<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21273
FULTON BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 43-1754577
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
410 Market Street, Fulton, Missouri 65251
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (573) 642-6618
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
</TABLE>
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X NO _____
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. X
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The Registrant's revenues for the fiscal year under report were $9,446,691.
As of June 30, 1999, there were issued and outstanding 1,653,949 shares of
the Registrant's common stock. The common stock is listed for trading on the
Nasdaq National Market under the symbol "FTNB." Based on the closing price, the
aggregate value of the common stock outstanding held by the nonaffiliates of the
Registrant on September 20, 1999 was $24,433,616 (1,320,736 shares at $18.50 per
share).
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PART I
Item 1. Business
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General
Fulton Bancorp, Inc. ("Company"), a Delaware corporation, was organized in
May 1996 for the purpose of becoming the holding company for Fulton Savings
Bank, FSB ("Savings Bank") upon the Savings Bank's conversion from a federal
mutual savings bank to a federal stock savings bank ("Conversion"). The
Conversion was completed on October 17, 1996.
The Savings Bank, founded in 1912, is a federally chartered savings bank
located in Fulton, Missouri. The Savings Bank is regulated by the Office of
Thrift Supervision ("OTS"), its primary federal regulator, and by 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. 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. 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.
Acquisition by Central Bancompany, Inc.
Pursuant to an Agreement and Plan of Merger dated as of May 18, 1999, by
and between the Company and Central Bancompany, Inc. ("Central"), the Company
has agreed to merge with a subsidiary of Central, with the Company being the
surviving corporation. The Company will then merge into Central, with Central
being the surviving corporation. Immediately after this merger, the Savings Bank
will merge with The Central Trust Bank, with The Central Trust Bank being the
surviving institution. As a result of this transaction, the Company and the
Savings Bank will cease to exist. Central intends to operate the Savings Bank's
Fulton office as a branch of The Central Trust Bank and to consolidate the
Company's Holts Summit office with The Central Trust Bank's existing office in
Holts Summit. Under the merger agreement, each outstanding share of the
Company's common stock will automatically become exchangeable for $19.15 in
cash. The Company's Stockholders approved the Company's merger with Central at
the Company's Special Meeting of Stockholders held on September 14, 1999.
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.
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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
several 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.
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, consumer and other loans. The Savings Bank's net loans receivable
totalled $99.3 million at June 30, 1999, representing 83.7% 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.
<TABLE>
<CAPTION>
At June 30,
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1999 1998 1997
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Amount Percent Amount Percent Amount Percent
---------- -------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.............. $ 61,527 55.03% $54,664 56.23% $53,461 58.37%
Multi-family..................... 6,198 5.54 6,039 6.21 4,279 4.67
Commercial....................... 12,387 11.08 12,011 12.36 9,507 10.38
Construction..................... 17,698 15.83 11,320 11.64 11,295 12.33
Land............................. 5,055 4.52 4,402 4.53 3,524 3.85
-------- ------ ------- ------ ------- ------
Total mortgage loans.......... 102,865 92.00 88,436 90.97 82,066 89.60
Consumer and other loans............ 8,940 8.00 8,775 9.03 9,525 10.40
-------- ------ ------- ------ ------- ------
Total loans...................... 111,805 100.00% 97,211 100.00% 91,591 100.00%
====== ====== ======
Undisbursed loan funds.............. (11,409) (8,197) (6,959)
Net deferred loan origination fees.. 80 61 46
Allowance for loan losses........... ( 1,171) (971) (919)
-------- ------- -------
Loan receivable, net............. $ 99,305 $88,104 $83,759
======== ======= =======
</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 June 30, 1999, $61.5 million, or
55.0% 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 Freddie Mac. The Savings Bank generally sells to Freddie Mac or
Fannie Mae all of the fixed-rate mortgage loans that it originates. Generally,
the Savings Bank sells whole loans to Freddie Mac 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
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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 June 30, 1999,
$72.0 million, or 64.4% 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 Freddie Mac. 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 May 1996, 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 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.
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. 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
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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 June 30, 1999, the Savings
Bank's gross loan portfolio included $6.2 million in multi-family real estate
loans and $12.4 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.
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 25 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 June 30, 1999, the Savings Bank's
construction loan portfolio totalled $17.7 million, or 15.8% of total gross
loans. At such date, the Savings Bank's construction loan portfolio consisted of
101 residential construction loans totaling $13.3 million and 5 commercial real
estate construction loans totaling $4.4 million.
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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 June 30, 1999, the Savings
Bank's land loan portfolio totalled $5.1 million and consisted of 70 loans.
Land loans originated by the Savings Bank are generally adjustable-rate loans
and have maturities of 10 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 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 June 30, 1999, the Savings Bank's consumer and
other loans totalled approximately $8.9 million, or 8.0% 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 June 30, 1999, the Savings Bank had no
material delinquencies in its consumer loan portfolio.
Maturity of Loan Portfolio. The following table sets forth contractual
amortization of loans at June 30, 1999. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
becoming due within one year. Amounts presented are the gross loan balances
before adjustments for undisbursed loan proceeds, net deferred loan origination
fees, and allowance for loan losses. The table does not include any estimate of
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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
One Year 5 Years
Within Through Through Beyond
One Year 5 Years 10 Years 10 Years Total
---------- -------- ---------- --------- --------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C>
One- to four-family (1).. $ 3,889 $10,345 $13,685 $33,608 $ 61,527
Multi-family............. 271 1,282 1,656 2,989 6,198
Commercial............... 605 2,970 3,819 4,993 12,387
Construction............. 17,698 -- -- -- 17,698
Land..................... 2,207 877 905 1,066 5,055
Consumer and other loans.... 4,503 3,594 679 164 8,940
------- ------- ------- ------- --------
Total gross loans..... $29,173 $19,068 $20,744 $42,820 $111,805
======= ======= ======= ======= ========
</TABLE>
______________________________
(1) Includes 117 loans totaling $7.8 million construction/permanent loans.
The following table sets forth the dollar amount of all loans due after June
30, 2000 that have fixed interest rates and have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Floating- or
Fixed- Adjustable-
Rates Rates
----------- ------------
(In thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family (1) $ 7,817 $49,821
Multi-family 875 5,052
Commercial 6,162 5,620
Construction --- ---
Land 452 2,396
Consumer and other loans 3,848 589
------- -------
Total gross loans $19,154 $63,478
======= =======
</TABLE>
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
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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 June 30, 1999, 1998 and 1997, the Savings Bank originated $91.1
million, $58.2 million and $55.6 million of loans, respectively. Of the $91.1
million of loans originated during the year ended June 30, 1999, 43% were
adjustable-rate loans and 57% were fixed-rate loans.
The Savings Bank generally sells all of its fixed-rate single-family
residential mortgage loans to the Freddie Mac 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 Freddie Mac 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 June 30, 1999, 1998 and 1997,
totalled $29.6 million, $15.6 million and $22.4 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 June 30, 1999, the Savings Bank
had $1.2 million in loans held for sale.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1997 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family................................................ $ 51,334 $ 23,951 $ 29,317
Multi-family....................................................... 1,754 2,489 1,048
Commercial......................................................... 6,316 5,698 4,207
Construction....................................................... 20,852 17,053 11,243
Land............................................................... 3,308 1,805 2,201
Consumer and other loans.............................................. 7,562 7,179 7,625
-------- -------- --------
Total loans originated.......................................... 91,126 58,175 55,641
-------- -------- --------
Loans purchased:
Mortgage loans:
One- to four-family................................................ 1,227 -- --
Construction....................................................... 858 57 --
-------- -------- --------
Total loans purchased........................................... 2,085 57 --
-------- -------- --------
Loans sold:
Whole loans........................................................... 21,228 4,298 7,766
Participations........................................................ 8,370 11,306 14,587
-------- -------- --------
Total loans sold................................................... 29,598 15,604 22,353
-------- -------- --------
Less:
Principal repayments.................................................. 55,784 38,601 27,957
Transfer to real estate owned......................................... 73 438 --
Transfers to repossessed assets....................................... 10 2 --
Amounts charged off................................................... 13 19 --
-------- -------- --------
55,880 39,060 27,957
-------- -------- --------
Decrease in loans held for sale.......................................... 3,649 814 1,938
-------- -------- --------
Net increase in loans receivable......................................... $ 11,382 $ 4,382 $ 7,269
======== ======== ========
</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 $3.3 million at June 30, 1999.
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.
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Loan Servicing. The Savings Bank sells loans to Freddie Mac, 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 June 30, 1999, the Savings Bank was
servicing $98.9 million of loans for others. Loan servicing includes processing
payments, accounting for loan funds and collecting and paying real estate 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 June 30, 1999,
loan servicing fees totalled $295,000. 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 June 30, 1999, the
Savings Bank held $678,000 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 (1) the cause of the delinquency, (2) whether the cause is
temporary, (3) the attitude of the borrower toward the debt, and (4) 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.
-9-
<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans 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 June 30,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family............................. $225 $ 71 $ 40
Commercial...................................... -- -- 160
Land............................................ 9 -- --
Consumer and other loans........................... -- -- --
--------- --------- ---------
Total........................................ 234 71 200
Accruing loans which are contractually
past due 90 days or more........................... 215 84 166
--------- --------- ---------
Total of nonaccrual and 90 days past due loans........ 449 155 366
Real estate owned, net................................ 158 158 197
--------- --------- ---------
Total nonperforming assets................... $607 $313 $563
========= ========= =========
Restructured loans.................................... $644 $252 $252
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable, net........... 0.45% 0.17% 0.41%
Nonaccrual and 90 days or more past due loans
as a percentage of total assets.................... 0.38 0.14 0.36
Nonperforming assets as a percentage of total assets..
0.51 0.28 0.56
</TABLE>
Interest income that would have been recorded for the year ended June 30,
1999 had nonaccruing loans been current in accordance with their original terms
amounted to approximately $15,000. The amount of interest included in interest
income on such loans for the year ended June 30, 1999 amounted to approximately
$8,000.
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 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, real estate owned is carried at the lower of the foreclosed amount
or fair value, less estimated selling costs.
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
-10-
<PAGE>
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.
