not yet
determined the impact of the adoption of SFAS No. 125.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated 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 Savings Bank'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 Delaware business corporation at the
direction of the Savings Bank in May 1996 for the purpose of becoming a holding
company for the Savings Bank upon completion of the Conversion. Upon completion
of the Conversion, the Savings Bank will be a wholly-owned subsidiary of the
Holding Company.
BUSINESS
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon completion of the Conversion, the Holding
Company's sole business activity will be the ownership of the stock of the
Savings Bank and investment of the net proceeds of the Offerings retained by it.
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 Savings Bank with
the payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the capital stock of the Savings
Bank, the competitive conditions applicable to the Holding Company will be the
same as those confronting the Savings Bank. See "BUSINESS OF THE SAVINGS BANK
- -- Competition."
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<PAGE>
BUSINESS OF THE SAVINGS BANK
GENERAL
The Savings Bank operates as a community oriented financial
institution and is committed to serving the needs of its customers in its market
area. The Savings Bank's business consists primarily of attracting deposits
from the general public and using those funds to originate and purchase real
estate loans.
MARKET AREA
The Savings Bank conducts operations in central Missouri through its
main office in Fulton, Missouri and its branch office in Holts Summit, Missouri,
both of which are in Callaway County. The Savings Bank also serves Boone County
and, to a lesser extent, Cole and Audrian Counties. Fulton, which is the county
seat, serves as the economic and employment center of Callaway County.
Additional employment is available in the nearby metropolitan areas of Columbia
(in Boone County) and Jefferson City (in Cole County). Columbia is the location
of the University of Missouri and provides significant employment in education
and medicine. Jefferson City is the state capital of Missouri, resulting in a
significant concentration of government employment and an historically stable
economy. Callaway County represents the Savings Bank's primary market area for
deposit generation as most of its depositors live in this county, particularly
in the areas surrounding the Savings Bank's offices. The Savings Bank's
deposits have increased slightly in recent years. However, because Callaway
County has a small population, the Savings Bank's ability to achieve deposit
growth is limited. The Savings Bank's lending activities have been concentrated
in Callaway County and the city of Columbia. Loan demand has been strong in
recent years, especially in the city of Columbia. The Savings Bank anticipates
using the proceeds of the Offerings for increased local lending, although no
assurances can be given as to how long it will take to deploy such funds.
While Callaway County is a more rural county with a much lower
population base and overall smaller economy than Cole and Boone Counties, the
economy has been stable historically due to the economies in the contiguous
counties. The Callaway County economy, which had been based on agriculture, has
diversified in recent years to include employment in health care, education,
manufacturing and local/state government. The County's largest employers are
Fulton State Hospital and Union Electric Company, which operates a large
electrical generation plant. The economy of Columbia and Boone County
historically has been very stable due to the presence of the University of
Missouri. Callaway and Boone Counties have an estimated combined population of
159,000, with Callaway County having an estimated population of only 35,000.
Over the last five years, both Callaway and Boone County have experienced growth
in population and households exceeding the state and national averages in
percentage terms, although the actual numbers are small given the relatively
small size of these counties. Unemployment is currently low, with unemployment
rates of 3.5% in Callaway County and 1.1% in Boone County in March 1996.
The Savings Bank faces competition from many financial institutions
for deposits and loan originations. See "-- Competition" and "RISK FACTORS --
Competition Within Market Area."
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Savings Bank is the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential property. The
Savings Bank also originates multi-family, commercial real estate, construction,
land and consumer and other loans. The Savings Bank's net loans receivable
totalled $73.9 million at April 30, 1996, representing 86.4% of consolidated
total assets.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan at the dates
indicated. The Savings Bank had no concentration of loans exceeding 10% of total
gross loans other than as disclosed below.
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<PAGE>
<TABLE>
<CAPTION>
At April 30,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........ $46,741 59.61% $46,244 65.37% $42,088 66.46%
Multi-family............... 3,845 4.90 3,588 5.07 3,379 5.34
Commercial................. 8,706 11.10 6,560 9.27 5,877 9.28
Construction............... 7,686 9.80 5,142 7.27 3,938 6.22
Land....................... 1,518 1.94 1,188 1.68 1,129 1.78
------- ------ ------- ------ ------- ------
Total mortgage loans..... 68,496 87.35 62,722 88.66 56,411 89.08
Consumer and other loans.... 9,922 12.65 8,020 11.34 6,917 10.92
------- ------ ------- ------ ------- ------
Total loans.............. 78,418 100.00% 70,742 100.00% 63,328 100.00%
====== ====== ======
Less:
Undisbursed loan funds..... 3,743 2,175 2,381
Allowance for loan losses.. 782 762 665
------- ------- -------
Loan receivable, net..... $73,893 $67,805 $60,282
======= ======= =======
</TABLE>
RESIDENTIAL REAL ESTATE LENDING. The primary lending activity of the
Savings Bank is the origination of mortgage loans to enable borrowers to
purchase existing one- to four-family homes. At April 30, 1996, $46.7 million,
or 59.6% of the Savings Bank's total gross loan portfolio, consisted of loans
secured by one- to four-family residences. The Savings Bank presently
originates both ARM loans and fixed-rate mortgage loans. The Savings Bank's
loans are generally underwritten and documented in accordance with the
guidelines established by the Federal Home Loan Mortgage Corporation ("FHLMC").
The Savings Bank generally sells to FHLMC or Fannie Mae (formerly known as the
Federal National Mortgage Association) all of the fixed-rate mortgage loans that
it originates. Generally, the Savings Bank sells whole loans to FHLMC and
Fannie Mae on a servicing-retained basis. All loans are sold without recourse.
The Savings Bank also sells a portion of the ARM loans that it originates to
other financial institutions. Such loans generally are sold on a servicing-
retained basis and the Savings Bank occasionally retains a participation
interest in the loan. The Savings Bank's decision to hold or sell loans is
based on its asset/liability management policies and goals and the market
conditions for mortgages. See "-- Lending Activities -- Loan Originations,
Sales and Purchases." At April 30, 1996, $62.3 million, or 79.5% of the Savings
Bank's total gross loans, were subject to periodic interest rate adjustments.
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. Substantially all of the ARM loans originated by the Savings
Bank meet the underwriting standards of FHLMC. The Savings Bank offers ARM
products that adjust either annually or every three years. These ARM products
utilize the national quarterly cost of funds index as published by the OTS plus
a margin of 3.0%. The initial interest rate on the Savings Bank's ARM loans is
generally at or near the fully indexed rate. Until recently, the Savings Bank's
ARM loans utilized the 8th District cost of funds index. Accordingly, most of
the Savings Bank's ARM portfolio is based on this index. The Savings Bank
switched from the 8th District to the national cost of funds index because it
believes that the national cost of funds index is more stable and cannot easily
be influenced by the deposit pricing and borrowing costs of a few institutions.
Both the 8th District and the national cost of funds indices are lagging market
indices, which means that upward adjustments in these indices may occur more
slowly than changes in the Savings Bank's cost of interest-bearing liabilities,
especially during periods of rapidly increasing interest rates. ARM loans held
in the Savings Bank's portfolio do not permit negative amortization of principal
and carry no prepayment restrictions. The periodic interest rate cap (the
maximum amount by which the interest rate may be increased or decreased in a
given period) on the Savings Bank's ARM loans is generally 1.0% to 1.5% per
adjustment period and the lifetime interest rate cap is generally 4.5% to 6.0%
over the initial interest rate of the loan. The terms and
33
<PAGE>
conditions of the ARM loans offered by the Savings Bank, including the index for
interest rates, may vary from time to time. Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
The Savings Bank also offers ARM loans for non-owner-occupied one- to four-
family homes. The rates on such loans are generally slightly higher than for a
comparable loan for an owner-occupied residence. Loans secured by non-owner-
occupied residences generally involve greater risks than loans secured by owner-
occupied residences. Payments on loans secured by such properties are often
dependent on the successful operation or management of the properties. In
addition, repayment of such loans may be subject to a greater extent to adverse
conditions in the real estate market or the economy. The Savings Bank requires
that borrowers with loans secured by non-owner-occupied homes submit annual
financial statements. See "RISK FACTORS -- Certain Lending Risks."
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to increased rates to be paid by the customer. 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. See "RISK FACTORS -- Interest Rate Risk Exposure." Another
consideration is that although ARM loans allow the Savings Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Savings Bank has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Savings Bank's cost of funds.
While one- to four-family residential real estate loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Savings
Bank's loan portfolio contain due-on-sale clauses providing that the Savings
Bank may declare the unpaid amount due and payable upon the sale of the property
securing the loan. Typically, the Savings Bank enforces these due-on-sale
clauses to the extent permitted by law and as business judgment dictates. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans.
The Savings Bank generally requires title insurance insuring the status of
its lien or a title abstract and acceptable attorney's opinion on all loans
where real estate is the primary source of security. The Savings Bank 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 Savings Bank's lending policies generally limit the maximum loan-to-
value ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price, with the condition that
private mortgage insurance is generally required on loans with loan-to-value
ratios greater than 80%. The maximum loan-to-value ratio on mortgage loans
secured by non-owner-occupied properties generally is 80%.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. Multi-family
residential and commercial real estate lending has been a constant part of the
Savings Bank's lending strategy in recent years. At April 30, 1996, the Savings
Bank's loan portfolio included $3.8 million in multi-family real estate loans
and $8.7 million in commercial real estate loans. The Savings Bank frequently
sells participation interests in the larger multi-family and commercial real
estate loans that it originates. The Savings Bank retains the servicing rights
on such loans and generally retains 10% or 20% of the loan balance.
34
<PAGE>
Multi-family and commercial real estate loans originated by the Savings
Bank are predominately adjustable-rate loans and generally are for terms of up
to 20 years. The maximum loan-to-value ratio for multi-family and commercial
real estate loans generally is 75%. Multi-family loans typically are secured by
small to medium sized projects. The Savings Bank's commercial real estate loan
portfolio consists predominantly of loans secured by residential care
facilities, nursing homes, medical buildings, small shopping centers, small
office buildings and churches, most of which are located in the Savings Bank's
market area. Appraisals on properties that secure multi-family and commercial
real estate loans are performed by an independent appraiser engaged by the
Savings Bank before the loan is made. Underwriting of multi-family and
commercial real estate loans includes a thorough analysis of the cash flows
generated by the real estate to support the debt service and the financial
resources, experience, and income level of the borrowers. Annual operating
statements on each multi-family and commercial real estate loan are required and
reviewed by management.
Multi-family and commercial real estate lending affords the Savings Bank 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, 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 multi-family
and commercial 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 Savings Bank seeks to
minimize these risks by limiting the maximum loan-to-value ratio to 75% and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan. The
Savings Bank also obtains loan guarantees from financially capable parties based
on a review of personal financial statements.
CONSTRUCTION LENDING. The Savings Bank originates residential construction
loans to individuals and, occasionally, to builders, to construct one- to four-
family homes. In addition, the Savings Bank occasionally originates
construction loans for multi-family or commercial properties. In addition, the
Savings Bank occasionally originates speculative construction loans, i.e, where
purchasers for the finished homes may be identified either during or following
the construction period. The Savings Bank limits the number of speculative
loans to a single builder in order to limit risk. At April 30, 1996, the
Savings Bank's construction loan portfolio totalled $7.7 million, or 9.8% of
total gross loans. At such date, the Savings Bank's construction loan portfolio
consisted of 56 residential construction loans totalling $6.3 million and four
commercial real estate construction loans totalling $1.4 million.
Construction loans are generally made in connection with permanent
financing. Construction loans that are not made in connection with the granting
of permanent financing on the property are for terms of six months.
Construction lending is considered to involve a higher level of risk as
compared to one- to four-family residential 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 more difficult to evaluate and monitor. If the estimate of value
proves to be inaccurate, the Savings Bank may be confronted at, or prior to, the
maturity of the loan, with a project the value of which is insufficient to
assure full repayment. The Savings Bank attempts to minimize these risks by
limiting the maximum loan-to-value ratio on construction loans to 85% for
residential construction loans and 80% for non-residential construction loans
and by conditioning disbursements on the presentation of itemized bills and an
inspection of the construction site. For non-residential construction loans,
the Savings Bank generally obtains personal guarantees and requires borrowers to
submit annual financial statements.
LAND LENDING. The Savings Bank occasionally originates loans for the
acquisition of land upon which the purchaser can then build or make improvements
necessary to build or to sell as improved lots. At April 30, 1996, the Savings
Bank's land loan portfolio totalled $1.5 million and consisted of 30 loans.
Land loans originated by the Savings Bank are generally adjustable-rate loans
and have maturities of ten to 20 years.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to four-family residential mortgage loans because such loans are more
difficult to evaluate. If the estimate of value proves to be
35
<PAGE>
inaccurate, in the event of default and foreclosure the Savings Bank may be
confronted with a property the value of which is insufficient to assure full
repayment. The Savings Bank attempts to minimize this risk by limiting the
maximum loan-to-value ratio on land loans to 65%.
CONSUMER AND OTHER LENDING. The Savings Bank originates a variety of
consumer and other non-mortgage loans. Consumer loans generally have shorter
terms to maturity and higher interest rates than mortgage loans. The Savings
Bank's consumer and other loans consist primarily of secured consumer loans,
automobile loans, home improvement loans, deposit account loans and student
loans. The Savings Bank also engages in a small amount of commercial business
lending. Such loans include asset-based loans secured by inventory and short-
term working capital loans. At April 30, 1996, the Savings Bank's consumer and
other loans totalled approximately $9.9 million, or 12.6% of the Savings Bank's
total gross loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer 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. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans. At April 30, 1996, the Savings Bank had no
material delinquencies in its consumer loan portfolio.
36
<PAGE>
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at April 30, 1996 regarding the dollar amount of principal
repayments for loans becoming due during the periods indicated. All loans are
included in the period in which the final contractual payment is due. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. The table does not
include any estimate of prepayments which significantly shorten the average life
of all loans and may cause the Savings Bank's actual repayment experience to
differ from that shown below.