The following sets forth the Savings Bank's classified loans at June 30,
1999:
<TABLE>
<CAPTION>
Loss Doubtful Substandard
---------------------- ---------------------- --------------------
Amount Number Amount Number Amount Number
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...................... $ -- -- $ -- -- $ 1,472 34
Multi-family............................. -- -- -- -- -- --
Commercial............................... -- -- -- -- 420 4
Construction............................. -- -- -- -- -- --
Land..................................... -- -- -- -- 9 1
Consumer and other loans.................... -- -- 118 3 145 15
-------- -------- -------- -------- -------- --------
$ -- -- $ 118 3 $ 2,046 54
======== ======== ======== ======== ======== ========
</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
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 June 30, 1999, the Savings Bank had an allowance for loan losses of
$1,171,000. 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 generally accepted accounting principles,
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
-11-
<PAGE>
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.
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 June 30,
---------------------------------------
1999 1998 1997
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Allowance at beginning of period........................ $ 971 $ 919 $ 800
Provision for loan losses............................... 210 70 120
Recoveries:
Mortgage loans:
One- to four-family............................... -- -- 11
Multi-family...................................... -- -- --
Commercial........................................ -- -- --
Construction...................................... -- -- --
Land.............................................. -- -- --
Consumer and other loans............................. 4 -- 4
--------- --------- ---------
Total recoveries............................... 4 -- 15
Charge-offs:
Mortgage loans:
One- to four-family............................... -- 14 --
Multi-family...................................... -- -- --
Commercial........................................ -- -- --
Construction...................................... -- -- --
Land.............................................. -- -- --
Consumer and other loans............................. 14 4 16
--------- --------- ---------
Total charge-offs................................. 14 18 16
--------- --------- ---------
Net charge-offs................................... 10 18 1
--------- --------- ---------
Balance at end of period.......................... $ 1,171 $ 971 $ 919
========= ========= =========
Allowance for loan losses as a percentage of
total loans outstanding at end of period............. 1.17% 1.05% 1.03%
Net charge-offs as a percentage of average
loans outstanding during the period.................. 0.01 0.02 --
Allowance for loan losses as a percentage of
nonperforming loans at end of period................. 260.80 626.45 251.09
</TABLE>
-12-
<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 June 30,
-------------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- --------------------
% 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.................... $ 562 55.03% $ 295 56.23% $ 382 58.37%
Multi-family........................... 46 5.54 46 6.21 43 4.67
Commercial............................. 160 11.08 176 12.36 162 10.38
Construction........................... 56 15.83 45 11.64 37 12.33
Land................................... 34 4.52 29 4.53 34 3.85
Consumer and other loans.................. 151 8.00 235 9.03 101 10.40
Unallocated............................... 162 N/A 145 N/A 160 N/A
-------- -------- --------
Total allowance for loan losses..... $ 1,171 $ 971 $ 919
======== ======== ========
</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."
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.
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
-13-
<PAGE>
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 Company's investment
securities portfolio at the dates indicated. All of the Company's investment
securities are classified as available for sale.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
1999 1998 1997
--------------------- ------------------------ ------------------------
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>
U.S. Governmental and Federal $ 1,421 82.47% $ 950 100.00% $ 1,899 100.00%
agency obligations..................
State and municipal securities......... 302 17.53 -- -- -- --
-------- -------- -------- -------- -------- --------
Total portfolio.................... $ 1,723 100.00% $ 950 100.00% $ 1,899 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Company's investment securities at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------------------------------------------------
Amount Due or Repricing:
Within Over One Year
One Year or Less to Five Years Over Five Years Total
--------------------- ---------------------- ---------------------- ----------------------
Carrying Weighted Carrying Weighted Carrying Weighted Weighted
Value Average Value Average Value Average Carrying Average
Yield Yield Yield Value Yield
---------- -------- --------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government $ -- --% $ 1,421 5.89% $ -- --% $ 1,421 5.89%
and federal agency
obligations..........
State and municipal -- -- 201 4.90 101 5.00 302 4.93
securities........... -------- ------- ------- -------
Total portfolio....... $ -- --% $ 1,622 5.77% $ 101 5.00% $ 1,723 5.73%
======== ======= ======= =======
</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.
-14-
<PAGE>
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 120 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.
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of June 30, 1999.
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.............. $1,679
Over three through six months..... 743
Over six through twelve months.... 1,878
Over twelve months................ 2,003
------
Total jumbo certificates
of deposits................. $6,303
======
</TABLE>
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 June 30,
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrese) Amount Total (Decrease) Amount Total
--------- ------- --------- ------- ------- --------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook................. $ 6,747 9.29% $ 459 $ 6,288 9.09% $ 369 $ 5,919 8.77%
NOW accounts............. 5,768 7.94 804 4,964 7.18 33 4,931 7.30
Money market deposit..... 3,409 4.69 769 2,640 3.82 (127) 2,767 4.10
Fixed-rate certificates
which mature:
Within 1 year......... 36,261 49.92 3,891 32,370 46.80 (895) 33,265 49.28
After 1 year, but
within 2 years..... 11,003 15.15 (2,366) 13,369 19.33 2,139 11,230 16.63
After 2 years, but
within 4 years..... 6,412 8.83 677 5,735 8.29 (944) 6,679 9.89
After 4 years......... 778 1.07 (1,140) 1,918 2.77 1,054 864 1.28
Other.................... 2,261 3.11 381 1,880 2.72 26 1,854 2.75
------- ------ ------- ------- ------ ------ ------- ------
Total.............. $72,639 100.00% $ 3,475 $69,164 100.00% $1,655 $67,509 100.00%
======= ====== ======= ======= ====== ====== ======= ======
</TABLE>
-15-
<PAGE>
The following table sets forth the time deposits in the Savings Bank
categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1999 1998 1997
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
3.00 -- 3.99%.................... $ 33 $ 7 $ 103
4.00 -- 4.99%.................... 18,499 93 1,669
5.00 -- 5.99%.................... 24,067 36,755 33,133
6.00 -- 6.99%.................... 11,506 15,623 16,067
7.00 -- 7.99%.................... 335 900 1,043
8.00 -- 8.99%.................... 14 14 23
------- ------- -------
Total.......................... $54,454 $53,392 $52,038
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1999.
<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%.................... $ 33 $ -- $ -- $ -- $ -- $ 33
4.00 -- 4.99%.................... 15,773 2,632 94 -- -- 18,499
5.00 -- 5.99%.................... 13,837 5,574 2,403 1,546 707 24,067
6.00 -- 6.99%.................... 6,284 2,796 1,290 1,065 71 11,506
7.00 -- 7.99%.................... 335 -- -- -- -- 335
8.00 -- 8.99%.................... -- -- -- 14 -- 14
------- ------- ------ ------ ---- -------
Total.......................... $36,262 $11,002 $3,787 $2,625 $778 $54,454
======= ======= ====== ====== ==== =======
</TABLE>
The following table sets forth the deposit activities of the Savings Bank
for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1999 1998 1997
--------- ------------ -------
(In thousands)
<S> <C> <C> <C>
Beginning balance.................................... $69,164 $67,509 $70,316
Net deposits (withdrawals) before interest credited.. 410 (1,426) (5,095)
Interest credited.................................... 3,065 3,081 2,288
------- ------- -------
Net increase (decrease) in deposits.................. 3,475 1,655 (2,807)
------- ------- -------
Ending balance....................................... $72,639 $69,164 $67,509
======= ======= =======
</TABLE>
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.
-16-
<PAGE>
The following table sets forth certain information regarding short-term
borrowings by the Savings Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1999 1998 1997
----------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding at any month end during the period.. $19,663 $15,447 $8,000
Approximate average FHLB advances
outstanding during the period................... 17,556 11,446 6,962
Approximate weighted average rate paid on
FHLB advances during the period................. 6.10% 6.20% 6.22%
Balance of FHLB advances outstanding
at end of period................................ $18,199 $12,810 $6,500
Weighted average rate paid on FHLB advances
at end of period................................ 5.97% 6.16% 5.84%
</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.
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.
Subsidiary Activities
The Savings Bank has one subsidiary, Multi-Purpose Service Agency, Inc.,
whose activities consist primarily of selling credit life insurance to the
Savings Bank's customers. At June 30, 1999, the Savings Bank's equity
investment in its subsidiary was $57,000.
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 June 30, 1999.
Personnel
As of June 30, 1999, the Savings Bank had 44 employees. The employees
are not represented by a collective bargaining unit and the Savings Bank
believes its relationship with its employees to be good.
-17-
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Savings Bank is a member of the FHLB and its deposit
accounts are insured up to applicable limits by the SAIF managed by the FDIC.
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 savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Savings Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. 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 regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Savings Bank and their operations. Certain of
the regulatory requirements applicable to the Savings Bank and to the Company
are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth in this report does not purport to be a complete description
of such statutes and regulations and their effects on the Company and the
Savings Bank.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Savings
Bank continues to be a qualified thrift lender. See "Regulation and
Supervision--QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the Savings Bank and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (1) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (2) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
-18-
<PAGE>
on subsidiary savings institutions as described below. The Savings Bank must
notify the OTS 30 days before declaring any dividend to the Company. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
Prior approval of the OTS is necessary before a "change in control" occurs
in a savings and loan holding company such as the Company. A "change in
control" may occur upon a person or entity's acquisition (alone or acting in
concert) of 10% or more of the Company's stock.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets. In
addition, certain activities, such as mergers and acquisitions, and branching,
are subject to the prior approval of the OTS.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% (3% for institutions receiving the highest rating on the CAMELS
financial institution's examination rating system leverage ratio and an 8% risk-
based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard. The OTS
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At June 30, 1999, the Savings Bank met
each of its capital requirements.
-19-
<PAGE>
The following table presents the Savings Bank's capital position at June
30, 1999.
<TABLE>
<CAPTION>
Excess Capital
--------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
----------- ---------- -------------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............... $20,080 $1,776 $18,304 16.96% 1.50%
Core (Leverage)........ 20,080 4,736 15,344 16.96 4.00
Risk-based............. 20,933 5,438 15,495 30.80 8.00
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institution's assets or the amount which would
bring the institution into compliance with all capital standards. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Savings Bank are presently
insured by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members, including the Savings Bank, approximated 6.10
basis points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points.