<TABLE>
<CAPTION>
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
----------- ------- ------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 307 $1,142 $1,194 $4,837 $39,261 $46,741
Multi-family............ 4 55 49 266 3,471 3,845
Commercial.............. -- 285 444 613 7,364 8,706
Construction............ 7,686(1) -- -- -- -- 7,686
Land.................... 347 56 27 79 1,009 1,518
Consumer and other loans.. 3,556 3,478 1,566 974 348 9,922
------- ------ ------ ------ ------- -------
Total gross loans..... $11,900 $5,016 $3,280 $6,769 $51,453 $78,418
======= ====== ====== ====== ======= =======
- --------------
</TABLE>
(1) Includes 32 loans totalling $4.5 million that will convert to permanent
loans.
The following table sets forth the dollar amount of all loans due after April
30, 1997, that have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed- Floating- or
Rates Adjustable-Rates
------- ----------------
<S> <C> <C>
(In Thousands)
Mortgage loans:
One- to four-family...... $ 4,677 $41,757
Multi-family............. -- 3,841
Commercial............... 1,301 7,405
Construction............. -- --
Land..................... 57 1,114
Consumer and other loans.. 5,835 531
------- -------
Total gross loans $11,870 $54,648
======= =======
</TABLE>
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<PAGE>
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 terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank 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 mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
LOAN SOLICITATION AND PROCESSING. Loan applicants come primarily through
existing customers, referrals by realtors, homebuilders and existing customers,
and walk-ins. The Savings Bank also uses radio and newspaper advertising to
create awareness of its loan products. Upon receipt of a loan application from
a prospective borrower, a credit report and other data are obtained to verify
specific information relating to the loan applicant's employment, income and
credit standing. An appraisal of the real estate offered as collateral
generally is undertaken by an independent fee appraiser certified by the State
of Missouri.
Real estate loans up to $250,000 must be approved by the Loan Committee,
which consists of the President and three non-employee Directors. Loans
exceeding $250,000 must be approved by the entire Board of Directors. The
Savings Bank's loan approval process allows mortgage loans to be approved in
approximately five days and closed in 20 days. Consumer loans may be approved
by any loan officer. Non-mortgage loans exceeding $100,000 must be approved by
the entire Board of Directors.
LOAN ORIGINATIONS, SALES AND PURCHASES. While the Savings Bank originates
both adjustable-rate and fixed-rate loans, its ability to generate each type of
loan is dependent upon relative customer demand for loans in its market. For
the years ended April 30, 1996, 1995 and 1994, the Savings Bank originated $51.3
million, $35.7 million and $43.1 million of loans, respectively. Of the $51.3
million of loans originated during the year ended April 30, 1996, 81.2% were
adjustable-rate loans and 18.8% were fixed-rate loans.
The Savings Bank generally sells all of its fixed-rate single-family
residential mortgage loans to the FHLMC or Fannie Mae and a portion of its
residential ARM loans to other financial institutions. Sales are made on a non-
recourse basis with servicing retained. Sales of loans to FHLMC and Fannie Mae
are whole loans, whereas the Savings Bank frequently retains a participation
interest in residential ARM loans sold to other financial institutions. The
Savings Bank also sells participation interests to other financial institutions
in the larger multi-family, commercial real estate and construction loans that
it originates. Such sales are also made on a non-recourse basis with servicing
retained. The Savings Bank has obtained commitments from several financial
institutions to purchase loans up to a specified aggregate amount. Sales of
loans and loan participations for the years ended April 30, 1996, 1995, and 1994
totalled $22.6 million, $11.8 million and $20.3 million, respectively. Sales of
loans generally are beneficial to the Savings Bank since these sales increase
the size of the Savings Bank's loan servicing portfolio. See "-- Lending
Activities -- Loan Servicing." Loan sales also provide funds for additional
lending and other investments and increase liquidity. In addition, sales of
participation interests in non-residential mortgage loans help to reduce the
risks associated with this type of lending. At April 30, 1996, the Savings Bank
had $2.3 million in loans held for sale.
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<PAGE>
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family............ $25,263 $19,150 $28,856
Multi-family................... 4,519 545 308
Commercial..................... 4,415 1,167 2,242
Construction................... 8,365 7,683 5,355
Land........................... 655 108 110
Consumer and other loans......... 8,079 7,002 6,249
------- ------- -------
Total loans originated....... 51,296 35,655 43,120
Loans purchased:
Mortgage loans:
One- to four-family............ -- 669 --
Construction................... 484 277 --
------- ------- -------
Total loans purchased........ 484 946 --
Loans sold:
Whole loans.................... 3,812 1,617 13,311
Participations................. 18,820 10,191 7,032
------- ------- -------
Total loans sold.............. 22,632 11,808 20,343
Less:
Principal repayments........... 20,463 16,507 18,823
Transfer to real estate owned.. 271 93 49
Loans held for sale............ 2,306 573 --
------- ------- -------
23,040 17,173 18,872
------- ------- -------
Net increase in loans
receivable, net................. $ 6,108 $ 7,620 $ 3,905
======= ======= =======
</TABLE>
LOAN COMMITMENTS. The Savings Bank occasionally issues commitments to
originate loans conditioned upon the occurrence of certain events. Such
commitments are made on specified terms and conditions and are honored for up to
45 days from the date of loan approval. The Savings Bank had outstanding net
loan commitments of approximately $7.8 million at April 30, 1996.
LOAN ORIGINATION AND OTHER FEES. The Savings Bank, in some instances,
receives loan origination fees. Loan fees are a fixed dollar amount or a
percentage of the principal amount of the mortgage loan that is charged to the
borrower for funding the loan. The amount of fees charged by the Savings Bank
currently is $300 for loans secured by owner-occupied, single-family homes and
$500 for most larger loans. Current accounting standards require fees received
(net of certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid are recognized as
income at the time of prepayment.
LOAN SERVICING. The Savings Bank sells loans to FHLMC, Fannie Mae and other
financial institutions on a servicing-retained basis and receives fees in return
for performing the traditional services of collecting individual payments and
managing the loans. At April 30, 1996, the Savings Bank was servicing $84.4
million of loans for others. Loan servicing includes processing payments,
accounting for loan funds and collecting and paying real estate
39
<PAGE>
taxes, hazard insurance and other loan-related items, such as private mortgage
insurance. When the Savings Bank receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a predetermined
net amount based on the yield on that mortgage. The difference between the
coupon on the underlying mortgage and the predetermined net amount paid to the
investor is the gross loan servicing fee. For the year ended April 30, 1996,
loan servicing fees totalled $281,000. In addition, the Savings Bank retains
certain amounts in escrow for the benefit of the investor for which the Savings
Bank incurs no interest expense but is able to invest. At April 30, 1996, the
Savings Bank held $213,000 in escrow for its portfolio of loans serviced for
others.
NONPERFORMING ASSETS AND DELINQUENCIES. When a mortgage loan borrower fails
to make a required payment when due, the Savings Bank institutes collection
procedures. The first notice is mailed to the borrower approximately ten days
after the payment is due in order to permit the borrower to make the payment
before the imposition of a late fee. A second notice is generated when a
payment becomes 20 days past due. Attempts to contact the borrower by telephone
or letter generally begin when a payment becomes 30 days past due. If a
satisfactory response is not obtained, continuous follow-up contacts are
attempted until the loan has been brought current. Before the 90th day of
delinquency, attempts to interview the borrower, preferably in person, are made
to establish (i) the cause of the delinquency, (ii) whether the cause is
temporary, (iii) the attitude of the borrower toward the debt, and (iv) a
mutually satisfactory arrangement for curing the default.
In most cases, delinquencies are cured promptly; however, if by the 91st day
of delinquency, or sooner if the borrower is chronically delinquent and all
reasonable means of obtaining payment on time have been exhausted, foreclosure,
according to the terms of the security instrument and applicable law, is
initiated. Interest income on loans is reduced by the full amount of accrued
and uncollected interest.
The Savings Bank's Board of Directors is informed on a monthly basis as to
the status of all loans that are delinquent more than 60 days, the status on all
loans in foreclosure, and the status of all foreclosed and repossessed property
owned by the Savings Bank.
40
<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans within the meaning of SFAS
No. 15 at the dates indicated. It is the policy of the Savings Bank to cease
accruing interest on loans 90 days or more past due.
<TABLE>
<CAPTION>
At April 30,
-------------------------
1996 1995 1994
------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to four-family.......................... $ 175 $ 135 $ 247
Commercial................................... 69 -- 642
Consumer and other loans...................... 75 18 32
----- ----- ------
Total................................... 319 153 921
Accruing loans which are contractually
past due 90 days or more...................... -- -- --
----- ----- ------
Total of nonaccrual and
90 days past due loans........................ 319 153 921
Real estate owned, net......................... 197 5 203
----- ----- ------
Total nonperforming assets................ $ 516 $ 158 $1,124
===== ===== ======
Restructured loans............................. $ 271 $ 273 $ 260
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable, net...... 0.43% 0.23% 1.53%
Nonaccrual and 90 days or more past due loans
as a percentage of total assets............... 0.37 0.19 1.25
Nonperforming assets as a percentage of
total assets.................................. 0.60 0.20 1.53
</TABLE>
Interest income that would have been recorded for the year ended April
30, 1996 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $10,000. The amount of interest included in
interest income on such loans for the year ended April 30, 1996 amounted to
approximately $6,000.
REAL ESTATE OWNED AND HELD FOR INVESTMENT. Real estate acquired by
the Savings Bank as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate owned ("REO") until it is sold. When property is
acquired it is recorded at the lower of its cost, which is the unpaid principal
balance of the related loan plus foreclosure costs, or fair market value.
Subsequent to foreclosure, REO is carried at the lower of the foreclosed amount
or fair value, less estimated selling costs. At April 30, 1996, the Savings
Bank had $197,000 of REO, which consisted of one commercial building lot.
Real estate held for investment ("REI") is carried at the lower of
cost or net realizable value. All costs of anticipated disposition are
considered in the determination of net realizable value. At April 30, 1996, the
Savings Bank's REI totalled $253,000 and consisted of seven condominium units
and additional building lots, all of which
41
<PAGE>
are part of a single development consisting of ten units. The Savings Bank
acquired five units and the additional building lots through foreclosure and
purchased two additional units. The Savings Bank has subsequently purchased the
remaining three units, which it believes will facilitate the sale of the entire
development.
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 may 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 classified as special mention and monitored by the Savings Bank.
At April 30, 1996, assets classified as substandard or special mention
totalled $1.5 million and included 30 substandard loans, which consisted of 15
one- to four-family mortgage loans totalling $664,000, five commercial real
estate loans totalling $84,000 and ten consumer loans totalling $50,000, and 27
special mention loans, which consisted of 20 one- to four-family mortgage loans
totalling $667,000 and seven consumer loans totalling $41,000. The aggregate
amounts of the Savings Bank's classified assets at the dates indicated were as
follows:
<TABLE>
<CAPTION>
At April 30,
--------------
1996 1995
------ ------
(In Thousands)
<S> <C> <C>
Loss...................... $ -- $ --
Doubtful.................. -- --
Substandard............... 798 1,135
Special mention........... 708 201
------ ------
Total classified assets.. $1,506 $1,336
====== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The Savings Bank has established a
systematic methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Savings Bank 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 Savings Bank increases its allowance
for loan losses by charging provisions for loan losses against income.
The general valuation allowance is maintained to cover losses inherent
in the portfolio of performing loans. Management's periodic evaluation of the
adequacy of the allowance is based on a number of factors, including
management's evaluation of the collectibility of the loan portfolio, the nature
of the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans and economic conditions. Specific valuation allowances
42
<PAGE>
are established to absorb losses on loans for which full collectibility may not
be reasonably assured. The amount of the allowance is based on the estimated
value of the collateral securing the loan and other analyses pertinent to each
situation. Generally, a provision for losses is charged against income on a
quarterly basis to maintain the allowances.
At April 30, 1996, the Savings Bank had an allowance for loan losses
of $782,000. The allowance for loan losses is maintained at an amount
management considers adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, 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.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank 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 Savings Bank's financial condition and results of
operations.
43
<PAGE>
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses at and for the periods indicated. Where specific loan
loss reserves have been established, any differences between the loss allowances
and the amount of loss realized has been charged or credited to current income.
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period.............. $ 762 $ 665 $ 719
Provision for loan losses (1)................. 44 118 48
Recoveries:
Mortgage loans:
One- to four-family......................... 1 -- --
Multi-family................................ -- -- --
Commercial.................................. -- -- --
Construction................................ -- -- --
Land........................................ -- 2 4
Consumer and other loans..................... 2 26 6
------- ------- ------
Total recoveries.......................... 3 28 10
Charge-offs:
Mortgage loans:
One- to four-family......................... 1 20 6
Multi-family................................ -- 2 40
Commercial.................................. -- -- --
Construction................................ -- -- --
Land........................................ 10 -- 15
Consumer and other loans..................... 16 27 51
------- ------- ------
Total charge-offs......................... 27 49 112
------- ------- ------
Net charge-offs........................... 24 21 102
------- ------- ------
Balance at end of period.................. $ 782 $ 762 $ 665
======= ======= ======
Allowance for loan losses as a percentage of
total loans outstanding at end of period..... 1.02% 1.10% 1.09%
Net charge-offs as a percentage of average
loans outstanding during the period.......... 0.03 0.03 0.17
Allowance for loan losses as a percentage of
nonperforming loans at end of period......... 245.44 498.05 72.18
</TABLE>
___________
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Comparison of Operating Results for the Years Ended April
30, 1996 and 1995 -- Provisions for Loan Losses" and "-- Comparison of
Operating Results for the Years Ended April 30, 1995 and 1994 -- Provisions
for Loan Losses" for a discussion of the factors responsible for changes in
the Savings Bank's provision for loan losses between the periods.
44
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods 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.
<TABLE>
<CAPTION>
At April 30,
-----------------------------------------------------------
1995 1994 1996
-------------------- ----------------- -------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------------ ------ -------- ------ -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 322 59.61% $ 319 65.37% $251 66.46%
Multi-family............ 38 4.90 36 5.07 34 5.34
Commercial.............. 78 11.10 118 9.27 211 9.28
Construction............ 83 9.80 41 7.27 25 6.22
Land.................... 15 1.94 12 1.68 11 1.78
Consumer and other loans.. 104 12.65 78 11.34 79 10.92
Unallocated............... 142 N/A 158 N/A 54 N/A
----- ----- ----
Total allowance for
loan losses.......... $ 782 $ 762 $665
===== ===== ====
</TABLE>
INVESTMENT ACTIVITIES
- ---------------------
The Savings Bank is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Treasury 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 Savings Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like the
Savings Bank are also required to maintain an investment in FHLB stock. The
Savings Bank 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.
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 as a net amount in a separate component
of equity. It is currently the intention of management to classify all
securities in the Savings Bank's investment portfolio as available for sale.
45
<PAGE>
A committee consisting of the Chief Executive Officer, the Chief Financial
Officer and three outside Directors determines appropriate investments in
accordance with the Board of Directors' approved investment policies and
procedures. The Savings Bank's investment policies generally limit investments
to U.S. Government and agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed securities and
certain types of mutual funds. The Savings Bank's investment policy does not
permit engaging directly in hedging activities or purchasing high risk mortgage
derivative products or corporate bonds rated less than BBB. Investments are
made based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, the Savings Bank'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 Savings Bank's credit and interest rate risk, and risk-based
capital is also given consideration during the evaluation.
The following table sets forth the composition of the Savings Bank's
investment and mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At April 30,
------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
---------- ---------- --------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Government and federal
agency obligations.......... $3,216 100.00% $4,201 99.98% $ -- --%
Mortgage-backed securities.... -- -- 1 .02 -- --
------ ------ ------ ------ ------ ------
Total available for sale.. 3,216 100.00 4,202 100.00 -- --
HELD TO MATURITY:
Investment securities:
U.S. Government and federal
agency obligations.......... -- -- -- -- 4,260 78.08
Mortgage-backed securities.... -- -- -- -- 1,196 21.92
------ ------ ------ ------ ------ ------
Total held to maturity... -- -- -- -- 5,456 100.00
------ ------ ------ ------ ------ ------
Total $3,216 100.00% $4,202 100.00% $5,456 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
46
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities or periods to repricing of the Savings
Bank's investment and mortgage-backed securities at April 30, 1996.
<TABLE>
<CAPTION>
At April 30, 1996
-------------------------------------------------------------
Amount Due or Repricing within:
Over One to
One Year or Less Five Years Totals
------------------- ------------------- -------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
obligations $2,511 5.92% $705 6.65% $3,216 6.08%
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major sources of the Savings
Bank's funds for lending and other investment purposes. 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. Borrowings through the FHLB-Des Moines are
used to compensate for reductions in the availability of funds from other
sources. Presently, the Savings Bank has no other borrowing arrangements.
DEPOSIT ACCOUNTS. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. Substantially all of the Savings Bank's depositors are residents of
the State of Missouri. Deposits are attracted from within the Savings Bank's
market area through the offering of a broad selection of deposit instruments,
including NOW accounts, money market deposit accounts, regular savings accounts,
certificates of deposit and retirement savings plans. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining
the terms of its deposit accounts, the Savings Bank considers current market
interest rates, profitability to the Savings Bank, matching deposit and loan
products and its customer preferences and concerns. The Savings Bank reviews
its deposit mix and pricing weekly. The Savings Bank does not accept brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.
The Savings Bank currently offers certificates of deposit for terms not
exceeding 60 months. As a result, the Savings Bank believes that it is better
able to match the repricing of its liabilities to the repricing of its loan
portfolio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset and Liability Management."
In the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the Holding Company, as the sole stockholder of the
Savings Bank.
47
<PAGE>
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at April 30, 1996.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
- ------------- ---- ----------------------------- ------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
--% None Noninterest-bearing $ 200 $ 1,710 2.43%
2.62 None NOW 400 4,259 6.06
3.43 None Money Market Deposit 1,500 3,040 4.32
3.03 None Passbook none 5,910 8.41
Certificates of Deposit
-----------------------
3.70 91 Day Fixed term, fixed rate 1,000 105 0.15
5.21 6 Mo. Fixed term, fixed rate 1,000 6,858 9.75
4.95 9 Mo. Fixed term, fixed rate 1,000 51 0.07
5.62 12 Mo. Fixed term, fixed rate 1,000 14,654 20.84
6.05 18 Mo. Fixed term, fixed rate 1,000 724 1.03
6.75 20 Mo. Fixed term, fixed rate 1,000 100 0.14
6.11 24 Mo. Fixed term, fixed rate 1,000 13,746 19.55
6.18 30 Mo. Fixed term, fixed rate 1,000 2,211 3.15
5.66 36 Mo. Fixed term, fixed rate 1,000 6,078 8.64
5.17 42 Mo. Fixed term, fixed rate 1,000 185 0.26
5.96 48 Mo. Fixed term, fixed rate 1,000 4,793 6.82
6.04 60 Mo. Fixed term, fixed rate 1,000 5,871 8.35
7.59 96 Mo. Fixed term, fixed rate 1,000 21 0.03
------- ------
Total $70,316 100.00%
======= ======
</TABLE>
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of April 30, 1996.
Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- --------------
(In Thousands)
<S> <C>
Three months or less........... $ 418
Over three through six months.. 1,123
Over six through 12 months..... 2,221
Over 12 months................. 2,117
------
Total jumbo certificates
of deposit.................. $5,879
======
</TABLE>
48
<PAGE>
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 Savings Bank between the dates indicated.
<TABLE>
<CAPTION>
At April 30,
-------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- ------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------- ------- ---------- ------ ------- ---------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook............................. $ 5,910 8.41% $ 417 $ 5,493 8.42% $ (995) $ 6,488 10.04%
NOW accounts......................... 4,259 6.06 379 3,880 5.95 (583) 4,463 6.90
Money market deposit................. 3,040 4.32 (1,526) 4,566 7.00 (2,871) 7,437 11.51
Fixed-rate certificates which
mature:
Within 1 year...................... 33,966 48.30 5,286 28,680 43.99 896 27,784 42.99
After 1 year, but within 2 years... 13,322 18.95 940 12,382 18.99 4,097 8,285 12.82
After 2 years, but within 4 years.. 7,662 10.90 (1,017) 8,679 13.31 750 7,929 12.27
After 4 years...................... 447 0.63 (590) 1,037 1.59 (808) 1,845 2.85
Other................................ 1,710 2.43 1,222 488 0.75 89 399 0.62
------- ------ ------- ------- ------ ------- ------- ------
Total.............................. $70,316 100.00% $ 5,111 $65,205 100.00% $ 575 $64,630 100.00%
======= ====== ======= ======= ====== ======= ======= ======
</TABLE>
49
<PAGE>
TIME DEPOSITS BY RATES. The following table sets forth the time deposits in
the Savings Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At April 30,
-------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
2.00 - 2.99%.... $ -- $ 8 $ 77
3.00 - 3.99%.... 105 451 14,348
4.00 - 4.99%.... 6,119 12,879 18,785
5.00 - 5.99%.... 26,144 16,993 8,148
6.00 - 6.99%.... 20,261 17,539 3,005
7.00 - 7.99%.... 2,751 2,862 1,424
8.00 - 8.99%.... 17 45 55
9.00 - 9.99%.... -- -- --
10.00 - 10.99%... -- 1 1
------- ------- -------
Total........... $55,397 $50,778 $45,843
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits at
April 30, 1996.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
--------- ------- ------ ------ ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00 - 3.99%... $ 105 $ -- $ -- $ -- $ -- $ 105
4.00 - 4.99%... 5,962 157 -- -- -- 6,119
5.00 - 5.99%... 17,458 6,404 2,130 140 12 26,144
6.00 - 6.99%... 8,674 6,628 2,117 2,506 336 20,261
7.00 - 7.99%... 1,764 133 505 261 85 2,751
8.00 - 8.99%... -- -- 3 -- 14 17
------- ------- ------ ------ ---- -------
Total......... $33,966 $13,322 $4,755 $2,907 $447 $55,397
======= ======= ====== ====== ==== =======
</TABLE>
DEPOSIT ACTIVITY. The following table sets forth the deposit activities of
the Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------
1996 1995 1994
------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Beginning balance........... $65,205 $64,630 $65,235
------- ------- -------
Net deposits (withdrawals)
before interest credited... 2,941 (1,037) (2,149)
Interest credited........... 2,170 1,612 1,544
------- ------- -------
Net increase (decrease) in
deposits................... 5,111 575 (605)
------- ------- -------
Ending balance.............. $70,316 $65,205 $64,630
======= ======= =======
</TABLE>
50
<PAGE>
BORROWINGS. The Savings Bank utilizes 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 Savings Bank 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) 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.
The following tables sets forth certain information regarding short-
term borrowings by the Savings Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended April 30,
-----------------------------
1995 1994 1996
------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances outstanding
at any month end during the period......... $5,500 $4,500 --
Approximate average FHLB advances
outstanding during the period.............. 4,555 3,093 --
Approximate weighted average rate paid on
FHLB advances during the period............ 6.62% 7.23% --
Balance of FHLB advances outstanding
at end of period........................... $5,000 $4,500 --
Weighted average rate paid on
FHLB advances at end of period............. 6.75% 6.84% --
</TABLE>
COMPETITION
The Savings Bank operates in a competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Its most direct competition for savings deposits has historically
come from local commercial banks and other thrifts operating in its market area.
As of April 30, 1996, there were five commercial banks and two other thrifts
operating in Callaway County, Missouri, of which only one commercial bank was
larger in terms of deposits than the Savings Bank. All of the other financial
institutions in Callaway County are locally owned. A portion of the Callaway
County residents commute to work in either Columbia or Jefferson City and, thus,
there is strong competition from other financial institutions in these larger
metropolitan areas. Particularly in times of high interest rates, the Savings
Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Savings Bank's competition for loans also comes from mortgage
bankers. Such competition for deposits and the origination of loans may limit
the Savings Bank's growth in the future.
SUBSIDIARY ACTIVITIES
The Savings Bank has one subsidiary, Multi-Purpose Service Agency, Inc.
("Service Corporation"), whose activities consist primarily of selling credit
life insurance to the Savings Bank's customers. At April 30, 1996, the Savings
Bank's equity investment in its subsidiary was a deficit of $68,000.
51
<PAGE>
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that at least one-half of any amount in excess
of 1% is used primarily for community, inner-city and community development
projects. The Savings Bank's investment in its subsidiary did not exceed these
limits at April 30, 1996.
PROPERTIES
The Savings Bank operates two full service facilities, both of which it
owns. At April 30, 1996, the net book value of the properties (including land
and buildings) and the Savings Bank's fixtures, furniture and equipment was $1.3
million.
PERSONNEL
As of April 30, 1996, the Savings Bank had 33 full-time and five part-time
employees. The employees are not represented by a collective bargaining unit
and the Savings Bank believes its relationship with its employees to be good.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. In September 1994, a former employee of the Savings
Bank filed a charge of race discrimination against the Savings Bank with the
Missouri Commission on Human Rights and the Equal Employment Opportunity
Commission based on the termination of her employment. The charge is being
investigated by the Missouri Commission on Human Rights. The Savings Bank has
vigorously contested the charge and believes the charge is without merit. No
lawsuit based on this charge has been filed against the Savings Bank. In the
opinion of management, the Savings Bank 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 Savings Bank.
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company consists of seven persons
divided into three classes, each of which contains approximately one third of
the Board. The Directors shall be elected by the stockholders of the Holding
Company for staggered three-year terms, or until their successors are elected
and qualified. One class of Directors, consisting of Messrs. Richard W. Gohring
and Dennis J. Adrian, has a term of office expiring at the first annual meeting
of stockholders, a second class, consisting of Mrs. Bonnie K. Smith and Mr.
David W. West, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Messrs. Kermit D. Gohring,
Clifford E. Hamilton and Billy M. Conner has a term of office expiring at the
third annual meeting of stockholders. The executive officers of the Holding
Company are elected annually and hold office until their respective successors
have been elected and qualified or until death, resignation or removal by the
Board of Directors.
The following individuals hold the offices set forth opposite their names
below.
Name Position held with Holding Company
---- ----------------------------------
Kermit D. Gohring President and Chief Executive Officer
Richard W. Gohring Vice-President
Bonnie K. Smith Secretary-Treasurer
52
<PAGE>
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and executive officers of the Holding Company during the past five
years is set forth under "MANAGEMENT OF THE SAVINGS BANK -- Biographical
Information."
MANAGEMENT OF THE SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Savings Bank 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 Savings Bank.
The Savings Bank also has three emeritus directors, Millard F. Stewart, Virgil
A. Johnston and Cecil M. Stock. The executive officers of the Savings Bank 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 Savings Bank.
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
- ---- ------- -------------------------- ------- -------
<S> <C> <C> <C> <C>
Dennis J. Adrian 47 Director 1995 1999
Billy M. Conner 65 Director 1995 1997
Kermit D. Gohring 60 Chief Executive Officer, President 1967 1998
and Chairman of the Board
Richard W. Gohring 41 Executive Vice President 1989 1998
and Director
Clifford E. Hamilton, Jr. 53 Vice Chairman of the Board 1989 1997
Bonnie K. Smith 51 Senior Vice President, Secretary- 1985 1998
Treasurer and Director
David W. West 58 Director 1995 1999
- ---------------------
</TABLE>
(1) As of April 30, 1996.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years.
Dennis J. Adrian is the sole owner of Vandelicht Trucking, Inc., a
local trucking company. He is also the President and majority owner of Mo-Con,
Inc., a local concrete mixing and delivery firm with which he has been
associated since 1968.
Billy M. Conner is the co-owner and operator of BCGC, Inc.,
a local family farming operation.