By law, there will be equal sharing of FICO payments between SAIF and BIF
members on the earlier of January 1, 2000 or the date the SAIF and BIF are
merged.
The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Savings Bank. Management
cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
-20-
<PAGE>
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Savings Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999 if there were no more
savings associations as of that date. Various proposals to eliminate the federal
savings association charter, create a uniform financial institutions charter,
abolish the OTS and restrict savings and loan holding company activities have
been introduced in Congress. Currently pending legislation would place
activities restrictions on unitary savings and loan holding companies, subject
to a grandfather for existing unitaries such as the Savings Bank. The Savings
Bank is unable to predict whether such legislation will be enacted or the extent
to which the legislation would restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At June 30,
1999, the Savings Bank's limit on loans to one borrower was $3.2 million, and
the Savings Bank's largest aggregate outstanding balance of loans to one
borrower was $2.8 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (1)
specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of June 30, 1999, the Savings Bank met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier I Bank") and had not been advised by the
OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (1) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (2) 75% of its net income for the previous four quarters. Any additional
capital distributions required prior regulatory approval. At June 30, 1999, the
Savings Bank was a Tier I Bank. Effective April 1, 1999, the OTS's capital
distribution regulation changed. Under the new regulation, an application to and
the prior approval of the OTS will be required prior to any capital distribution
if the institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations (i.e., generally, safety and soundness,
compliance and Community Reinvestment Act examination ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with OTS. If an application is not required, the institution must
still provide prior notice to OTS of the capital distribution. In the event the
Savings Bank's capital fell below its regulatory requirements or the OTS
notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
-21-
<PAGE>
Liquidity. The Savings Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Savings Bank has never been subject to monetary penalties for failure to meet
its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Savings Bank's latest
quarterly thrift financial report.
Transactions with Related Parties. The Savings Bank's authority to engage
in transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Savings Bank and its non-
savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Savings Bank may make to insiders based, in
part, on the Savings Bank's capital position and requires certain board approval
procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
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<PAGE>
Federal Home Loan Bank System
The Savings Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Savings Bank, as a member of the FHLB, is required to acquire
and hold shares of capital stock in that FHLB in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Savings Bank was in
compliance with this requirement with an investment in FHLB stock at June 30,
1999, of $1.0 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1999, 1998 and 1997,
dividends from the FHLB to the Savings Bank amounted to $59,000, $47,000 and
$45,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Savings Bank's net interest income would likely also be
reduced.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Savings Bank complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a fiscal
year, consolidated basis and the accrual method of accounting, and are subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. 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 Company or the Savings Bank. For its 1999 taxable year, the
Company is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (1) the percentage of taxable income
method or (2) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Congress repealed the reserve method of accounting for bad debts for tax
years beginning after 1995 and required savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500
-23-
<PAGE>
million) are required to use only the specific charge-off method. Thus, the
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to a
2-year suspension if the "residential loan requirement" is satisfied.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Savings Bank's 1996 taxable year, in which the Savings Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Savings Bank during its six taxable
years preceding its current taxable year.
The Savings Bank is required to recapture (i.e., take into income) over a
six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
a result of such recapture, the Savings Bank will incur an additional tax
liability of approximately $60,000 which is generally expected to be taken into
income beginning in 1998 over a six year period.
Distributions. Under the 1996 Act, if the Savings Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Savings Bank's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Savings Bank's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Savings Bank's income.
Non-dividend distributions include distributions in excess of the Savings Bank's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Savings Bank's current or
accumulated earnings and profits will not be so included in its income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Savings Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Savings Bank does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a $0.0657 fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Missouri Taxation
The Company and its wholly owned subsidiary, Multi-Purpose Service Agency,
Inc., are subject to the Missouri corporation franchise tax. Each corporation's
franchise tax liability is equal to one-twentieth of one percent of the par
value of the corporation's outstanding shares and surplus if the corporation's
outstanding shares and surplus exceeds $200,000. If the corporation's
outstanding shares, or any part of the outstanding shares, consist of shares
without par value, then, for the purposes of calculating the corporation's tax
liability, such shares shall be considered as having a value of $5.00 per share
unless the actual value of such shares should exceed $5.00 per share, in which
case the tax shall be levied and collected on the actual value and the surplus
if the actual value and the surplus exceeds $200,000.
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<PAGE>
Missouri-based banking institutions, like the Savings Bank, pay a special
financial institutions tax at the rate of 7% of net income, based on adjusted
federal taxable income without regard to net operating loss carryforwards. This
tax is in lieu of certain other state taxes on banking 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 under the Unemployment Compensation Law of Missouri, social
security taxes, sales taxes and use taxes. In addition, the Savings Bank is
entitled to a credit against this tax for all taxes paid to the State of
Missouri or any political subdivision, except taxes on tangible personal
property owned by the Savings Bank and held for lease or rental to others and on
real estate, contributions paid under the Unemployment Compensation Law of
Missouri, social security taxes, sales and use taxes, and taxes imposed by the
Missouri Financial Institutions Tax Law. Missouri banking institutions do not
pay the regular corporate income tax.
Item 2. Description of Property
- --------------------------------
The Company operates two full service facilities, both of which it owns.
At June 30, 1999, the net book value of the property (including land and
building) and the Company's fixtures, furniture and equipment was $1.4 million.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties on 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. Neither the Company nor the Savings Bank is a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
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<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market under
the symbol "FTNB." As of June 30, 1999, there were 1,653,949 shares of common
stock outstanding and 558 stockholders, excluding persons or entities who hold
stock in nominee or "street name." Dividend payments by the Company are
dependent primarily on dividends received by the Company from the Savings Bank.
Under federal regulations, the dollar amount of dividends the Savings Bank may
pay is dependent upon its capital position and recent net income. Generally, if
the Savings Bank satisfies its regulatory capital requirements, it may make
dividend payments up to the limits prescribed in the OTS regulations. However,
institutions that have converted to the stock form of ownership may not declare
or pay a dividend on, or repurchase any of, its common stock if the effect
thereof would cause the regulatory capital of the institution to be reduced
below the amount required for the liquidation account which was established
in the conversion in accordance with the OTS regulations. See Note O of the
Consolidated Financial Statements.
The table below shows the price range of common stock and dividends paid
for the years ended June 30, 1999 and 1998. This information was provided by the
Nasdaq Stock Market.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter... $20.188 $15.750 $0.075 $26.750 $19.750 $0.05
Second Quarter.. 17.656 14.875 0.075 24.000 19.250 0.05
Third Quarter... 16.313 14.750 0.075 23.125 21.500 0.06
Fourth Quarter.. 18.250 13.250 0.075 23.500 16.750 0.06
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations or Plan of Operations
- --------------------------------------------
General
Management's discussion and analysis of the financial condition and results
of operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto.
Operating Strategy
The business of the Savings Bank consists principally of attracting
deposits from the general public and using such deposits to originate
residential and commercial mortgage loans. The Savings Bank generally sells most
of the fixed-rate and some of the adjustable-rate mortgage loans that it
originates while retaining the related servicing rights. Loan originations
include single- and multi-family mortgages, construction, land, consumer, and
other loans. Management maintains adequate liquidity by investing in interest-
bearing deposits and U.S. Government securities. Funding assets with deposits
remains management's primary strategy, although FHLB advances have allowed
management to lock in relative low long-term rates to improve return on equity
over the longer term.
Operating results are dependent primarily on net interest income, which is
the difference between the income earned on interest-earning assets, such as
loans and investments, and the cost of interest-bearing liabilities, consisting
of deposits and FHLB advances. Operating results are also significantly affected
by general economic and competitive conditions, primarily changes in market
interest rates, governmental legislation and policies concerning monetary,
fiscal affairs, and housing, as well as regulatory policies.
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<PAGE>
The Savings Bank's strategy is to operate as a conservative, well-
capitalized, profitable, community-oriented financial institution dedicated to
financing home ownership and other consumer needs while focusing on superior
customer service. Management believes it has successfully implemented its
strategy by (1 ) maintaining strong capital levels, (2) limiting interest rate
risk, (3) controlling operating expenses, (4) generating additional noninterest
income through loan sales and servicing operations, and (5) emphasizing
personalized customer service at competitive prices.
Interest Rate Risk Management
Management has adopted a strategy to maintain the interest rate sensitivity
of its assets and liabilities in order to reduce the impact of rate changes on
the Savings Bank's net interest income. The strategy includes originating and
holding adjustable rate mortgage loans and maintaining a relatively short-term
investment portfolio. At June 30, 1999, adjustable-rate and short-term
construction loans comprised 80.2% of the loan portfolio. As a part of managing
interest sensitivity and planning for long-term profitability, management is
engaging in a funds matching program where the proceeds from relatively low-
cost, long-term, fixed-rate, FHLB advances are invested in mortgage loans with
similar maturities at favorable interest-rate spreads.
Interest Rate Sensitivity of Net Portfolio Value
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the risk-
based capital rules. Using data compiled by the OTS, the 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-bearing
liabilities that mature or reprice within a specific time period). NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. The calculation is intended to illustrate the change in NPV
that will occur in the event of an immediate change in interest rates of at
least 200 basis points with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Under OTS
regulations, and institution with a greater than "normal" level of interest rate
risk is subject to a deduction from total capital for purposes of calculating
its risk-based capital. The OTS, however, has delayed the implementation of this
regulation. An institution with a "normal" level of interest rate risk is
defined as one whose "measured interest rate risk" is less than 2.0%.
Institutions with assets of less than $300 million and a risk-based capital
ratio of more than 12.0% are exempt. The Savings Bank is exempt because of its
asset size. Based on the Savings Bank's regulatory capital levels at June 30,
1999, management believes that, if the proposed regulation was implemented at
that date, 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.
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<PAGE>
The following table is provided by the OTS, based on information provided
by the Savings Bank, and sets forth the changes in the Savings Bank's NPV at
June 30, 1999, based on OTS assumptions, that would occur in the event of an
immediate change in interest rates, with no effect given to any steps that
management might take to counteract that change.