Kermit D. Gohring is the President, Chief Executive Officer and
Chairman of the Board of the Holding Company and the Savings Bank. He has been
associated with the Savings Bank since 1964 and President since 1974.
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<PAGE>
Richard W. Gohring is Executive Vice President and a Director of the
Savings Bank and Vice-President and a Director of the Holding Company. He has
been associated with the Savings Bank since 1985.
Clifford E. Hamilton, Jr. is a Circuit Judge in Columbia, Missouri and
presently serves as a general jurisdiction judge in the Thirteenth Judicial
Circuit of Missouri, which includes Fulton and Columbia. He currently serves as
the Vice Chairman of the Board.
Bonnie K. Smith is Senior Vice President, Secretary-Treasurer and a
Director of the Savings Bank and Secretary-Treasurer of the Holding Company.
She has been associated with the Savings Bank since 1971.
David W. West is the co-owner and operator of a local family
farming operation.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended April 30, 1996, the Board of Directors held 15 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such director served.
The Audit Committee, consisting of Directors Hamilton (Chairman),
Conner and West, meets with the Savings Bank's outside auditor to discuss the
results of the annual audit. The Audit Committee met one time during the fiscal
year ended April 30, 1996.
The Salary Committee, consisting of Directors Kermit Gohring
(Chairman), Conner and Hamilton, is responsible for determining compensation for
all employees. The Salary Committee met one time during the fiscal year ended
April 30, 1996.
The Savings Bank also maintains standing Loan, Interest Rate Risk,
Community Reinvestment Act, Nominating and Compliance Committees.
DIRECTORS' COMPENSATION
Non-employee Directors receive a fee of $1,000 per month. Employee
Directors receive a fee of $500 per month. It is currently anticipated that,
after completion of the Conversion, directors' fees will continue to be paid by
the Savings Bank and no separate fees will be paid for service on the Board of
Directors of the Holding Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished
for the President of the Savings Bank for the year ended April 30, 1996. No
other executive officers of the Savings Bank received salary and bonus in excess
of $100,000 during the year ended April 30, 1996.
<TABLE>
<CAPTION>
Annual Compensation(1)
----------------------------------------------------
Name and Other Annual All Other
Position Year Salary($) Bonus($) Compensation($)(2) Compensation($)(3)
------------------- ---- --------- -------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
Kermit D. Gohring 1996 $58,015 $51,029 $6,000 $3,271
President
</TABLE>
(footnotes on following page)
54
<PAGE>
- --------------------------
(1) Compensation information for fiscal years ended April 30, 1995 and 1994 has
been omitted as the Savings Bank was not a public company nor a subsidiary
thereof at such time.
(2) Consists of directors' fees. The aggregate amount of perquisites and other
personal benefits was less than 10% of the total annual salary and bonus
reported.
(3) Amount contributed by the Savings Bank to 410(k) plan.
EMPLOYMENT AGREEMENTS. In connection with the Conversion, the Holding
Company and the Savings Bank (collectively, the "Employers") will enter into a
three-year employment agreement with Mr. Kermit Gohring. The Savings Bank
recently eliminated its bonus program. Consequently, under the agreement the
initial salary level for Mr. Gohring will be $96,000, which amount will be paid
by the Savings Bank 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 agreement, the term of the agreement may be extended
for an additional year. The agreement is terminable by the Employers at any
time or upon the occurrence of certain events specified by federal regulations.
The employment agreement provides for severance payments and other benefits
in the event of involuntary termination of employment in connection with any
change in control of the Employers. Severance payments also will be provided on
a similar basis in connection with a voluntary termination of employment where,
subsequent to a change in control, Mr. Gohring 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 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, as amended ("Exchange Act")) 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 severance payment from the Employers will equal 2.99 times Mr. Gohring's
average annual compensation during the five-year period preceding the change in
control. Such amount will be paid in a lump sum within ten business days
following the termination of employment. Assuming that a change in control had
occurred at April 30, 1996, Mr. Gohring would be entitled to a severance payment
of approximately $271,500. Section 280G of the Internal Revenue Code of 1986,
as amended ("Code"), states that severance payments which equal or exceed three
times the base compensation of the individual are deemed to be "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 agreement restricts Mr. Gohring'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.
In connection with the consummation of the Conversion, the Holding Company
and the Savings Bank intend to enter into similar employment agreements with Mr.
Richard Gohring and Mrs. Bonnie Smith that would have a term of 18 months and
provide for a severance payment in the event of a change in control equal to 1.5
times the executive's average annual compensation over the five-year period
preceding the change in control. The Board of Directors of the Holding Company
or the Savings Bank may, from time to time, also enter into employment or
severance agreements with other senior executive officers.
55
<PAGE>
BENEFITS
GENERAL. The Savings Bank currently pays the premiums for medical, dental,
life and disability insurance benefits for full-time employees, subject to
certain deductibles.
401(K) PLAN. The Savings Bank maintains the Fulton Savings Bank 401(k) Plan
(the "401(k) Plan") for the benefit of eligible employees of the Savings Bank.
The 401(k) Plan is intended to be a tax-qualified plan under Sections 401(a) and
401(k) of the Code. Employees of the Savings Bank who have completed 1,000
hours of service during 12 consecutive months and who have attained age 19 are
eligible to participate in the 401(k) Plan. Participants may contribute a
portion of their annual compensation to the 401(k) Plan through a salary
reduction election in an amount not in excess of applicable Code limits. The
limit for 1996 is $9,500. The Savings Bank matches participant contributions on
a discretionary basis. In addition to employer matching contributions, the
Savings Bank 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 (excluding commissions) bears to the total
compensation of all participants during the plan year. To be eligible to
receive a discretionary employer contribution, the participant must complete
1,000 hours of service during the plan year and remain employed by the Savings
Bank on the last day of the plan year. Participants are at all times 100%
vested in salary reduction contributions. With respect to employer matching and
discretionary employer contributions, participants vest in such contributions at
the rate of 20% per year beginning with the completion of their third year of
service with full vesting occurring after seven years of service. For the
fiscal year ended April 30, 1996, the Savings Bank incurred total contribution-
related expenses of $19,000 in connection with the 401(k) Plan.
In general, the investment of 401(k) Plan assets is directed by an
investment committee authorized by the Board of Directors of the Savings Bank.
However, in connection with the Conversion, the 401(k) Plan has been amended to
provide participants with the opportunity to direct the investment of up to 50%
of their vested account balance to purchase shares of the 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."
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized the
adoption by the Savings Bank of an ESOP for employees of the Savings Bank 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 Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Savings Bank who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 19 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be issued
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
Savings Bank's contributions to the ESOP and dividends payable on Common Stock
held by the ESOP over the anticipated ten-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." In
any plan year, the Savings Bank 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.
56
<PAGE>
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 upon the
completion of five years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Savings Bank's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
It is anticipated that Messrs. Kermit Gohring and Richard Gohring and Mrs.
Bonnie Smith will be appointed by the Board of Directors of the Savings Bank to
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 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 SOP 93-6, the Savings Bank will recognize compensation expense
in an amount equal to the fair market value of the ESOP shares when such shares
are committed to be released to participants' accounts.
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations of
the IRS and the Department of Labor issued thereunder. The Savings Bank 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 Savings Bank expects that a favorable
determination letter will be received by the ESOP.
1996 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. The approval of a majority vote of
the Holding Company's outstanding shares is required prior to the 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 a incentive to contribute to the success of the Holding Company and
the Savings Bank, 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 Savings
Bank. 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 (149,500 shares based on the
issuance of 1,495,000 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
57
<PAGE>
be adjusted by the Committee 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"). Under the Stock Option Plan, the
Committee will determine which officers and key employees will be granted
options, whether such options will be ISOs or NQOs, the number of shares subject
to each option, and the exercisability of such options. The per share exercise
price of an option will equal at least 100% of the fair market value of a share
of Common Stock on the date the option is granted. All options granted to
nonemployee directors will be NQOs and such options will be granted at an
exercise price equal to 100% of the fair market value of the Common Stock on the
date the option is granted. Options granted upon the effective date of the
Stock Option Plan will become exercisable ratably over a five-year period
following the date of grant. However, unvested options will be immediately
exercisable in the event of the recipient's death or disability. Unvested
options will also be exercisable following a change in control (as defined in
the Stock Option Plan) of the Holding Company or the Savings Bank to the extent
authorized or not prohibited by applicable law or regulations.
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 generally
nontransferable except by will or the laws of descent or distribution.
The Stock Option Plan will also provide that upon the payment of an
"extraordinary dividend" by the Holding Company, each optionee will receive a
cash payment equivalent to the dividends that would have been payable to such
optionee had the options been exercised on or before the record date of such
dividend. For purposes of the Stock Option Plan, an "extraordinary dividend" is
a dividend payable at a rate in excess of the Savings Bank's weighted average
cost of funds on interest-bearing liabilities for the 12-month period preceding
the record date of the dividend.
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, the Savings Bank
anticipates that if stockholder approval is obtained it would provide awards to
its directors, officers and employees to the extent permitted by applicable
regulations. OTS regulations currently provide that no individual officer or
employee may receive more than 25% of the shares reserved for issuance under any
stock compensation plan and that non-employee directors may not receive more
than 5% of such shares individually or 30% in the aggregate for all non-employee
directors. The amount of individual awards will be determined prior to
submitting the Stock Option Plan for stockholder approval, and disclosure of
such awards will be included in the proxy materials for such meeting.
58
<PAGE>
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 Savings
Bank. The MRP will enable the Holding Company and the Savings Bank 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 Savings Bank.
The MRP will be submitted to stockholders for approval at a meeting to be
held no earlier than six months following consummation of the Conversion. The
approval of a majority vote of the Holding Company's stockholders is required
prior to implementation of the MRP within one year of the consummation of the
Conversion. The MRP will comply with all applicable regulatory requirements.
However, the OTS will not approve or endorse the MRP. The MRP expects to
acquire a number of shares of Common Stock equal to 4% of the Common Stock
issued in connection with the Conversion (59,800 shares based on the issuance of
1,495,000 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 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 to the MRP Trust.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock vesting ratably over a five-year 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. If a recipient terminates employment
for reasons other than death or disability, the recipient will forfeit all
rights to allocated shares that are then subject to restriction. In the event
of the recipient's death or disability, all restrictions will expire and all
allocated shares will become unrestricted. In addition, all allocated shares
will become unrestricted in the event of a change in control (as defined in the
MRP) of the Holding Company or the Savings Bank to the extent authorized or not
prohibited by applicable law or regulations. Compensation expense in the amount
of the fair market value of the Common Stock at the date of the grant to the
recipient will be recognized during the years in which the shares vest.
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.
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, the Savings Bank
anticipates that if stockholder approval is obtained it would provide awards to
its directors, officers and employees to the extent permitted by applicable
regulations. OTS regulations currently provide that no individual officer or
employee may receive more than 25% of the shares reserved for issuance under any
stock compensation plan and that non-employee directors may not receive more
than 5% of such shares individually or 30% in the aggregate for all non-employee
directors. The amount of individual awards will be determined prior to
submitting the MRP for stockholder approval, and disclosure of such awards will
be included in the proxy materials for such meeting.
59
<PAGE>
TRANSACTIONS WITH THE SAVINGS BANK
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and must not involve more than the
normal risk of repayment or present other unfavorable features. The Savings
Bank is therefore prohibited from making any new loans or extensions of credit
to the Savings Bank's executive officers and directors at different rates or
terms than those offered to the general public and has adopted a policy to this
effect. 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
or her related interests, are in excess of the greater of $25,000 or 5% of the
Savings Bank'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 Savings
Bank to its executive officers and directors was $357,000 at April 30, 1996, or
approximately 1.6% of pro forma stockholders' equity (based on the issuance of
the maximum of the Estimated Valuation Range).
REGULATION
GENERAL
The Savings Bank 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 (the "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 Savings Bank'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 Savings Bank's mortgage documents. The Savings Bank
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 Savings Bank'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 Holding Company,
the Savings Bank and their operations. The Holding Company, as a savings and
loan holding company, will also be required to file certain reports with, and
otherwise comply with the rules and regulations of, the OTS.
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
60
<PAGE>
capitalized and able to raise funds in the capital markets, and to ensure that
the FHLBs operate in a safe and sound manner.
The Savings Bank, 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 (borrowings) from the
FHLB-Des Moines. The Savings Bank is in compliance with this requirement with
an investment in FHLB-Des Moines stock of $637,000 at April 30, 1996.
Among other benefits, the FHLB 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 established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and soundness of
the banking industry. In 1989 the FDIC also became the insurer, up to the
prescribed limits, of the deposit accounts held at federally insured savings
associations and established two separate insurance funds: the BIF and the SAIF.
As insurer of deposits, the FDIC has examination, supervisory and enforcement
authority over all savings associations.
The Savings Bank's accounts are insured by the SAIF. The FDIC insures
deposits at the Savings Bank to the maximum extent permitted by law. The
Savings Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. 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 currently ranging
from .23% for well capitalized, financially sound institutions with only a few
minor weaknesses to .31% for undercapitalized institutions that pose a
substantial risk of loss to the SAIF unless effective corrective action is
taken. Until the second half of 1995, the same matrix applied to BIF-member
institutions. The FDIC is authorized to raise assessment rates in certain
circumstances. The Savings Bank's assessments expensed for the year ended April
30, 1996, totalled $153,000.
Effective January 1, 1996, the FDIC substantially reduced deposit insurance
premiums for well-capitalized, well-managed financial institutions that are
members of the BIF. Under the new assessment schedule, rates were reduced to a
range of 0 to 27 basis points, with approximately 92% of BIF members paying the
statutory minimum annual assessment rate of $2,000. With respect to SAIF member
institutions, the FDIC has retained the existing rate schedule of 23 to 31 basis
points. The Savings Bank is, and after the Conversion will remain, a member of
the SAIF rather than the BIF. See "RISK FACTORS -- Recapitalization of SAIF and
Its Impact on SAIF Premiums."
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 Savings Bank.
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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
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. 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, a Tier I risk-based capital ratio of
4.0% or more and 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%, a Tier I risk-based capital ratio that is less than 4.0% or 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%, a Tier I risk-based capital ratio that is less than 3.0% or 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, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At April 30, 1996, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIA requires the federal banking
regulatory agencies to prescribe, 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; and (vi) compensation, fees
and benefits. The federal banking agencies adopted regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement safety and soundness standards required by the FDIA. 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. The agencies also proposed asset quality and earnings
standards which, if adopted in final, would be added to the Guidelines. If the
OTS determines that the Savings Bank fails to meet any standard prescribed by
the Guidelines, the agency may require the Savings Bank to submit to the agency
an acceptable plan to achieve compliance with the standard, as required by the
FDIA. OTS regulations establish deadlines for the submission and review of such
safety and soundness compliance plans.
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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 become a national bank 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 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; and direct or indirect obligations of the FDIC. 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 and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC 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 April 30, 1996, the qualified thrift investments of the Savings Bank were
approximately 84.1% of its portfolio assets.
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. The Holding Company is not
subject to any minimum 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 (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 nonincludable 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."
As required by federal law, the OTS has proposed a rule revising its minimum
core capital requirement to be no less stringent than that imposed on national
banks. The OTS has proposed that only those savings associations rated a
composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required
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to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank'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 totalled 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 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
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first be deducted from an institution's total capital until savings associations
become familiar with the process for requesting an adjustment to its interest
rate risk component.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Savings Bank's historical amounts and percentages at
April 30, 1996 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 Savings Bank 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).
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 Savings Bank is currently meeting 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 Savings Bank'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. At April 30, 1996, the Savings Bank's limit on loans
to one borrower was $1.4 million. At April 30, 1996, the Savings Bank's largest
aggregate amount of loans to one borrower was $977,000.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. When a savings
association establishes or acquires a subsidiary or elects to 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
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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 ("Sections 23A and 23B")
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.
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 Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank'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 Savings Bank may make to such persons based, in part, on the
Savings Bank'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.
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. 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
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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 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 holding company.
QUALIFIED THRIFT LENDER TEST. The HOLA requires 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 Savings Bank will report their income
on a calendar year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions. 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 Savings Bank or the Holding Company.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions such as the Savings Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have been
computed using an amount based on the Savings Bank's actual loss experience, or
a percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the nonqualifying reserve. The Savings Bank's deduction with respect to
nonqualifying loans was computed under the experience method, which essentially
allows a deduction based on the Savings Bank's actual loss experience over a
period of several years. Each year the Savings Bank selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve. The Savings Bank used the percentage method bad debt deduction for the
taxable years ended December 31, 1995, 1994 and 1993. However, the use of the
percentage method for the taxable year ended December 31, 1995 resulted in no
bad debt deduction because of other limitations in the computation.
Recently enacted legislation repealed the reserve method of accounting for
bad debt reserves for tax years beginning after December 31, 1995. As result,
savings associations will no longer be able to calculate their deduction for bad
debts using the percentage-of-taxable-income method. Instead, savings
associations will be required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings association or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years. This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At April 30, 1996, the Savings Bank's post-1987 reserves totalled
approximately $174,000. The recapture may be suspended for up to two years if,
during those years, the institution satisfies a residential loan requirement.
The Savings Bank anticipates that it will meet the residential loan requirement
for the taxable year ending December 31, 1996.
Under prior law, if the Savings Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Savings Bank would be required to
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deduct bad debts as they occur and would additionally be required to recapture
its bad debt reserve deductions ratably over a multi-year period. At April 30,
1996, the Savings Bank's total bad debt reserve for tax purposes was
approximately $1.9 million. Among other things, the qualifying thrift
definitional tests required the Savings Bank to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations
of the United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loans secured by
interests in improved residential real property or by savings accounts, student
loans and property used by the Savings Bank in the conduct of its banking
business. Under current law, a savings association will not be required to
recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests.
DISTRIBUTIONS. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank'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 Savings
Bank'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
Savings Bank's bad debt reserve. Thus, any dividends to the Holding Company
that would reduce amounts appropriated to the Savings Bank's bad debt reserve
and deducted for federal income tax purposes would create a tax liability for
the Savings Bank. The amount of additional taxable income attributable to 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 Savings Bank makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). See "REGULATION" and "DIVIDEND
POLICY" for limits on the payment of dividends by the Savings Bank. The Savings
Bank 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 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 carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Savings Bank'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 .12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Savings Bank, whether or not an Alternative Minimum
Tax ("AMT") is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. The Holding Company may
exclude from its income 100% of dividends received from the Savings Bank 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 Savings Bank
will not file a consolidated tax return, except that if the Holding Company or
the Savings Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
There have not been any IRS audits of the Savings Bank's federal income tax
returns during the past five years.
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STATE TAXATION
MISSOURI. Missouri-based thrift institutions, such as the Savings Bank,
are subject to a special financial institutions tax, based on net income without
regard to net operating loss carryforwards, at the rate of 7% of net income.
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 Savings Bank 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 taxes and use taxes. In addition, the
Savings Bank is entitled to credit against this tax all taxes paid to the State
of Missouri or any political subdivision, except taxes on tangible personal
property owned by the Savings Bank 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.
DELAWARE. As a Delaware holding company not earning income in Delaware,
the Holding Company is exempted from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
THE CONVERSION
THE OTS HAS GIVEN APPROVAL TO THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY
THE MEMBERS OF THE SAVINGS BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL.
OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
THE PLAN.
GENERAL
On January 9, 1996, the Board of Directors of the Savings Bank unanimously
adopted the Plan of Conversion, pursuant to which the Savings Bank will be
converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank to be held as a wholly-owned subsidiary of the
Holding Company, a newly formed Delaware 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 SAVINGS BANK'S PROXY
STATEMENT AND IS AVAILABLE FROM THE SAVINGS BANK UPON REQUEST. The OTS has
approved the Plan of Conversion subject to the Plan's approval by the members of
the Savings Bank entitled to vote on the matter at a Special Meeting called for
that purpose to be held on October 15, 1996, 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 Savings
Bank. Under the Plan, 1,105,000 to 1,495,000 shares of Common Stock are being
offered for sale by the Holding Company at the Purchase Price of $10.00 per
share. As part of the Conversion, the Savings Bank will issue all of its newly
issued common stock (1,000 shares) 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 Savings Bank will
convert from a federally chartered mutual savings bank 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, subject to
certain limitations; (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 Savings Bank to be issued
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in connection with the Conversion. The Conversion will be effected only upon
completion of the sale of at least $11,050,000 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 December 31, 1994); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of June 30, 1996); and (iv) Other Members (depositors of the Savings Bank as
of September 3, 1996 and borrowers of the Savings Bank with loans outstanding as
of April 15, 1995 which continue to be outstanding as of September 3, 1996).
Shares of Common Stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering to members of the general
public, with priority being given to natural persons and trusts of natural
persons residing in the Local Community. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at anytime 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 Subscription Offering unless extended by the Savings Bank 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 Savings Bank 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 Savings Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank'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 Savings Bank 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
Savings Bank would be required to charge all Conversion expenses against current
income.
Orders for shares of Common Stock will not be filled until at least
1,105,000 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 Savings Bank'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 Savings Bank's passbook rate from the date payment is received until the
Conversion is terminated.
PURPOSES OF CONVERSION
The Savings Bank's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the Savings
Bank as its subsidiary. The Savings Bank, as a mutual savings association, does
not have stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Holding Company and the
Savings Bank will be structured in the form used by
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holding companies of commercial banks and by a large number of savings
institutions. Management of the Savings Bank believes that the Conversion
offers a number of advantages which will be important to the future growth and
performance of the Savings Bank in that it is intended: (i) to improve the
overall competitive position of the Savings Bank in its market area and to
support possible future expansion and diversification of operations (currently
there are no specific plans, arrangements or understandings, written or oral,
regarding any such activities); (ii) to afford members of the Savings Bank and
others the opportunity to become stockholders of the Holding Company and thereby
participate more directly in, and contribute to, any future growth of the
Holding Company and the Savings Bank; and (iii) to provide future access to
capital markets.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE SAVINGS
BANK
VOTING RIGHTS. Savings members and borrowers will have no voting rights in
the converted Savings Bank or the Holding Company and therefore will not be able
to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Savings Bank 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 Savings Bank'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 Savings Bank.
TAX EFFECTS. The Savings Bank has received an opinion from Breyer &
Aguggia, 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 Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank 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 zero; (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 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 Savings Bank,
whose findings are not binding on the IRS, has indicated 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 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 Savings Bank could also recognize a gain on the
distribution of such Subscription Rights. Eligible Account Holders,
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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 Savings Bank 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 Savings Bank, 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 Breyer & Aguggia 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 Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank 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
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the Savings
Bank, including certificates of deposit ("Savings Account(s)"), shall not be
entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to OTS regulations, the Savings Bank 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 Savings Bank subsequent
to the Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Savings Bank.
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 Savings Bank subsequent to December 31, 1994 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 December 31, 1994 or
June 30, 1996 or (ii) the amount of the "qualifying deposit" in such Savings
Account on December 31, 1994 or June 30, 1996, 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.
In the event of a complete liquidation of the Savings Bank (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
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purchase of assets with assumptions of Savings Accounts and other liabilities or
similar transactions with another federally insured institution in which the
Savings Bank 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.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
THE SUBSCRIPTION OFFERING IS EXPECTED TO EXPIRE AT 4:30 P.M., CENTRAL TIME,
ON THE EXPIRATION DATE, UNLESS EXTENDED OR CONTINUED AS DESCRIBED ON THE COVER
PAGE OF THIS PROSPECTUS.
SUBSCRIPTION OFFERING. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all 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. 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 Savings Bank as of December 31, 1994 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$150,000 of Common Stock, 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 Savings Bank in the one year period preceding
December 31, 1994 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.
Category 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each depositor with
$50.00 or more on deposit as of June 30, 1996 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $150,000 of Common
Stock, 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 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 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 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.
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Category 4: OTHER MEMBERS. Each depositor of the Savings Bank as of the
Voting Record Date and each borrower with a loan outstanding on April 15, 1995
which continues to be outstanding as of the Voting Record Date will receive
nontransferable Subscription Rights to purchase up to $150,000 of Common Stock
in the Conversion to the extent shares are available following subscriptions by
Eligible Account Holders, the Savings Bank'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 OR
MODIFIED WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Subscription Offering and all Subscription Rights under the Plan will
expire at 4:30 p.m., Central Time, on the Expiration Date, whether or not the
Savings Bank has been able to locate each person entitled to such Subscription
Rights. The Subscription Offering may be extended by the Holding Company and
the Savings Bank up to October 28, 1996 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 sale of
Common Stock is not completed within such period, all funds received will be
promptly returned with interest at the Savings Bank'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 may 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 the Local Community. Purchasers in the Direct Community Offering are
eligible to purchase up to $150,000 of Common Stock in the Conversion (or 15,000
shares based on the Purchase Price). No person or entity, together with
associates of and persons acting in concert with such person or entity, may
purchase in the aggregate shares with an aggregate purchase price of more than
$200,000 (or 20,000 shares based on the Purchase Price). 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, is expected to commence immediately subsequent to the
Expiration Date, but may begin at anytime during 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 Savings Bank with
approval of the OTS. Any extensions beyond 45 days after the close of the
Subscription Offering would require a resolicitation of orders, wherein
subscribers would be given the opportunity to continue their orders, in which
case they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Savings Bank's passbook rate, or be
permitted to modify or cancel their orders. 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 SAVINGS BANK 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.
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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 provides that, if necessary, all
shares of Common Stock not purchased in the Subscription 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 managed by Trident Securities acting as agent of the
Holding Company. THE HOLDING COMPANY AND THE SAVINGS BANK 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 will be sold at the $10.00
Purchase Price, the same price as all other shares in the Offering. 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 $150,000. See "-- Plan of
Distribution for the Subscription, 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 Savings Bank's
passbook rate until the completion of the Offerings. At the completion of the
Conversion, the funds received in the Offerings 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
following the Expiration Date, unless extended by the Holding Company with the
approval of the OTS.
In the event the Savings Bank 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 Savings Bank, 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 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. 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.
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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 Savings Bank
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 reside. However, the Holding Company and the Savings Bank 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; (ii) the granting of Subscription Rights
or offer or sale of shares of Common Stock to such persons would require the
Holding Company to register, under the securities laws of such state, as a
broker or dealer or to register or otherwise qualify the Common Stock for sale
in such state; or (iii) such registration or qualification would be impractical
for reasons of cost or otherwise. Where the number of persons eligible to
subscribe for shares in one state is small, the Holding Company and the Savings
Bank 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 and the cost of registering or qualifying the
shares.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
The Savings Bank and the Holding Company have retained Trident Securities
to consult with and advise the Savings Bank and to assist the Savings Bank and
the Holding Company, on a best efforts basis, in the distribution of shares in
the Offerings. Trident Securities is a broker-dealer registered with the SEC
and a member of the National Association of Securities Dealers, Inc. ("NASD").
Trident Securities will assist the Savings Bank in the Conversion as follows:
(i) it will act as marketing advisor with respect to the Subscription Offering
and will represent the Savings Bank 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 to ensure that directors, officers and
employees of the Savings Bank are knowledgeable regarding the Conversion
process; and (iii) it will provide assistance in the establishment and
supervision of the Stock Information Center and will train the Savings Bank'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 Savings Bank on the other hand concerning fee structure,
Trident Securities will receive a management fee in the amount of $157,500.
Trident and selected dealers participating in the Syndicated Community Offering
shall receive a commission in an amount to be agreed upon jointly by Trident
Securities and the Savings Bank for shares sold by them 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, including
legal fees, not to exceed $38,500 in the aggregate. 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."