<TABLE>
<CAPTION>
Net Portfolio Value
(In thousands)
----------------------------
Basis Point
("bp") Change Dollar Dollar Percent
in Rates Amount Change Change
--------------- --------- -------- -------
<S> <C> <C> <C>
300 bp $24,111 $ 571 2%
200 bp 24,362 822 3
100 bp 24,224 684 3
0 bp 23,540 -- --
(100) bp 22,431 (1,109) (5)
(200) bp 21,282 (2,257) (10)
(300) bp 20,183 (3,357) (14)
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods of 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 substantially all of the Savings Bank's
adjustable rate mortgage (ARM) loans, have features which restrict changes in
interest rates on a short-term basis over the life of the asset. Further, in the
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could deviate significantly from those
assumed in calculating the table.
Comparison of Financial Condition at June 30, 1999 and 1998
Total assets increased $8.5 million or 7.8% to $118.7 million at June 30,
1999 primarily due to growth in loans receivable, which increased $7.6 million
or 8.2%. Management took advantage of favorable rates and terms available on
FHLB advances which funded $5.4 million of the growth in total assets. Deposits
increased by $3.5 million or 5.0%. Transaction accounts (non-interest-bearing,
NOW, money market, and passbook savings) increased $2.4 million or 15.3% in the
aggregate and certificates of deposit increased $1.1 million or 2.0%. The
balance of mortgages sold to and serviced for others decreased by $5.9 million
or 5.6% to $98.9 million at June 30, 1999.
Total stockholders' equity increased $119,000 from June 30, 1999 to June
30, 1999. Employee Stock Ownership Plan ("ESOP") and Management Recognition and
Development Plan ("MRDP") transactions increased total stockholders' equity
$1,547,000 in the aggregate and net income contributed $993,000. Treasury stock
purchases reduced total stockholders' equity $1,899,000, dividends paid totaled
$505,000, and unrealized losses on available for sale securities, net of tax
decreased stockholders' equity $17,000.
Nonperforming assets, which are defined as loans 90 days or more past due,
loans on nonaccrual status, and foreclosed real estate owned totaled $607,000 or
0.51% of total assets at June 30, 1999 compared to $313,000 or 0.28% of total
assets at June 30, 1998.
-28-
<PAGE>
Comparison of Results of Operations for the Years Ended June 30, 1999 and 1998
Net income for the fiscal year ended June 30, 1999 totaled $993,000 or
$0.64 per diluted share compared to $1,139,000 or $0.70 per diluted share for
the year ended June 30, 1998. The $146,000 or 12.8% decrease in net income
reflected a $164,000 increase in non-interest expense, a $140,000 increase in
the provision for loan losses, and a $190,000 decrease in noninterest income.
Those unfavorable variances were partially offset by a $338,000 increase in net
interest income and a $10,000 decrease in income taxes. Return on average total
assets was 0.85% for the fiscal year ended June 30, 1999 compared to 1.06% for
the previous fiscal year, and return on average stockholders' equity was 3.87%
compared to 4.50%.
Net Interest Income. The $338,000 or 8.4% increase in net interest income
reflected an $8.8 million or 8.3% increase in average total earning assets.
Average loans increased $10.1 million or 11.2%, and all other interest earning
assets decreased $1.3 million in the aggregate. Net interest margin was 3.82% of
average earning assets for the fiscal year ended June 30, 1999 compared to 3.81%
for the previous fiscal year. Approximately $6.1 million of the increase in
average total earning assets was funded by FHLB advances. Average total deposits
increased $2.3 million or 3.3%.
Provision for Loan Losses. The provision for loan losses is a charge
against income to increase the Savings Bank's allowance for loan losses to a
level management considers adequate to absorb losses inherent in the loan
portfolio. Management's evaluation of the adequacy of the allowance for loan
losses considers the composition and risk characteristics of the loan portfolio,
historical loss experience, specific impaired loans, concentrations by borrower,
and general economic conditions. The $210,000 provision for the fiscal year
ended June 30, 1999 increased the allowance for loan losses to $1,171,000 or
1.17% of total loans outstanding at June 30, 1999 compared $971,000 or 1.05% of
total loans outstanding at June 30, 1998.
Noninterest Income. The $190,000 or 25.5% decrease in noninterest income
primarily reflected a decrease in gain on sales of loans, which was partially
offset by as decrease in loss on foreclosed assets. The decline in gain on sales
of loans primarily reflected the write-off of previously recorded gains on sales
of loans which paid off during the fiscal year, while the decrease in loss on
foreclosed assets reflected the fact that a $40,000 provision for loss was
recorded in the prior fiscal year to reduce the carrying value of a parcel
owned. Loan servicing fees declined $16,000 or 5.1% due to an increase in
amortization of servicing assets.
Noninterest Expense. The $164,000 or 5.7% increase in noninterest expense
primarily reflected $83,000 of merger-related expense included in other
noninterest expense plus increases in salaries and benefits, data processing,
and directors fees. Employee salaries and benefits, which is the largest
component of noninterest expense increased $26,000 or 1.5% due primarily to a
$117,000 or 13.4% increase in salary expense and a $32,000 or 63.3% increase in
employee insurance costs. Those unfavorable variances were partially offset by a
$69,000 decrease in ESOP expense and a $54,000 decrease in MRDP expense. The
increase in salary expense was necessary to remain competitive in the local
market area. The decrease in ESOP expense reflected a lower average market price
for the Company's stock, and the decrease in MRDP expense reflected the fact
that expense related to the award was accelerated in the first year and
decreases in each succeeding year.
Income Taxes. The $10,000 decrease in income tax expense primarily
reflected decreased pre-tax income. However, the non-deductibility of merger
related expenses contributed to the increase in the Company's effective income
tax rate to 39.5% for the fiscal year ended June 30, 1999 compared to 36.6% for
the previous fiscal year.
Comparison of Results of Operations for the Years Ended June 30, 1998 and 1997
The Company earned $1,139,000 or $0.70 per diluted share for the fiscal
year ended June 30, 1998, a $317,000 increase from the $822,000, or $0.52 per
diluted share, reported for the 1997 fiscal year. Results for 1998 reflected
increases in both net interest income and noninterest income, and a reduction in
the provision for loan losses. Return on assets improved to 1.06% from 0.83%,
and return on stockholders' equity improved to 4.50% from 4.10%.
-29-
<PAGE>
Net Interest Income. Net interest income increased 16.4% or $566,000 for
the year ended June 30, 1998, on the strength of an $810,000 rise in interest
income. The rise in interest income was due primarily to a $5.3 million increase
in average loans outstanding. Interest on net loans rose $636,000 over 1997.
Higher loan rates also contributed to the rise. Interest expense rose $244,000,
due to an increase in interest paid on FHLB advances.
While net interest income increased in dollar terms, the spread between the
yield on earning assets and the cost of interest-bearing liabilities declined
slightly to 2.55% from 2.66%. The decline in the spread reflects the time lag
between receiving the proceeds of FHLB advances and their subsequent investment
in higher yielding loans. Income from interest-bearing deposits rose $264,000,
due to the temporary investment of advance proceeds, while the interest paid on
FHLB advances rose $277,000. Contributing to the narrower spread was a decrease
in lower-costing savings accounts. Average deposits were higher in fiscal year
1997 due to the funds held in late 1996 during the Company's public offering.
Management adopted a long-term strategy to increase net interest income and
return on shareholders' equity. FHLB advances allow management to lock in
relatively low-cost, long-term, fixed-rate obligations, which can profitably
fund long-term assets. While rate spreads using this strategy are lower,
management expects net interest income and return on shareholders' equity to
improve.
Provision for Loan Losses. The $70,000 provision for the year ended June
30, 1998 reflects management's evaluation of the size and composition of the
loan portfolio. Noninterest Income. Noninterest income for the year ended June
30, 1998, rose $152,000 or 25.6%, to $745,000. Recognition of gains on loan
sales exceeded decreases in the related servicing income and a provision for
loss on foreclosed real estate. Pursuant to adoption of Statement of Financial
Accounting Standards No. 125, the Savings Bank recognized gains of $392,000 on
the sale of loans, compared to $158,000 recognized in 1997. The increase
primarily reflected a full year of gain recognition, as opposed to six month for
the comparable 1997 period.
Loan servicing income decreased 2% to $311,000 for the year ended June 30,
1998, as compared to $318,000 for the prior year. The decrease is a result of
the amortization of loan servicing assets. A $40,000 provision for loss on
foreclosed real estate reduced the carrying value of the parcel owned.
Noninterest Expense. Noninterest expense increased $265,000 to $2,890,000.
The absence of a one-time, $427,000 Savings Association Insurance Fund
assessment levied in 1996 mitigated a $634,000 rise in salaries and benefits, of
which $524,000 related to the adoption of the MRDP. The majority of the five
year, $1.5 million stock award is expensed in the first two years of the
program. A $107,000 increase in other noninterest expense was due primarily to
higher expenses related to being a publicly traded company.
Income Taxes. The provision for income taxes increased to $657,000 for the
year ended June 30, 1998, compared to $471,000 for the year ended June 30, 1997,
primarily as a result of higher income before income taxes. The Company's
effective income tax rate was 36.6% for 1998 compared to 36.4% for 1997.
Average Balances and Rates Earned and Paid
Earnings of the Company depend largely on the spread between the yield on
interest-earning assets and the cost of interest-bearing liabilities, as well as
the relative size of the Company's interest-earning asset and interest-bearing
liability portfolios.