The Holding Company and the Savings Bank 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 and Direct Community
Offerings principally by the distribution of this Prospectus and through
activities conducted at the Savings Bank's Stock Information Center at
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its main office facility. The Stock Information Center is expected to operate
during normal business hours throughout the Subscription and Direct Community
Offerings. 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 Subscription and Direct Community Offerings, responding to
questions regarding the Conversion and the Subscription and Direct Community
Offerings 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 Savings Bank may participate in
the Offerings 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 Savings Bank may answer questions regarding
the business of the Savings Bank 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 Savings Bank 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 Savings Bank 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 Savings Bank's personnel participating in the Subscription and
Direct Community Offering is registered or licensed as a broker or dealer or an
agent of a broker or dealer. The Savings Bank'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 ("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 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 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 Savings Bank will accept
for processing only orders submitted on Order Forms.
To purchase shares in the Subscription Offering, an executed Order Form and
certification 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 Savings Bank (which may be given by
completing the appropriate blanks in the Order Form), must be received by the
Savings Bank by 4:30 p.m., Central Time, on the Expiration Date. Order Forms
which 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. In addition, the Savings Bank is not obligated to
accept orders submitted on photocopied or telecopied Order Forms. The Holding
Company and the Savings Bank 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 Savings Bank 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 Community Offering, the Order Form, accompanied by the required
payment for each share subscribed for, must be received by the Savings Bank
prior to the time the
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Direct Community Offering terminates, which may be 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 Savings Bank 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 (December 31,
1994) and/or the Supplemental Eligibility Record Date (June 30, 1996) and/or the
Voting Record Date (September 3, 1996) 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.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Savings Bank, (ii) by check, bank draft, or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Savings
Bank. 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
Savings Bank's passbook rate from the date payment is received 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 Offerings 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
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 Savings Bank to withdraw the amount of the
aggregate Purchase Price from his or her deposit account, the Savings Bank 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 Savings Bank 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 Savings Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, 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 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.
Individual Retirement Accounts ("IRAs") maintained in the Savings Bank 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 Savings Bank 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 Offerings. 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 Savings Bank now holds the depositor's IRA funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
using funds in a Savings Bank IRA to purchase Common Stock should contact the
Stock Information Center at the Savings Bank 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
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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 Savings Bank 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. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of Common Stock which they
purchased, even though trading of the Common Stock may have commenced.
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 Savings Bank 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 Savings Bank
and the Holding Company have retained RP Financial to prepare an appraisal of
the pro forma market value of the Holding Company and the Savings Bank as
converted, as well as a business plan. RP Financial will receive a fee expected
to total approximately $27,500 for its appraisal services and preparation of a
business plan, plus reasonable out-of-pocket expenses incurred in connection
with the appraisal. The Savings Bank 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 Savings Bank as converted taking into
account the formation of the Holding Company as the holding company for the
Savings Bank. For its analysis, RP Financial undertook substantial
investigations to learn about the Savings Bank'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
Savings Bank's Form AC Application for Approval of Conversion and the Holding
Company's Form S-1 Registration Statement. Furthermore, RP Financial visited
the Savings Bank's facilities and had discussions with the Savings Bank's
management and its special conversion legal counsel, Breyer & Aguggia. No
detailed individual analysis of the separate components of the Holding Company's
or the Savings Bank's assets and liabilities was performed in connection with
the evaluation.
In estimating the pro forma market value of the Holding Company and the
Savings Bank 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 Savings Bank's primary market area, the
Savings Bank's financial performance and condition in relation to publicly-
traded institutions that RP Financial deemed comparable to the Savings Bank, 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
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 Savings Bank 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 expenses of
$542,000, an assumed after-tax rate of return on the net Conversion proceeds of
4.02%, purchases by the ESOP of 8% of the stock sold in the Conversion and
purchases in the open market by the MRP of a number of shares equal to 4% of the
stock sold in the Conversion at the Purchase Price. See "PRO FORMA DATA" for
additional information concerning these assumptions. The use of different
assumptions may yield somewhat different results.
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On the basis of the foregoing, RP Financial has advised the Holding Company
and the Savings Bank that, in its opinion, as of July 12, 1996, the aggregate
estimated pro forma market value of the Holding Company and the Savings Bank as
converted and, therefore, the Common Stock was within the valuation range of
$11,050,000 to $14,950,000 with a midpoint of $13,000,000. 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 $11,050,000 to $14,950,000 with a
midpoint of $13,000,000. In determining the reasonableness and adequacy of the
appraisal, consistent with OTS regulations and policies, the Board of Directors
reviewed the methodology and reasonableness of the assumptions utilized by RP
Financial in the preparation of the appraisal. Assuming that the shares are
sold at $10.00 per share in the Conversion, the estimated number of shares would
be between 1,105,000 and 1,495,000 with a midpoint of 1,300,000. The Purchase
Price of $10.00 was determined by discussion among the Boards of Directors of
the Savings Bank 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 Offerings relate 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 Savings Bank, 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 Savings
Bank 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
Savings Bank as converted at the time of the sale. If, however, the facts do
not justify such a statement, the Offerings 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 shown above. In the
event the total amount of shares issued is less than 1,105,000 or more than
1,719,250 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $11,050,000 or more than $17,192,500,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is
established by RP Financial, such new range will be subject to approval by the
OTS.
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 Savings Bank 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 will terminate.
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In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Savings Bank furnished 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 Savings Bank and the Holding Company or independently value the
assets or liabilities of the Holding Company and the Savings Bank. 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
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 purchase 8% of the shares of
Common Stock issued in the Conversion, no person or entity may purchase shares
with an aggregate purchase price of more than $150,000 (or 15,000 shares based
on the Purchase Price); and no person or entity, together with associates of and
persons acting in concert with such person or entity, may purchase in the
aggregate shares with an aggregate purchase price of more than $200,000 (or
20,000 shares based on the Purchase Price). Officers, directors and their
associates may not purchase, in the aggregate, more than 34% of the shares of
Common Stock offered in the Conversion. For purposes of the Plan, 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 Savings Bank'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 Savings Bank 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, all persons who
subscribed for the maximum number of shares will 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 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 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 other party shall also be
deemed to be acting in concert with any person who is also acting in concert
with that other party.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Savings Bank or a majority-owned
subsidiary of the Savings Bank) 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
Savings Bank 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
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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 to mean an executive officer of
the Savings Bank, 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
Savings Bank 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; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases 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. However, recent OTS policy has relaxed this restriction,
particularly during the second six months after conversion. While an applicant
needs to demonstrate the existence of "exceptional circumstances" during the
first six months after conversion, the OTS has indicated that it would analyze
repurchases during months six through 12 after conversion on a case-by-case
basis. 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
(x) no more than 5% of the outstanding common stock is to be purchased during
any 12-month period, (y) the repurchases do not cause the association to become
undercapitalized as defined under the OTS prompt corrective action regulations
and (z) the repurchase would not adversely affect the financial condition of the
association. No assurances, however, can be given that the OTS will approve a
repurchase program under current policy or that such policy will not change or
become more restrictive.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of Common Stock purchased in the Offerings 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.
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 Savings Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following 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.
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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.
In addition, 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 Delaware corporate law, as well as the Certificate 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 Certificate of Incorporation and Bylaws of the Holding
Company. 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).
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings 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
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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 acquiror 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 acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror 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 that 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 CERTIFICATE OF INCORPORATION
AND BYLAWS AND DELAWARE LAW
A number of provisions of the Holding Company's Certificate 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 Certificate 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 Certificate of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made in each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to how to
obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. The Certificate 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 (the "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 and Regulations of the Exchange Act
and includes shares beneficially owned by such person or any of such person's
affiliates (as defined in the Certificate of Incorporation), shares which such
person or such person's affiliates have the right to acquire upon the exercise
of conversion rights or options and shares as
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to which such person and such person's 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 Savings Bank 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 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
Certificate 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 Certificate 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 two-thirds of the directors then in office and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which the director has been
chosen expires. 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 Certificate 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 AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 6,000,000 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 Certificate 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 Certificate of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation
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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 Delaware 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 a majority of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. One exception under Delaware law
to the majority approval requirement applies to stockholders owning 15% or more
of the common stock of a corporation for a period of less than three years.
Such 15% stockholder, in order to obtain approval of a business combination,
must obtain the approval of two-thirds of the outstanding stock, excluding the
stock owned by such 15% stockholder, or satisfy other requirements under
Delaware 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
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Holding Company's Certificate 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 Certificate 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 Certificate of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Certificate of Incorporation of
the Holding Company requires 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 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. 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 CERTIFICATE
OF INCORPORATION AND BYLAWS. The Board of Directors of the Savings Bank
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 Savings Bank 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 Savings Bank and Holding Company and its
stockholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best 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
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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 Exchange Act deregistration.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate 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 Savings Bank and the Holding Company, however,
have concluded that the potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Delaware business corporation. The Holding Company and the
Savings Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws of the Holding
Company and in Federal and Delaware 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.
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DESCRIPTION OF CAPITAL STOCK
OF THE HOLDING COMPANY
GENERAL
The Holding Company is authorized to issue 6,000,000 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 1,495,000 shares of Common Stock 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.
STOCK REPURCHASES. The Plan and OTS regulations place certain limitations
on the repurchase of the Holding Company's capital stock. See "THE CONVERSION -
- - Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
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 Delaware 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 bank, corporate powers and control of the
Savings Bank are vested in its Board of Directors, who elect the officers of the
Savings Bank 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 Savings Bank,
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 Savings Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Holding Company, as holder of the Savings Bank's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Savings Bank (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 Savings Bank
available for distribution. In
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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.
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
Certificate 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 will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Conversion and will
not deregister its Common Stock for a period of at least three years following
the completion of the Conversion. Upon 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 Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and the Missouri tax
consequences of the Offerings have been opined upon by Moore, Horton & Carlson,
P.C., Mexico, Missouri. Breyer & Aguggia 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 Malizia, Spidi, Sloane & Fisch,
P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of the Savings Bank as of April 30,
1996 and 1995 and for each of the three years in the period ended April 30, 1996
included in this Prospectus have been audited by Moore, Horton & Carlson, P.C.,
independent auditors, as stated in its report appearing herein, and have been so
included in reliance upon the report of such firm given upon its authority as
experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank
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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.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-8461) 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, N.W., 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 Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Registration Statement is publicly available through the SEC's World Wide Web
site on the Internet (http://www.sec.gov).
The Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Savings Bank'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 that are a part thereof, may
be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W.,
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.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FULTON SAVINGS BANK, FSB
<TABLE>
<CAPTION>
Pages
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Statements of Financial Condition as of
April 30, 1996 and 1995.................................... F-2
Consolidated Statements of Changes in Equity for the Years
Ended April 30, 1996, 1995 and 1994........................ F-3
Consolidated Statements of Income for the Years Ended
April 30, 1996, 1995 and 1994.............................. 19
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1996, 1995 and 1994........................ F-4
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements on the Holding Company have not been included
since it will not engage in material transactions, if any, until after the
Conversion. The Holding Company, which has been inactive to date, has no
significant assets, liabilities, revenues, expenses or contingent liabilities.
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[MOORE, HORTON & CARLSON, P.C. LOGO]
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Fulton Savings Bank, FSB and Subsidiary
Fulton, Missouri
We have audited the accompanying consolidated statements of financial condition
of Fulton Savings Bank, FSB and Subsidiary ("Bank") as of April 30, 1996 and
1995, and the related consolidated statements of income, changes in equity, and
cash flows for each of the three years in the period ended April 30, 1996.
These consolidated financial statements are the responsibility of the Bank'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 Fulton Savings Bank,
FSB and Subsidiary as of April 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1996, in conformity with generally accepted accounting principles.
As described in Note A to the consolidated financial statements, the Bank
changed its method of accounting for investment securities to conform with
Statement of Financial Accounting Standards No. 115 effective May 1, 1994 and
accounting for impaired loans to conform with Statements of Financial Accounting
Standards Nos. 114 and 118 effective May 1, 1995.