-30-
<PAGE>
The following table sets forth, for the periods indicated, information
regarding average balances of assets, liabilities, and stockholders' equity,
interest income from interest-earning assets and interest expense on interest-
bearing liabilities, and resultant yields, costs, rate spreads, and net interest
margin. The ratio of average interest-earning assets to average interest-bearing
liabilities is also presented. Average balances for the fiscal years ended June
30, 1999 and 1998 are based on daily average balances. Average balances for the
fiscal year ended June 30, 1997 were derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily balances
for 1997 caused any material differences in the information presented.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------------
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 (1):
Loans receivable (2)....... $100,228 $8,235 8.22% $ 90,144 $7,397 8.21% $ 84,796 $6,761 7.97%
U.S. Government and federal
agency securities
available for sale..... 1,219 72 5.91 1,469 88 5.99 2,746 180 6.55
State and Municipal
securities available
for sale............... 225 11 4.89 -- -- -- -- -- --
FHLB stock................. 923 59 6.39 687 47 6.84 637 45 7.06
Interest-bearing deposits.. 11,401 515 4.52 12,922 662 5.12 6,943 398 5.73
-------- ------ -------- ------ -------- ------
Total
interest-bearing
assets.............. 113,996 8,892 7.80 105,222 8,194 7.79 95,122 7,384 7.76
Non-interest-earning assets... 3,775 3,545 4,392
Allowance for loan losses..... (1,051) (961) (860)
-------- -------- --------
Total assets......... $116,720 $107,806 $ 98,654
======== ======== ========
Interest-bearing liabilities:
NOW, money market and
savings accounts.......... 16,599 417 2.51 15,726 394 2.51 16,829 441 2.62
Certificates of deposit.... 54,119 3,055 5.64 52,716 3,079 5.84 53,470 3,065 5.73
-------- ------ -------- ------ -------- ------
Total deposits.......... 70,718 3,472 4.91 68,442 3,473 5.07 70,299 3,506 4.99
FHLB advances................. 17,556 1,071 6.10 11,446 710 6.20 6,962 433 6.22
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities............ 88,274 4,543 5.15 79,888 4,183 5.24 77,261 3,939 5.10
Non-interest-bearing
liabilities.................. 2,774 2,624 1,349
-------- -------- --------
Total liabilities....... 91,048 82,512 78,610
Stockholders' equity.......... 25,672 25,294 20,044
-------- -------- --------
Total liabilities and
Stockholders' equity. $116,720 $107,806 $ 98,654
======== ======== ========
Net interest income........... $4,349 $4,011 $3,445
====== ====== ======
Interest rate spread (3)...... 2.65% 2.55% 2.66%
Net interest margin (4)....... 3.82% 3.81% 3.62%
Ratio of average interest-
earning assets to average
interest-bearing liabilities. 129.14% 131.71% 123.12%
</TABLE>
___________________________________
(1) Includes related assets available for sale and unamortized discounts and
premiums.
(2) Net of deferred loan fees and includes loans held for sale and non
performing loans.
(3) Difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
-31-
<PAGE>
The following table presents weighted average yield on loans, investments,
and other interest-earning assets, the weighted average interest rate on
deposits and borrowings, and interest rate spread at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
Weighted average yield earned on:
Loans receivable, net.............................................. 8.05% 8.01% 8.07%
U.S. Government and federal agency obligations..................... 5.89 5.63 6.18
available for sale
State and municipal securities available for sale.................. 4.93 -- --
FHLB stock......................................................... 6.23 7.18 6.98
Interest-bearing deposits.......................................... 5.55 6.05 5.43
All interest-earning assets........................................ 7.72 7.74 7.85
Weighted average rate paid on:
NOW, money market and savings accounts............................. 2.85 2.99 2.97
Certificates of deposit............................................ 5.41 5.82 5.78
FHLB advances...................................................... 5.97 6.16 5.84
All interest-bearing liabilities...................................... 5.06 5.38 5.25
Interest rate spread (spread between weighted average yield
earned on all interest-earning assets and weighted average
rate paid on all interest-bearing liabilities)..................... 2.66 2.36 2.60
</TABLE>
-32-
<PAGE>
The following table sets forth the effects of changing rates and volume on
net interest income of the Company. Changes which are not solely due to volume
(change in volume times old rate) or rate (change in rate times old volume)
changes are allocated to such categories based on the respective percentage
change in average balances and rates.
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
Compared to Compared to
Year Ended June 30, 1998 Year Ended June 30, 1997
---------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
------------------ -----------------
Total Total
Rate Volume Change Rate Volume Change
-------- ------ ------ ---- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income
earned on:
Loans receivable, net................. $ 9 $829 $ 838 $201 $435 $636
U.S. Government and federal
agency securities available
for sale........................... (1) (15) (16) (14) (78) (92)
Sales and municipal securities
available for sale................. 5 6 11 -- -- --
FHLB stock............................ (3) 15 12 (1) 3 2
Interest-bearing deposits............. (74) (73) (147) (46) 310 264
----- ---- ----- ---- ---- ----
Total interest and dividend
income.......................... (64) 762 698 140 670 810
Interest expense:
NOW, money market and
savings accounts................... 1 22 23 (19) (28) (47)
Certificates of deposit............... (105) 81 (24) 57 (43) 14
FHLB advances......................... (12) 373 361 (1) 278 277
----- ---- ----- ---- ---- ----
Total interest expense............. (116) 476 360 37 207 244
----- ---- ----- ---- ---- ----
Net interest income................ $ 52 $286 $ 338 $103 $463 $566
===== ==== ===== ==== ==== ====
</TABLE>
Liquidity and Capital Resources
The Company's principal sources of funds are cash receipts from deposits,
proceeds from principal and interest payments on loans, proceeds from sales of
loans and loan participations, proceeds from maturing securities, FHLB advances,
and net earnings. The Savings Bank has an agreement with the FHLB of Des Moines
to provide cash advances of unspecified amounts. The Savings 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. For regulatory
purposes, liquidity is measured as a ratio of cash and certain investments to
withdrawable deposits. The minimum level of liquidity required by regulation is
presently 4%. The Company's liquidity ratio at June 30, 1999 was approximately
15.85%. The Company maintains a higher level of liquidity than required by
regulation in order to more closely match interest-sensitive assets with
interest-sensitive liabilities.
Liquidity management is both an ongoing and long-term component of the
Company's asset/liability management strategy. Excess funds generally are
invested in interest-bearing deposits at the FHLB of Des Moines. Should the
Company require funds beyond its ability to generate them internally, additional
sources of funds are available through advances from the FHLB. The primary
investing activity of the Company is the origination of mortgage loans. During
the year ended June 30, 1999 the Company originated mortgage loans in the amount
of $83.6
-33-
<PAGE>
million and purchased $1.3 million of one- to four-family mortgage loans. Other
investing activities include investing in interest-bearing deposits and the
purchase of U.S. Government and state and municipal obligations.
The Company 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. During the three years ended June 30, 1999, the Company used its
sources of funds primarily to fund loan commitments and to pay deposit
withdrawals. At June 30, 1999, the Company had loan commitments outstanding of
$3.3 million of which $2.1 million was for fixed rate loans with interest rates
ranging from 6.625 to 8.50%.
Like most thrift institutions, deposits, particularly certificates of
deposit, have been the primary source of external funds for the Company. By
offering interest rates that are competitive with or at a slight premium to the
average rate paid by local competitors, the Company has had some success in
lengthening the maturity of it certificate of deposit portfolio, a component of
its asset/liability management strategy. At June 30, 1999, certificates of
deposit amounted to $54.5 million, or 75.0% of total deposits, including $36.1
million which were scheduled to mature within one year of June 30, 1999.
Historically, the Company has been able to retain a significant amount of its
deposits as they mature. Management of the Company believes it has adequate
resources to fund all loan commitments by deposits and, as necessary, borrowing
in the form of FHLB advances and that it can adjust the offering rates of
certificates to retain deposits in changing interest rate environments.
The Company is not subject to any regulatory capital requirements. The
Savings Bank is subject to certain capital requirements imposed by the OTS. The
Savings Bank satisfied each of those requirements at June 30, 1999. See Note I
of the Consolidated Financial Statements.
Year 2000 Issue
The Year 2000 issue concerns computer software programs which use only two
digits to identify the calendar year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The Year 2000 issue presents several potential risks to the
Company.
The banking transactions of the Company's customers are processed by one or
more computer systems provided by a third-party data processing service. Failure
of one or more of those systems to function as a result of the Year 2000 date
change could result in the Company's inability to properly process customer
transactions. If that were to occur, the Company could lose customers to other
financial institutions, resulting in a loss of revenue.
A number of the Company's borrowers utilize computers and computer software
to varying degrees in conjunction with the operation of their businesses. The
customers and suppliers of the Company's borrowers may utilize computers as
well. Should the Company's borrowers, or the businesses on which they depend,
experience Year 2000 related computer problems, such borrowers' cash flow could
be disrupted, adversely effecting their ability to repay their loans with the
Company.
Concern on the part of certain depositors that the Year 2000 related
problems could impair access to their deposit account balances following the
Year 2000 date change could result in the Company experiencing a deposit outflow
prior to December 31, 1999. Should the Year 2000 related problems occur which
cause any of the Savings Bank's systems, or the systems of the third-party
service bureau upon which the Company depends, to become inoperative, increased
personnel costs could be incurred if additional staff is required to perform
functions that the inoperative systems would have other wise performed.
Management believes it is not possible to estimate the potential lost
revenue due to the Year 2000 issue, as the extent and longevity of such
potential problems cannot be predicted.
-34-
<PAGE>
The Company has a Year 2000 Action Plan which management has used to
identify and correct Year 2000 compliance issues. The Company has reviewed all
services and operational components to identify technical and non-technical
areas of concern. Having identified these internal and external components, the
Company has replaced some of its computer hardware with Year 2000 compliant
equipment. The Company has requested third party providers to insure Year 2000
compliance by requiring them to test their own systems and services. All third
party vendors have identified Year 2000 issues and are compliant or are
completing revisions to systems and software to become Year 2000 complaint.
Testing schedules have been established with each provider. The primary service
provider for the Company is Fiserv, which provides data processing services.
Fiserv has indicated that it is Year 2000 compliant. Further, the Company has
tested all of its internal computer software and has determined that they are
Year 2000 compliant.
As stated earlier, a number of the Company's borrowers utilize computers
and computer software to varying degrees in conjunction with the operation of
their businesses. The Company has contacted these borrowers to determine their
status relating to compliance with Year 2000 issues. Responses received from
these borrowers indicate that they are aware of the Year 2000 problem and are
compliant or taking the necessary steps to be compliant. The Company is
requiring new borrowers to be Year 2000 compliant before granting any extensions
of credit.
The Company has developed a business resumption and contingency plan.
This plan takes into account the actions the Company will implement if there is
a disruption caused by Year 2000 related computer problems. The Company feels
that the probability of an extended disruption is unlikely. Nevertheless, the
contingency plans being developed take into account disruptions caused by the
loss utilities such as power, water or telecommunications. The Company is
preparing to handle its business transactions off-line for a short period of
time.
To date, the Company has incurred costs of approximately $106,000
relating to the Year 2000 issue. The majority of that amount was the result of
the purchase of Year 2000 compliant hardware and software. The Company presently
anticipates that total expense relating to the Year 2000 issue will not exceed
$150,000.
New Accounting Standards
See Note A to the Consolidated Financial Statements.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering the change
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of the Company is reflected in
increased operating costs. 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 rate do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
Item 7. Financial Statements
- ------------------------------
(a) Financial Statements
Independent Auditors' Report*
Consolidated Statements of Financial Condition as of June 30, 1999
and 1998*
Consolidated Statements of Income for the Years Ended June 30,
1999, 1998 and 1997*
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997*
Consolidated Statements of Cash Flows for the Years Ended June 30,
1999, 1998 and 1997*
Notes to the Consolidated Financial Statements*
*See Financial pages herein beginning on page F-1.
-35-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 9. Directors,Executive Officers, Promoters and Control Persons; Compliance
- -------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act
--------------------------------------
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. Mr. Gohring is 64
years old.
Richard W. Gohring is Executive Vice President and a Director of the
Savings Bank and Vice-President and a Director of the Company. He has been
associated with the Savings Bank since 1985. Mr. Gohring is 44 years old.
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. Judge Hamilton is 56 years old.
Bonnie K. Smith is Senior Vice President, Secretary-Treasurer and a
Director of the Savings Bank and Secretary-Treasurer of the Company. She has
been associated with the Savings Bank since 1971. Mrs. Smith is 54 years old.
Dennis J. Adrian is the sole owner of Vandelict 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. He has been a director of the Company and the Savings Bank since 1995.
Mr. Adrian is 50 years old.
Billy M. Conner is the co-owner and operator of BCGC, Inc., a local
family farming operation. He has been a director of the Company and the Savings
Bank since 1995. Mr. Conner is 69 years old.
David W. West is the co-owner and operator of a local family farming
operation. He has been a director of the Company and the Savings Bank since
1995. Mr. West is 61 years old.
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of any registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% shareholders are required by regulation
to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received,
as provided to the Company by the above referenced persons, the Company believes
that, during the fiscal year ended June 30, 1999, all filing requirements
applicable to its reporting officers, directors and greater than 10%
shareholders were properly and timely complied with.
Item 10. Executive Compensation
- -------------------------------
Directors
Non-employee Directors receive a monthly retainer of $1,200 from the
Savings Bank and $300 from the Company. Employee Directors receive a monthly
retainer of $800 from the Savings Bank and $200 from the Company.
-36-
<PAGE>
During the year ended June 30, 1998, each non-employee director received
options to acquire 8,596 shares of the Company's common stock under the
Company's 1997 Stock Option Plan. At the time they were awarded, the stock
options vested ratably over a five-year period. However, all of the options
will automatically vest upon the consummation of the Company's acquisition by
Central. Nevertheless, because the price at which these options may be
exercised exceeds the consideration to be received in the acquisition, all such
options will be canceled at the closing. Each non-employee director also
received 3,438 shares of restricted stock under the Company's Management
Recognition and Development Plan. At the time they were awarded, the restricted
stock grants vested ratably over a five-year period. However, all of the
restricted stock grants will automatically vest upon the consummation of the
Company's acquisition by Central and will be exchanged for the merger
consideration in connection therewith.
Following Central's acquisition of the Company, Central will elect or
appoint all of the members of the Company's Board who are willing to serve, to
an advisory board. Each member of the advisory board will receive a monthly fee
of $200 plus appropriate fees for any additional services performed.
Executive Compensation
Summary Compensation Table. The following information is furnished for the
Chief Executive Officer of the Company. No other executive officer of the
Company or the Savings Bank received salary and bonus in excess of $100,000
during the year ended June 30, 1999.
<TABLE>
<CAPTION>
Long-term Compensation
--------------------------------
Annual Compensation Awards
----------------------------------------- --------------------------------
Other Securities
Annual Restricted Underlying All Other
Compensation Stock Awards Options/SARs Compensation
Name and Principal Positions Year Salary($) Bonus($) ($) (1) ($) (3) (#) ($)
- ---------------------------- ----- ---------- --------- -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kermit D. Gohring 1999 $96,000 $ -- $9,300 $ -- -- $ 43,692(3)
Chief Executive Officer and 1998 96,000 -- $6,000 $ 306,026(2) 34,385 51,572
President 1997 94,000 4,000 6,000 -- -- 10,955
</TABLE>
_________________________________
(1) Consists of directors' fees. Does not include perquisites which did not
exceed the lesser of $50,000 or 10% of salary and bonus.
(2) Represents the total value of the award of 13,754 shares of restricted
common stock on October 23, 1997. Such awards will vest ratably over a five-
year period. At June 30, 1999, the value of the unvested restricted stock
award was $197,372. Dividends, if any, paid on the restricted common stock
are accrued and held in arrears until the restricted common stock becomes
vested.
(3) Consists of $2,880 employer contribution to 401(k) Plan and $40,812 employer
contribution to ESOP.
Employment Agreements. The Company and the Savings Bank (collectively, the
"Employers") have entered into a three-year employment agreement with Mr.
Gohring. Mr. Gohring's base salary under the agreement currently is $96,000
which amount is paid by the Savings Bank. 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 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 Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 25% or more of the combined voting power
of the 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 Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Company's assets, or a plan of partial or complete
liquidation.
-37-
<PAGE>
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. Section 280G of the Internal Revenue
Code states that severance payments that 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 Mr.
Gohring voluntarily terminates employment, except in the event of a change in
control.
Central's acquisition of the Company and the Savings Bank will constitute a
change in control of Fulton and Fulton Savings and as a result of Mr. Gohring's
termination of employment after completion of the merger, he will be entitled to
a severance payment in the amount of approximately $295,000.
Aggregated Option Exercises and Fiscal Year-End Option Value Table. The
following information with respect to options exercised during the fiscal year
ended June 30, 1999 and remaining unexercised at the end of the fiscal year is
presented for the Company's President and Chief Executive Officer.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money Options
Shares Value Unexercised Options at Fiscal Year End ($)
Acquired on ----------------------------- ----------------------------
Name Exercise (#) Realized($) Exercisable(1) Unexercisable Exercisable Unexercisable
------------ ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kermit D. Gohring.. -- -- -- 34,385 -- --
</TABLE>
_________________________________
(1) As a result of Central's acquisition of the Company, all of Mr. Gohring's
stock options will become exercisable at the closing of the acquisition.
However, because the price at which these options may be exercised exceeds
the consideration to be received in the acquisition, all such options will
be canceled at the closing.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Beneficial Ownership of Fulton Common Stock
The following table provides information as of June 30, 1999 with respect to
persons known to the Company to be the beneficial owners of more than 5% of the
Company's outstanding common stock.
<TABLE>
<CAPTION>
Number of Shares Percent of Common
Name and Address Beneficially Owned Stock Outstanding
- ---------------- ------------------ -----------------
<S> <C> <C>
Fulton Savings Bank, F.S.B. 137,332 (1) 8.3%
Employee Stock Ownership Plan
410 Market Street
Fulton, Missouri 65251
</TABLE>
- -----------------------------
(1) Includes 106,422 shares which have not been allocated to participants'
accounts and over which the trustees have sole voting power and 30,910
shares which have been allocated to participants' accounts and over which
the trustees have shared voting power. Under the terms of the ESOP, the
trustees will vote unallocated shares and allocated shares for which no
voting instructions are received in the same proportion as shares for which
the trustees have received voting instructions from participants. The
trustee of the ESOP is First Bankers Trust Company.
-38-
<PAGE>
The following table provides information about the shares of Fulton common
stock that may be considered to be owned by each director of the Company and by
all directors and executive officers of the Company as a group as of June 30,
1999. A person may be considered to own any shares of common stock over which
he or she has, directly or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
Number of Shares
That May Be
Number of Acquired Within Percent of
Shares 60 Days By Common Stock
Name/Title Owned Exercising Options Outstanding
---------------------------------------- ---------------- ------------------ ------------
<S> <C> <C> <C>
Dennis J. Adrian 24,088 (1) 1,719 1.6%
Director
Billy M. Conner 20,863 (1)(3) 1,719 1.3
Director
Kermit D. Gohring 38,702 (1)(2)(4) 6,877 2.7
President, Chief Executive Officer and
Director
Richard W. Gohring 16,070 (1)(2)(5) 2,406 1.1
Executive Vice President and Director
Clifford E. Hamilton, Jr. 25,438 (1)(6) 1,719 1.6
Director
Bonnie K. Smith 24,254 (1)(2)(7) 4,126 1.7
Senior Vice President and Director
David W. West 18,438 (1)(2) 1,719 1.2
Director
All directors and executive officers as a group 176,738 (1)(2) 22,692 11.9
(eight persons)
</TABLE>
- ----------------------------------
(1) Shares of restricted stock awarded under the Company's 1997 Management
Recognition and Development Plan as to which the holders have voting power
but not investment power are included as follows: Mr. Adrian, 2,750
shares; Mr. Conner, 2,750 shares; Mr. K. Gohring, 11,003 shares; Mr. R.
Gohring, 3,850 shares; Mr. Hamilton, 2,750 shares; Mrs. Smith, 6,601
shares; Mr. West, 2,750 shares; and all directors and executive officers
as a group, 36,304 shares.
(2) Shares allocated under the Savings Bank's ESOP as of December 31, 1998
over which the individual has shared voting power but not investment power
are included as follows: Mr. K. Gohring, 4,948 shares; Mr. R. Gohring,
3,056 shares; Mrs. Smith, 3,047 shares; and all directors and executive
officers as a group, 13,314 shares.
(3) Includes 2,532 shares owned by Mr. Conner's spouse.
(4) Includes 7,800 shares owned by Mr. Gohring's spouse.