/s/ Moore, Horton & Carlson, PC
Mexico, Missouri
June 14, 1996
F-1
<PAGE>
FULTON SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
APRIL 30
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash (includes interest-bearing deposits of $1,392,330 and
$2,498,789, respectively) $ 2,923,739 $ 4,188,434
Investment securities, available-for-sale--Note B 3,216,157 4,202,298
Stock in Federal Home Loan Bank of Des Moines 637,200 624,700
Loans held for sale 2,306,090 573,434
Loans receivable--Note C 73,893,045 67,805,044
Accrued interest receivable--Note D 607,572 493,053
Premises and equipment--Note E 1,307,144 1,120,410
Foreclosed real estate--Note C 197,525 4,815
Other assets 407,516 338,419
----------- -----------
TOTAL ASSETS $85,495,988 $79,350,607
=========== ===========
LIABILITIES AND EQUITY
Liabilities
Deposits--Note F $70,315,921 $65,204,680
Advances from Federal Home Loan Bank of
Des Moines--Note H 5,000,000 4,500,000
Advances from borrowers for property taxes and
insurance 619,539 666,932
Accrued interest payable 299,514 271,642
Other liabilities 144,271 223,202
----------- -----------
TOTAL LIABILITIES 76,379,245 70,866,456
Commitments and contingencies--Notes M and N
Equity
Retained earnings - substantially restricted--Note I 9,095,894 8,475,818
Unrealized gain on securities available-for-sale,
net of taxes--Note G 20,849 8,333
----------- -----------
TOTAL EQUITY 9,116,743 8,484,151
----------- -----------
TOTAL LIABILITIES AND EQUITY $85,495,988 $79,350,607
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FULTON SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED APRIL 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES
AVAILABLE-
FOR-SALE,
RETAINED NET OF
EARNINGS TAXES EQUITY
------------------------------------------
<S> <C> <C> <C>
Balance at April 30, 1993 $7,052,034 $ --- $7,052,034
Net income 881,049 --- 881,049
---------- ------- ----------
BALANCE AT APRIL 30, 1994 7,933,083 --- 7,933,083
Adoption of accounting change to record
net unrealized loss on securities
available-for-sale at May 1, 1994,
net of taxes --- (4,490) (4,490)
Net income 542,735 --- 542,735
Change in unrealized gain (loss) on
securities available-for-sale, net
of taxes --- 12,823 12,823
--------- ------- ----------
BALANCE AT APRIL 30, 1995 8,475,818 8,333 8,484,151
Net income 620,076 --- 620,076
Change in unrealized gain (loss) on
securities available-for-sale, net
of taxes --- 12,516 12,516
---------- ------- ----------
BALANCE AT APRIL 30, 1996 $9,095,894 $20,849 $9,116,743
========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FULTON SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 620,076 $ 542,735 $ 881,049
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 126,863 119,185 106,702
Amortization of premiums and discounts (1,167) 20,796 49,013
Provisions for loan losses 44,242 118,000 48,214
Deferred income taxes 5,000 8,000 (21,000)
Proceeds from sales of loans held for sale 22,632,003 11,808,305 20,343,296
Originations of loans held for sale (24,364,659) (12,381,739) (20,343,296)
Stock and patronage dividends (44,421) --- (12,200)
Loss on sale of securities available-for-sale --- 55,290 ---
Loss on sale of securities held-to-maturity --- --- 11,496
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable (114,519) (33,641) 51,516
Other assets (43,591) (38,656) 3,099
Accrued interest payable 27,872 68,186 (21,889)
Other liabilities (91,319) (21,191) (208,575)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,203,620) 265,270 887,425
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (193,687) (1,978,521) (1,475,703)
Proceeds from maturities of investment securities:
Held-to-maturity --- --- 1,292,382
Available-for-sale 1,200,899 32,401 ---
Proceeds from sales of investment securities:
Held-to-maturity --- --- 1,195,429
Available-for-sale --- 3,136,792 ---
Loans originated, net of repayments (5,837,654) (6,678,253) (4,007,122)
Purchase of mortgage loans (484,200) (946,148) ---
Purchase of premises and equipment (307,182) (85,076) (167,849)
Proceeds from sale of foreclosed real estate --- --- 77,516
Expenditures on foreclosed real estate (3,099) --- ---
------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (5,624,923) (6,518,805) (3,085,347)
</TABLE>
F-4
<PAGE>
FULTON SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 5,111,241 574,591 (604,792)
Advances from Federal Home Bank of Des Moines:
Borrowings 1,500,000 6,500,000 ---
Repayments (1,000,000) (2,000,000) ---
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (47,393) 44,954 (27,257)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 5,563,848 5,119,545 (632,049)
----------- ----------- -----------
NET DECREASE IN CASH (1,264,695) (1,133,990) (2,829,971)
CASH, BEGINNING OF PERIOD 4,188,434 5,322,424 8,152,395
----------- ----------- -----------
CASH, END OF PERIOD $ 2,923,739 $ 4,188,434 $ 5,322,424
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FULTON SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Fulton Savings Bank, FSB and Subsidiary (the "Bank")
- --------------------
provides a variety of financial services to individuals and corporate customers
through its headquarters located in Fulton, Missouri and its branch located in
Holts Summit, Missouri. The Bank's primary deposit products are interest-
bearing checking accounts and certificates of deposit. Its primary lending
products are one-to four-family residential loans.
The Bank was formerly known as Fulton Savings and Loan Association prior to its
conversion from a state to a federal charter on April 15, 1995.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
- ---------------------------
accounts of Fulton Savings Bank, FSB and its wholly-owned subsidiary, Multi-
Purpose Service Agency, Inc. Multi-Purpose Service Agency, Inc. principally
provides insurance products for the Bank's customers. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
- ----------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A majority of the Bank's loan portfolio consist of one-to four-family
residential loans in the central Missouri area. The central Missouri economy is
primarily dependent upon state government, light manufacturing and agriculture.
Accordingly, the ultimate collectibility of a substantial portion of the Bank's
portfolio is susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgements about information available to them at the time of their
examination. Because of these factors, in management's judgement the allowances
for loan losses reflected in the consolidated financial statements is adequate
to absorb estimated losses that may exist in the current portfolio.
F-6
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
LIQUIDITY REQUIREMENT: Regulations require the Bank to maintain an amount equal
- ---------------------
to 5% of deposits (net of loans on deposits) plus short-term borrowings in cash
and U.S. Government and other approved securities.
INVESTMENT SECURITIES: Effective May 1, 1994, the Bank adopted Statement of
- ---------------------
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which established three
classifications of investment securities: trading, held-to-maturity and
available-for-sale. Trading securities are acquired principally for the purpose
of near-term sales. Such securities are reported at fair value and unrealized
gains and losses are included in income. Securities which are designated as
held-to-maturity are designated as such because the investor has the ability and
the intent to hold these securities to maturity. Such securities are reported
at amortized cost.
All other securities are designated as available-for-sale, a designation which
provides 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.
In adopting SFAS No. 115, the Bank modified its accounting policies and
designated its securities in accordance with the three classifications. The
Bank's adoption of SFAS No. 115 resulted in the classification of all securities
as available-for-sale. At April 30, 1996 and 1995 the Bank had no securities
designated as trading or held-to-maturity.
MORTGAGE-BACKED SECURITIES: Mortgage-backed securities represent participating
- --------------------------
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed 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 Federal Home Loan
- ---------------------------------------------
Bank of Des Moines 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 HELD FOR SALE: Mortgage loans originated and held for sale in the
- -------------------
secondary market are carried at the lower of cost or market value determined on
an aggregate basis. Gains and losses, if any, on the sale of these loans are
determined using the specific identification method.
LOANS RECEIVABLE: Loans are stated at unpaid principal balances, less the
- ----------------
allowance for loan losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
maturity of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual status.
F-7
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
Loans are placed on nonaccrual status when principal or interest is delinquent
for 90 days or more. Any unpaid interest previously accrued on those loans is
reversed from income. Interest payments received on such loans are applied as a
reduction of the loan principal balance.
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.
The Bank adopted 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", effective May
1, 1995. 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 Bank
considers all one-to four-family residential mortgage loans, construction loans,
and all consumer and other loans to be smaller homogeneous loans.
These statements apply to all loans that are restructured involving a
modification of terms. Loans within the scope of these statements are
considered impaired when, based on current information and events, it is
probable that all principal and interest will not be collected in accordance
with the contractual terms of the loans. Management determines the impairment
of loans based on knowledge of the borrower's ability to repay the loan
according to the contractual agreement and the borrower's repayment history.
Management applies its normal loan review procedures in determining when a loan
is impaired. The Bank applies SFAS No. 114 on a loan by loan basis. All
nonaccrual loans are considered impaired. Impaired loans are measured based on
present value of expected cash flows, the loan's observable market price or the
fair value of the underlying collateral. If the value computed is less than the
recorded value, a valuation allowance is recorded for the difference as a
component of the provision for loan loss expense. Management has elected to
continue to use its existing nonaccrual methods for recognizing interest income
on impaired loans.
PREMISES AND EQUIPMENT: Premises and equipment are 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 or in lieu
- ----------------------
of loan foreclosure 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, less estimated cost to sell.
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.
F-8
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
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.
INTEREST RATE RISK: The Bank's asset base is exposed to risk including the risk
- ------------------
resulting from changes in interest rates in timing of cash flows. The Bank
monitors the effect of such risks by considering the mismatch of the maturities
of its assets and liabilities in the current interest rate environment and the
sensitivity of assets and liabilities to changes in interest rates. The Bank's
management has considered the effect of significant increases and decreases in
interest rates and believes such changes, if they occurred, would be manageable
and would not affect the ability of the Bank to hold its assets as planned.
However, the Bank is exposed to significant market risk in the event of
significant and prolonged interest rate changes.
NEW ACCOUNTING STANDARDS:
- ------------------------
Accounting for Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of" and is effective for years beginning after
December 15, 1995. The statement is effective for and will be adopted by
the Bank beginning May 1, 1996. The statement generally addresses required
disclosures for long-lived impaired assets and long-lived impaired assets
to be disposed of. The impact of the adoption of the new accounting
standard on the Bank's consolidated financial statements is not expected to
be material.
Accounting for Loan Servicing Rights
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" and is effective for years beginning after December 15,
1995. The statement is effective for and will be adopted by the Bank
beginning May 1, 1996. The statement generally requires entities that sell
or securitize loans and retain the mortgage servicing rights to allocate
the total cost of the mortgage loans to the mortgage servicing right and
the loan based on their relative fair value. Costs allocated to mortgage
servicing rights should be recognized as a separate asset and amortized
over the period of estimated net servicing income and evaluated for
impairment based on fair value. The impact of the adoption of the new
accounting standard on the Bank's consolidated financial statements is not
expected to be material.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The 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 are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as
if SFAS No. 123 had been adopted. The accounting requirements of SFAS No.
123 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 in their first fiscal year beginning after
December 15, 1994. Currently, the Bank does not have any stock-based
compensation plans. However, in the future, such plans may be offered and
the provisions of SFAS No. 123 would apply.
RECLASSIFICATION: Certain amounts in the 1995 and 1994 consolidated financial
- ----------------
statements have been reclassified to conform with the 1996 presentation.
F-9
<PAGE>
NOTE B--INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
----------------
COST GAINS LOSSES VALUE
----------------------------------------
<S> <C> <C> <C> <C>
April 30, 1996
U.S. Government obligations $3,182,778 $34,524 $1,396 $3,215,906
Mortgage-backed securities 222 29 --- 251
---------- ------- ------ ----------
$3,183,000 $ 34,553 $ 1,396 $ 3,216,157
========== ======= ====== ==========
April 30, 1995
U.S. Government obligations $4,187,924 $13,139 $ --- $4,201,063
Mortgage-backed securities 1,120 115 --- 1,235
---------- ------- ------ ----------
$4,189,044 $13,254 $ --- $4,202,298
========== ======= ====== ==========
</TABLE>
The scheduled maturities of debt securities at April 30, 1996 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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Amounts maturing:
One year or less $2,488,365 $2,510,625
After one through five years 694,413 705,281
Mortgage-backed securities 222 251
---------- ----------
$3,183,000 $3,216,157
========== ==========
</TABLE>
The Bank has investment securities pledged to secure deposits as required or
permitted by law, with a carrying value of $1,319,280 and $1,113,739 at April
30, 1996 and 1995, respectively.
The Bank sold available-for-sale securities in 1995 and held-to-maturity
securities in 1994 for total gross proceeds of $3,136,791 and $1,195,430 which
resulted in gross realized losses of $55,290 and $11,496 for the year ended
April 30, 1995 and 1994, respectively.
NOTE C--LOANS RECEIVABLE
Loans receivable consist of the following at April 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Mortgage loans:
One-to four-family residences $46,740,611 $46,243,774
Multi-family 3,844,456 3,587,641
Commercial 8,706,428 6,559,633
Construction 7,686,681 5,141,697
Land 1,518,202 1,188,597
----------- -----------
68,496,378 62,721,342
Less undisbursed portion of mortgage loans 3,742,642 2,174,494
----------- -----------
64,753,736 60,546,848
</TABLE>
F-10
<PAGE>
NOTE C--LOANS RECEIVABLE - CONT'D
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Consumer and other loans:
Consumer $ 6,683,299 $ 5,184,140
Automobile 2,080,708 1,912,348
Savings 345,399 335,578
Commercial 295,759 160,052
Equity line of credit 325,941 309,310
Education 187,796 116,108
Other 2,477 2,557
----------- -----------
9,921,379 8,020,093
----------- -----------
74,675,115 68,566,941
Less allowance for loan losses 782,070 761,897
----------- -----------
$73,893,045 $67,805,044
=========== ===========
</TABLE>
The Bank originates and maintains loans receivable which are substantially
concentrated in its lending area including Fulton, Missouri, Callaway County and
its contiguous counties. The Bank's principal market area consist of rural
communities and substantially all of the Bank's loans are to residents of or
secured by properties located in its principal lending area. Accordingly, the
ultimate collectibility of the Bank'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.
In the normal course of business, the Bank 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 and officers total approximately
$357,000 and $383,000 at April 30, 1996 and 1995, respectively.
At April 30, 1996, 1995 and 1994, the Bank serviced loans amounting to
$84,363,839, $73,802,855 and $71,940,941 respectively, for the benefit of
others. Also, the Bank had loans serviced by others amounting to $2,654,213,
$2,304,318 and $2,280,402 at April 30, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Allowance for loan losses is as follows:
YEAR ENDED APRIL 30
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Balance beginning of period $761,897 $665,068 $ 718,950
Provision for loan losses 44,242 118,000 47,599
Charge-offs (27,391) (49,071) (111,303)
Recoveries 3,322 27,900 9,822
-------- -------- ---------
BALANCE, END OF PERIOD $782,070 $761,897 $ 665,068
======== ======== =========
</TABLE>
At April 30, 1996 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, was $69,229. The average recorded
investment in impaired loans during the year ended April 30, 1996, was $111,776
and the related interest income that would have been recorded had the loans been
current in accordance with their original terms amounted to approximately
$10,000. The amount of interest included in interest income on such loans for
the year ended April 30, 1996, amounted to approximately $6,000.
The allowance for losses on foreclosed real estate is $-0- at April 30, 1996 and
$6,051 at April 30, 1995, 1994 and May 1, 1993.