(5) Includes 420 shares owned by Mr. Gohring's spouse.
(6) Includes 740 shares owned by Mr. Hamilton's spouse.
(7) Includes 2,330 shares owned by Mrs. Smith's spouse.
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
As required by federal regulations, all loans or extensions by the Savings
Bank of credit to executive officers and directors are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (except for loans made
pursuant to programs generally available to all employees) and do not involve
more than the normal risk of repayment or present other unfavorable features. In
addition, loans made by the Savings Bank to a director or executive officer in
an amount that, when aggregated with the amount of all other loans by the
Savings Bank 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) are subject to approval in advance by a majority of the
disinterested members of the Board of Directors.
-39-
<PAGE>
PART IV
Item 13. Exhibits List and Reports on Form 8-K
- ----------------------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of May 18, 1999, by and
between Central Bancompany, Inc. and Fulton Bancorp, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
filed with the SEC on May 21, 1999)
3.1 Certificate of Incorporation of Fulton Bancorp, Inc. (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (File No. 333-8461))
3.2 Bylaws of Fulton Bancorp, Inc. (incorporated by reference to
Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No. 333-
8461))
10.1 Employment Agreement with Kermit D. Gohring (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1997)
10.2 Fulton Bancorp, Inc. 1997 Management Recognition and Development
Plan (incorporated by reference to Exhibit B to the Company's Proxy
Statement dated September 23, 1997)
10.3 Fulton Bancorp, Inc. 1997 Stock Option Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated
September 23, 1997)
21 Subsidiaries of the Registrant
23 Consent of Moore, Horton & Carlson, P.C.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on May 21, 1999 on which it
reported under Item 5 that it had entered into an Agreement and
Plan of Merger with Central Bancompany, Inc.
-40-
<PAGE>
Fulton Bancorp, Inc.
1999 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Independent Auditors' Report.................................................................... F-2
Consolidated Statements of Financial Condition.................................................. F-3
Consolidated Statements of Stockholders' Equity................................................. F-4
Consolidated Statements of Income............................................................... F-5
Consolidated Statements of Cash Flows........................................................... F-6
Notes to Consolidated Financial Statements...................................................... F-8
</TABLE>
F-1
<PAGE>
[LETTERHEAD OF MH & C APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Fulton Bancorp, Inc.
Fulton, Missouri
We have audited the accompanying consolidated statements of financial condition
of Fulton Bancorp, Inc. ("Company") as of June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Moore, Horton & Carlson, P.C.
Mexico, Missouri
August 27, 1999
except for Note P, as
to which the date is
September 14, 1999.
F-2
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30
1999 1998
---------------------------
<S> <C> <C>
ASSETS
Cash (includes interest-bearing deposits of $12,694,150 and
$13,146,912, respectively) $ 13,290,305 $ 13,777,625
Investment securities, available-for-sale--Note B 1,722,865 950,276
Stock in Federal Home Loan Bank ("FHLB") of Des Moines 985,500 643,300
Loans held for sale -- 3,649,482
Loans receivable--Note C 99,304,780 88,104,227
Accrued interest receivable--Note D 740,190 678,310
Premises and equipment--Note E 1,375,788 1,419,413
Foreclosed real estate--Note C 157,525 157,525
Other assets 1,073,710 730,268
------------ ------------
TOTAL ASSETS $118,650,663 $110,110,426
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits--Note F $ 72,639,493 $ 69,163,842
Advances from Federal Home Loan Bank of Des Moines--Note H 18,199,425 12,810,007
Advances from borrowers for property taxes and insurance 1,135,445 984,986
Amounts collected for others on loans sold 681,139 499,333
Accrued interest payable 83,915 84,034
Other liabilities 296,840 1,072,857
------------ ------------
TOTAL LIABILITIES 93,036,257 84,615,059
Commitments and contingencies--Notes L, M and P
Stockholders' Equity--Notes G, I, J and O
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 6,000,000 shares authorized,
1,765,411 and 1,719,250 issued, respectively 17,654 17,193
Additional paid-in capital 17,881,523 16,943,018
Retained earnings - substantially restricted 11,161,766 10,673,592
Accumulated other comprehensive income (15,925) 998
Unearned Employee Stock Ownership Plan ("ESOP") shares (995,070) (1,133,372)
Deferred compensation-Management Recognition
and Development Plan ("MRDP") (536,821) (1,006,062)
Treasury stock at cost, 111,462 shares (1,898,721) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,614,406 25,495,367
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $118,650,663 $110,110,426
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-In Retained Comprehensive ESOP Deferred
Stock Capital Earnings Income Shares MRDP
---------- --------------- ------------ -------------- --------------- --------------
<C> <C> <C> <C> <C> <C>
Balance June 30, 1996 $ --- $ --- $ 9,260,375 $ 13,480 $ --- $ ---
Comprehensive income:
Net income --- --- 821,993 --- --- ---
Other comprehensive income
(loss) - unrealized loss on
securities available-for-sale,
net of taxes of $7,719 --- --- --- (13,074) --- ---
---------- ----------- ----------- ------------- -------------- --------------
Total comprehensive income --- --- 821,993 (13,074) --- ---
---------- ----------- ----------- ------------- -------------- --------------
Net proceeds from issuance of
common stock--Note O 17,193 16,531,937 --- --- --- ---
Common stock issued to
ESOP--Note J --- --- --- --- (1,375,400) ---
Release of ESOP shares --- 69,030 --- --- 103,726 ---
Dividends paid ($.10 per share) --- --- (171,925) --- --- ---
---------- ----------- ----------- ------------- -------------- --------------
BALANCE JUNE 30, 1997 17,193 16,600,967 9,910,443 406 (1,271,674) ---
Comprehensive income:
Net income --- --- 1,139,182 --- --- ---
Other comprehensive income
(loss) - unrealized gain on
securities available-for-sale,
net of taxes of $350 --- --- --- 592 --- ---
---------- ----------- ----------- ------------- -------------- --------------
Total comprehensive income --- --- 1,139,182 592 --- ---
---------- ----------- ----------- ------------- -------------- --------------
Release of ESOP shares --- 157,520 --- --- 138,302 ---
Purchase of Treasury Stock --- --- --- --- --- ---
Establish MRDP --- 5,622 --- --- --- (1,530,132
Valuation adjustment for MRDP --- 178,909 --- --- --- ---
Compensation expense MRDP --- --- --- --- --- 524,070
Dividends paid ($.22 per share) --- --- (376,033) --- --- ---
---------- ----------- ----------- ------------- -------------- --------------
BALANCE JUNE 30, 1998 17,193 16,943,018 10,673,592 998 (1,133,372) (1,006,062)
Comprehensive income:
Net income --- --- 993,455 --- --- ---
Other comprehensive income
(loss) - unrealized loss on
securities available-for-sale,
net of taxes of $9,993 --- --- --- (16,923) --- ---
---------- ----------- ----------- ------------- -------------- --------------
Total comprehensive income --- --- 993,455 (16,923) --- ---
---------- ----------- ----------- ------------- -------------- --------------
Release of ESOP shares --- 90,593 --- --- 138,302 ---
Purchase of Treasury Stock --- --- --- --- --- ---
Issuance of shares to MRDP 461 798,331 --- --- --- ---
Valuation adjustment for MRDP --- 49,581 --- --- --- ---
Compensation expense MRDP --- --- --- --- --- 469,241
Dividends paid ($.30 per share) --- --- (505,281) --- --- ---
---------- ----------- ----------- ------------- -------------- --------------
BALANCE JUNE 30, 1999 $17,654 $17,881,523 $11,161,766 $(15,925) $ (995,070) $ (536,821)
========== =========== =========== ============= ============== ==============
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
-------------- ------------
<S> <C> <C>
Balance June 30, 1996 $ --- $ 9,273,855
Comprehensive income:
Net income --- 821,993
Other comprehensive income
(loss) - unrealized loss on
securities available-for-sale,
net of taxes of $7,719 --- (13,074)
------------- -----------
Total comprehensive income --- 808,919
------------- -----------
Net proceeds from issuance of
common stock--Note O --- 16,549,130
Common stock issued to
ESOP--Note J --- (1,375,400)
Release of ESOP shares --- 172,756
Dividends paid ($.10 per share) --- (171,925)
------------- -----------
BALANCE JUNE 30, 1997 --- 25,257,335
Comprehensive income:
Net income --- 1,139,182
Other comprehensive income
(loss) - unrealized gain on
securities available-for-sale,
net of taxes of $350 --- 592
------------- -----------
Total comprehensive income --- 1,139,774
------------- -----------
Release of ESOP shares --- 295,822
Purchase of Treasury Stock (497,222) (497,222)
Establish MRDP 497,222 (1,027,288)
Valuation adjustment for MRDP --- 178,909
Compensation expense MRDP --- 524,070
Dividends paid ($.22 per share) --- (376,033)
------------- -----------
BALANCE JUNE 30, 1998 --- 25,495,367
Comprehensive income:
Net income --- 993,455
Other comprehensive income
(loss) - unrealized loss on
securities available-for-sale,
net of taxes of $9,993 --- (16,923)
------------- -----------
Total comprehensive income --- 976,532
------------- -----------
Release of ESOP shares --- 228,895
Purchase of Treasury Stock (1,898,721) (1,898,721)
Issuance of shares to MRDP --- 798,792
Valuation adjustment for MRDP --- 49,581
Compensation expense MRDP --- 469,241
Dividends paid ($.30 per share) --- (505,281)
------------- -----------
BALANCE JUNE 30, 1999 $(1,898,721) $25,614,406
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Interest Income
Mortgage loans $7,367,018 $6,497,768 $5,872,624
Consumer and other loans 868,214 899,136 887,835
Investment securities 141,483 134,928 224,874
Interest-bearing deposits 514,807 661,906 398,091
---------- ---------- ----------
Total Interest Income 8,891,522 8,193,738 7,383,424
Interest Expense
Deposits--Note F 3,471,254 3,472,938 3,505,186
Advances from FHLB 1,071,161 709,750 433,248
---------- ---------- ----------
Total Interest Expense 4,542,415 4,182,688 3,938,434
---------- ---------- ----------
Net Interest Income 4,349,107 4,011,050 3,444,990
Provision for Loan Losses--Note C 210,000 70,000 120,000
---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 4,139,107 3,941,050 3,324,990
Noninterest Income (Loss)
Loan servicing fees 294,702 310,638 317,735
Service charges and other fees 95,567 85,161 96,014
Income (Loss) from foreclosed assets, net (10,573) (48,918) 7,018
Gain on sale of loans 167,883 392,198 158,436
Gain on sale of other assets --- --- 9,780
Other 7,590 6,248 3,796
---------- ---------- ----------
Total Noninterest Income 555,169 745,327 592,779
Noninterest Expense
Employee salaries and benefits 1,741,424 1,715,872 1,081,983
Occupancy costs 282,247 272,233 274,151
Advertising 45,997 51,565 54,492
Data processing 188,462 166,065 176,412
Federal insurance premiums 46,324 47,703 511,473
Directors' fees 110,843 89,843 86,543
Other 638,924 546,914 439,722
---------- ---------- ----------
Total Noninterest Expense 3,054,221 2,890,195 2,624,776
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,640,055 1,796,182 1,292,993
Income Taxes--Note G 646,600 657,000 471,000
---------- ---------- ----------
NET INCOME $ 993,455 $1,139,182 $ 821,993
========== ========== ==========
Basic Income Per Share $ .65 $ .72 $ .52