F-11
<PAGE>
NOTE D--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at April 30:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Loans $552,739 $426,064
Investments securities 54,833 66,989
-------- --------
$607,572 $493,053
======== ========
</TABLE>
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at April 30:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Land $ 129,705 $ 129,705
Building and improvements 1,012,549 889,907
Furniture and equipment 1,120,859 953,568
---------- ----------
2,263,113 1,973,180
Less accumulated depreciation and amortization 955,969 852,770
---------- ----------
$1,307,144 $1,120,410
========== ==========
</TABLE>
NOTE F--DEPOSITS
Deposit account balances are summarized as follows at April 30:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE 1996 1995
AT APRIL 30, ------------------- -------------------
1996 AMOUNT % AMOUNT %
------------- ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C>
Non-interest-bearing ---% $ 1,709,399 2.4% $ 488,208 .8%
NOW 2.62 4,259,355 6.1 3,880,085 5.9
Money Market 3.43 3,040,067 4.3 4,565,323 7.0
Passbook savings 3.03 5,909,969 8.4 5,492,922 8.4
----------- ----- ----------- -----
14,918,790 21.2 14,426,538 22.1
Certificates of deposit:
2.00 to 2.99% --- --- --- 8,104 ---
3.00 to 3.99% 3.70 105,056 .1 450,804 .7
4.00 to 4.99% 4.81 6,118,806 8.7 12,878,849 19.7
5.00 to 5.99% 5.49 26,144,168 37.2 16,992,651 26.1
6.00 to 6.99% 6.31 20,260,958 28.9 17,538,780 26.9
7.00 to 7.99% 7.14 2,751,036 3.9 2,862,390 4.4
8.00 to 8.99% 8.00 17,107 --- 45,564 .1
9.00 to 9.99% --- --- --- --- ---
10.00% and over --- --- --- 1,000 ---
----------- ----- ----------- -----
5.79 55,397,131 78.8 50,778,142 77.9
----------- ----- ----------- -----
5.13 $70,315,921 100.0% $65,204,680 100.0%
=========== ===== =========== =====
</TABLE>
F-12
<PAGE>
NOTE F--DEPOSITS - CONT'D
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $5,879,277 and $4,791,054 at April 30, 1996 and 1995,
respectively. Deposits over $100,000 are not federally insured.
The Bank held deposits of approximately $1,578,000 and $1,253,000 for its
directors and officers at April 30, 1996 and 1995, respectively.
At April 30, 1996, contractual maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
STATED YEAR ENDED APRIL 30
INTEREST RATE 1997 1998 1999 2000 2001 AFTER
- ------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 105,056 $ --- $ --- $ --- $ --- $ ---
4.00 to 4.99% 5,962,465 156,341 --- --- --- ---
5.00 to 5.99% 17,458,244 6,403,895 2,130,213 139,702 12,114 ---
6.00 to 6.99% 8,673,857 6,628,049 2,116,434 2,506,856 328,762 7,000
7.00 to 7.99% 1,766,772 133,500 505,370 260,781 84,613 ---
8.00 to 8.99% --- --- 3,000 --- --- 14,107
----------- ----------- ---------- ---------- ---------- ----------
$33,966,394 $13,321,785 $4,755,017 $2,907,339 $ 425,489 $ 21,107
=========== =========== ========== ========== ========== ==========
</TABLE>
Interest expense on deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Now, Money Market and Passbook savings accounts $ 386,380 $ 484,797 $ 484,470
Certificate accounts 3,077,153 2,261,993 2,186,207
----------- ---------- ----------
$ 3,463,533 $2,746,790 $2,670,677
=========== ========== ==========
</TABLE>
NOTE G--INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Current $368,000 $309,500 $463,500
Deferred (benefit) (5,000) (8,000) 21,000
-------- -------- --------
$363,000 $301,500 $484,500
======== ======== ========
</TABLE>
In addition, the Bank recorded deferred income tax to equity relating to
unrealized gains and losses on investment securities available-for-sale of
$7,571 and $ 7,387 for the years ended April 30, 1996 and 1995, respectively.
F-13
<PAGE>
NOTE G--INCOME TAXES - CONT'D
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:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at statutory rates $334,239 34.0% $287,091 34.0% $464,287 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal benefit 21,120 2.1 24,090 2.8 33,214 2.4
Other, net 7,641 0.8 (9,681) (1.1) (13,001) (.9)
-------- ---- -------- ---- -------- ----
$363,000 36.9% $301,500 35.7% $484,500 35.5%
======== ==== ======== ==== ======== ====
</TABLE>
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 are as follows at April 30:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $240,000 $227,000
Deferred tax liabilities
Depreciation (120,000) (117,000)
Federal Home Loan Bank of Des Moines stock dividend (76,000) (71,000)
Unrealized gain on available-for-sale securities (12,308) (4,920)
--------- ---------
NET DEFERRED TAX ASSET $ 31,692 $ 34,080
========= =========
</TABLE>
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES (FHLB)
Advances from FHLB consist of the following at April 30:
<TABLE>
<CAPTION>
STATED INTEREST
MATURITY INTEREST RATE AT
DATE RATE APRIL 30, 1996 1996 1995
- ----------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
August 30, 1996 6.50% 6.50% $2,000,000 $2,000,000
March 20, 1997 7.12 7.12 2,500,000 2,500,000
April 11, 1997 Variable 5.90 500,000 ---
---------- ----------
$5,000,000 $4,500,000
========== ==========
</TABLE>
The Bank has signed a blanket pledge agreement with the FHLB under which it can
draw advances of unspecified amounts from the FHLB. The Bank 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
<PAGE>
NOTE I--EQUITY
Pursuant to the Financial Institutions Reform Recovery and Enforcement Act
("FIRREA") of 1989, as implemented by a rule promulgated by OTS, saving
institutions are required to have a minimum regulatory tangible capital equal to
1.5% of adjusted total assets, a minimum of 3.0% core/leverage capital ratio,
and a minimum 8% total risk-based capital. FIRREA also restricts investment
activities with respect to noninvestment grade corporate debt and certain other
investments and increases the required ratio of housing-related assets in order
to qualify as a savings institution.
The following table presents the Bank's capital position relative to its
regulatory capital requirements under FIRREA at April 30, 1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
(DOLLARS IN THOUSANDS)
TANGIBLE CORE RISK-BASED
--------------------------------
<S> <C> <C> <C>
GAAP capital $9,117 $9,117 $9,117
Adjustments to Capital:
Unrealized gains (21) (21) (21)
General valuation allowances as defined --- --- 642
Real estate investment, net --- --- (252)
------ ------ ------
REGULATORY CAPITAL 9,096 9,096 9,486
Regulatory capital requirement 1,282 2,564 4,111
------ ------ ------
EXCESS REGULATORY CAPITAL $7,814 $6,532 $5,375
====== ====== ======
Regulatory capital ratio 10.64% 10.64% 18.46%
Regulatory capital requirement 1.50 3.00 8.00
------ ------ ------
EXCESS REGULATORY CAPITAL RATIO 9.14% 7.64% 10.46%
====== ====== ======
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established additional capital requirements which require regulatory action
against depository institutions in one of the undercapitalized categories
defined in implementing regulations. Institutions such as the Bank, which are
defined as "well capitalized", must generally have a leverage capital (core)
ratio of at least 5%, a tier risk-based capital ratio of at least 6% and a total
risk-based capital ratio of at least 10%. In November 1994, the OTS revised its
regulations whereby unrealized gains or losses on available-for-sale securities
accounted for under SFAS No. 115 are not considered in the determination of
regulatory capital. FDICIA also provided for increased supervision by federal
regulatory agencies, increased reporting requirements for insured depository
institutions and other changes in the legal and regulatory environment for
institutions.
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts, which differs
from the provisions for such losses charged to income. Accordingly, retained
earnings at April 30, 1996, includes income of approximately $1,900,000 for
which no provision for federal income taxes has been made. If, in the future,
this portion of retained earnings is used for any purpose other than to absorb
loan losses, federal income taxes may be imposed at the then applicable rates.
The Bank's retained earnings at April 30, 1996, were substantially restricted
because of the effect of these bad debt reserves.
F-15
<PAGE>
NOTE J--EMPLOYEE BENEFITS
The Bank has a 401(k) salary reduction plan that covers all employees meeting
specific age and length of service requirements. Under the plan, the Bank
matches up to 3 percent of participating employees' salaries. Pension costs
recognized under the plan totalled $19,330, $17,913 and $12,199 for the year
ended April 30, 1996, 1995 and 1994, respectively.
NOTE K--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for taxes and interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes $ 247,100 $ 374,321 $ 608,355
========== ========== ==========
Interest $3,753,158 $2,876,055 $2,692,566
========== ========== ==========
</TABLE>
NOTE L--SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Noncash investment and financing activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Loans to facilitate sales of real estate $ 77,805 $70,500 $ ---
======== ======= =======
Foreclosed real estate acquired by foreclosure
or deed in lieu of foreclosure $267,861 $92,617 $49,524
======== ======= =======
Stock and patronage dividends $ 59,826 $ --- $12,200
======== ======= =======
</TABLE>
NOTE M--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank 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 Bank uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The Bank's exposure to credit loss in
the event of nonperformance by the other party is represented by the contractual
amount of those instruments. The Bank 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 Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty. Such
collateral consists primarily of residential properties.
F-16
<PAGE>
NOTE M--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - CONT'D
The Bank had the following outstanding commitments at April 30, 1996:
<TABLE>
<S> <C>
Undisbursed portion of mortgage loans $3,742,642
Undisbursed equity line of credit 88,359
Commitments to originate mortgage loans with variable or pending interest rates 3,007,780
Commitments to originate mortgage loans with fixed interest rates ranging from 7.875% to 8.75% 984,450
----------
TOTAL $7,823,231
==========
</TABLE>
At April 30, 1996, the Bank had amounts on deposit at banks and federal agencies
in excess of federally insured limits of approximately $2,518,000.
NOTE N--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements. In addition, the Bank is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial position of the Bank.
The United States Congress is considering legislation that, if it became law,
would result in an assessment on all Savings Association Insurance Fund
("SAIF")-insured deposits in such amounts that will increase the SAIF reserve
ratio to 1.25% of SAIF-insured deposits. This one-time assessment has been
estimated to be approximately 80 cents, per $100 of SAIF-insured deposits. If
this legislation became law, it could result in an assessment payable by the
Bank amounting to approximately $345,000, net of tax. If this legislation
becomes law, it is anticipated that this assessment will be charged to earnings
in the period during which it is signed into law. Therefore, no provision for
such an assessment has been made to the consolidated financial statements.
Thereafter, SAIF premiums are currently expected to decline to levels
approximating Bank Insurance Fund premiums.
NOTE O--PLAN OF CONVERSION
On January 9, 1996, the Bank'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 Bank's
members. The Plan, which includes the formation of a Holding Company, 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 Company and the acquisition of all of the capital stock of the Bank by
the Holding Company in exchange for a portion of the net proceeds of the
conversion. The Holding Company's common stock will be offered to various
eligible account holders, to the Bank's Employee Stock Ownership Plan, to other
supplemental eligible depositors and to other members of the Bank in a
subscription offering. Shares of the Holding Company'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 Bank.
F-17
<PAGE>
NOTE O--PLAN OF CONVERSION - CONT'D
At the time of conversion, the Bank 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 Bank after conversion. In
the event of a complete liquidation of the Bank (and only in such an event),
eligible depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account before any liquidation may
be made with respect to common stock.
The Bank 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 April 30, 1996, the Bank has incurred costs
related to the conversion of $22,722.
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS
On May 1, 1995, the Bank adopted SFAS No. 107, Disclosures about Fair Values of
Financial Instruments, which requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
condition. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Bank.
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed herein.
Cash and due from depository institutions: The carrying amounts of cash and due
from depository institutions approximate their fair value.
Investment 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 held-for-sale: The carrying value is a reasonable estimate of fair value.
Loans receivable: The fair value of first mortgage loans is estimated by using
discounted cash flow analyses, using interest rates currently offered by the
Bank for loans with similar terms to borrowers of similar credit quality. The
majority of real estate loans are residential. First mortgage loans are
segregated by fixed and adjustable interest terms. 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.
F-18
<PAGE>
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS - CONT'D
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 book value approximates
fair value.
All other liabilities: The book 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 creditworthiness of the counterparties. Neither the fees earned
during the year on these instruments nor their value at year-end are significant
to the Bank'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. For example, the Bank has a mortgage
servicing portfolio that contributes net fee income annually. The mortgage
servicing portfolio is not considered a financial instrument and its value has
not been incorporated into the fair value estimates. 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 April 30, 1996 (dollars in thousands) are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
ASSETS
Cash and due from depository institutions $ 2,924 $ 2,924
Investment securities 3,216 3,216
Stock in FHLB 637 637
Loans held-for-sale, net 2,306 2,306
Loans receivable, net 73,893 73,923
Accrued interest receivable 608 608
LIABILITIES
Transaction accounts 14,919 14,919
Certificates of deposit 55,397 55,513
Advances from Federal Home Loan Bank 5,000 5,000
Advances from borrowers for taxes and insurance 620 620
Accrued interest payable 300 300
</TABLE>
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 FULTON BANCORP, INC. OR FULTON SAVINGS BANK, FSB. 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 FULTON BANCORP, INC. OR FULTON SAVINGS BANK, FSB
SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary....................................................... (i)
Selected Consolidated Financial Information.............................. (vii)
Recent Developments...................................................... (ix)
Risk Factors............................................................. 1
Fulton Bancorp, Inc...................................................... 7
Fulton Savings Bank, FSB................................................. 7
Use of Proceeds.......................................................... 8
Dividend Policy.......................................................... 9
Market for Common Stock.................................................. 10
Capitalization........................................................... 11
Historical and Pro Forma Capital Compliance.............................. 13
Pro Forma Data........................................................... 14
Shares to be Purchased by Management Pursuant to Subscription Rights..... 18
Fulton Savings Bank, FSB and Subsidiary Consolidated Statements of
Income.................................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business of the Holding Company.......................................... 31
Business of the Savings Bank............................................. 32
Management of the Holding Company........................................ 52
Management of the Savings Bank........................................... 53
Regulation............................................................... 60
Taxation................................................................. 67
The Conversion........................................................... 69
Restrictions on Acquisition of the Holding Company....................... 83
Description of Capital Stock of the Holding Company...................... 88
Registration Requirements................................................ 89
Legal and Tax Opinions................................................... 89
Experts.................................................................. 89
Additional Information................................................... 90
Index to Consolidated Financial Statements............................... 91
</TABLE>
---------------
UNTIL THE LATER OF OCTOBER 1, 1996, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,105,000 TO 1,495,000 SHARES OF
COMMON STOCK
[LOGO]
(PROPOSED HOLDING COMPANY FOR
FULTON SAVINGS BANK, FSB)
---------------
PROSPECTUS
---------------
TRIDENT SECURITIES, INC.
SEPTEMBER 6, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