========== ========== ==========
Diluted Income Per Share $ .64 $ .70 $ .52
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 993,455 $ 1,139,182 $ 821,993
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 135,298 147,010 167,648
Amortization of premiums and discounts (1,763) (315) (9,401)
Provisions for loan losses 210,000 70,000 120,000
Provision for loss on other real estate --- 40,000 ---
Deferred income tax benefit (151,442) (83,400) (8,500)
Proceeds from sales of loans held for sale 29,597,214 15,604,233 22,352,416
Originations of loans held for sale (25,947,732) (14,790,495) (24,288,113)
Gain on sale of loans held for sale (162,718) (392,198) (158,436)
Amortization of servicing asset 94,550 45,314 3,567
Loss on disposal of foreclosed real estate 10,573 8,245 ---
ESOP shares released 228,895 295,822 172,755
MRDP compensation expense 469,241 524,070 ---
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable (61,880) 50,572 (24,263)
Other assets (132,999) 30,818 (209,117)
Accrued interest payable (119) (12,284) (3,373)
Other liabilities 72,357 (75,432) 27,402
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 5,352,930 2,601,142 (1,035,422)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of investment securities,
available-for-sale (1,747,955) --- (1,202,890)
Proceeds from maturities of investment securities,
available-for-sale 950,214 950,004 2,500,004
Loans originated, net of repayments (9,309,280) (4,460,978) (7,289,495)
Purchase of mortgage loans (2,085,218) --- ---
Purchase of FHLB stock (342,200) (6,100) ---
Purchase of premises and equipment (91,673) (83,800) (239,684)
Carrying value of other real estate investment
disposal --- --- 408,543
Expenditures on foreclosed real estate, net (7,470) --- ---
------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (12,633,582) (3,600,874) (5,823,522)
</TABLE>
F-6
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cont'd
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase (decrease) in deposits $ 3,475,651 $ 2,029,139 $ (3,631,612)
Advances from FHLB
Borrowings 8,000,000 13,000,000 11,500,000
Repayments (2,610,582) (6,689,993) (12,000,000)
Net increase (decrease) in advances for
taxes and insurance 150,459 (33,330) 59,293
Net increase (decrease) in amounts
collected for others on loans sold 181,806 236,880 (118,755)
Proceeds from sale of common stock --- --- 16,549,131
Purchase of treasury shares (1,898,721) (497,227) ---
Loan to ESOP --- --- (1,375,400)
Dividends paid (505,281) (376,033) (171,925)
----------- ----------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,793,332 7,669,436 10,810,732
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH (487,320) 6,669,704 3,951,788
CASH, BEGINNING OF PERIOD 13,777,625 7,107,921 3,156,133
----------- ----------- ------------
CASH, END OF PERIOD $13,290,305 $13,777,625 $ 7,107,921
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for
Interest on deposits $ 3,471,373 $ 3,485,222 $ 3,508,559
=========== =========== ============
Interest on FHLB advances $ 1,071,161 $ 709,750 $ 433,248
=========== =========== ============
Income taxes $ 754,227 $ 862,376 $ 288,000
=========== =========== ============
Noncash investing and financing activities are
as follows
Loans to facilitate sales of real estate $ 69,400 $ 30,000 $ ---
=========== =========== ============
Foreclosed real estate acquired by foreclosure
or deed in lieu of foreclosure $ 73,475 $ 40,140 $ ---
=========== =========== ============
Allocation of MRDP shares of common stock $ --- $ 1,530,132 $ ---
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Fulton Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of Fulton Bancorp, Inc.
conform to generally accepted accounting principles ("GAAP") and to prevailing
practices within the thrift industry. A summary of the more significant
accounting policies follows:
Nature of Operations: The Company, a Delaware corporation, was incorporated in
- --------------------
May, 1996 for the purpose of becoming the holding company of Fulton Savings
Bank, FSB ("Bank"). On October 17, 1996, the Bank converted from a mutual to a
stock form of ownership and the Company completed its initial public offering
and acquired all of the outstanding capital stock of the Bank.
The Bank provides a variety of financial services to individual 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 and savings accounts and certificates of deposit. Its
primary lending products are one- to four-family residential loans.
Principles of Consolidation: The consolidated financial statements include the
- ---------------------------
accounts of the Company and its wholly-owned subsidiary, the Bank, and its
wholly-owned subsidiary, Multi-Purpose Service Agency, Inc., whose activities
consist principally of selling mortgage redemption insurance to the Bank's
customers. Significant intercompany balances and transactions have been
eliminated in consolidation.
Investment Securities: All 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.
Stock in Federal Home Loan Bank of Des Moines: Stock in the FHLB is stated at
- ---------------------------------------------
cost and the amount of stock held is determined by regulation. No ready market
exists for such stock and it has no quoted market value.
Loans 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 receivable are carried at unpaid principal balances,
- ----------------
less the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred and amortized to interest
income over the contractual life of the loan using the interest method.
The Company's real estate loan portfolio consists primarily of long-term loans
secured by first trust deeds on single-family residences, other residential
property, commercial property and land. The adjustable-rate mortgage is the
Company's primary loan investment.
F-8
<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. Uncollectible interest on loans is charged off or an
allowance established by a charge to income equal to all interest previously
accrued. Interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal in which case the loan is returned to accrual basis.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
- -------------------------
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-
offs, net of recoveries.
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired, except those
classified as small-balance homogeneous loans which are collectively evaluated
for impairment. The Company considers all one- to four-family residential
mortgage loans, residential construction loans, and all consumer and other loans
to be smaller homogeneous loans. Impaired loans are assessed individually and
impairment identified when the accrual of interest has been discontinued, loans
have been restructured or management has serious doubts about the future
collectibility of principal and interest, even though the loans are currently
performing. Factors considered in determining impairment include, but are not
limited to, expected future cash flow, the financial condition of the borrower
and current economic conditions. The Company measures each impaired loan based
on the fair value of its collateral and charges off those loans or portions of
loans deemed uncollectible. Management has elected to continue to use its
existing nonaccrual methods for recognizing interest income on impaired loans.
Loan Servicing: Effective May 1, 1996, the Company adopted Statement of
- --------------
Financial Accounting Standard ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights (an amendment to SFAS No. 65). SFAS No. 122 was subsequently
superseded by SFAS No. 125 Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. SFAS No. 125 was effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996 and is to be applied prospectively. Both
statements generally require entities that sell or securitize loans and retain
mortgage servicing rights to allocate the total cost of the mortgage loan to the
mortgage servicing right and the loan based on their relative fair value. The
gain on sale of the loan is increased by the amount of the servicing asset
recorded. 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.
Premises and Equipment: Premises and equipment have been stated at cost less
- ----------------------
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
respective assets, which range from five to fifty years.
Foreclosed Real Estate: Real estate acquired in settlement of loans is carried
- ----------------------
at the lower of the balance of the related loan at the time of foreclosure or
fair value less the estimated costs to sell the asset. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
Income Taxes: Deferred tax assets and liabilities are recognized for the future
- ------------
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities 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-9
<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.
Risk and Uncertainties: The Company is a community-oriented financial
- ----------------------
institution which provides traditional financial services within the areas it
serves. The Company is engaged primarily in the business of attracting deposits
from the general public using these funds to originate one- to four-family
residential mortgage loans located primarily in Fulton, Missouri, Callaway
County, and its contiguous counties. The Company's principal market area
consists of rural communities and substantially all of the Company's loans are
to residents of or secured by properties located in its principal lending area.
Accordingly, the ultimate collectibility of the Company's loan portfolio is
dependent upon market conditions in that area. This geographic concentration is
considered in management's establishment of the allowance for loan losses.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the periods covered. Actual results could
differ significantly from these estimates and assumptions.
In the normal course of its business, the Company encounters two significant
types of risk, economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more or less rapidly, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities held by the
Company.
The Company is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
Net Income Per Share: Basic income per share is based upon the weighted average
- --------------------
number of common shares outstanding during the periods presented. Diluted
income per share include the effects of all dilutive potential common shares
outstanding during each period. Income per share for all periods presented
conform to SFAS No. 128.
New Accounting Standards: The Company has adopted SFAS No. 130, Reporting of
- ------------------------
Comprehensive Income and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information for the year ended June 30, 1999. SFAS No.
130 requires the Company to classify items of other comprehensive income by
their nature in the consolidated financial statements. The Company has
displayed the accumulated balance of other comprehensive income separately in
the equity section of the consolidated financial statements. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. The
Company has one reportable operating segment.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, entities are required to carry all derivative instruments in
the statement of financial position at fair value.
F-10
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
The FASB has deferred implementation of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company does not expect the statement to have a
significant effect on the consolidated financial statements.
Reclassification: Certain amounts in the prior periods consolidated financial
- ----------------
statements have been reclassified to conform with the current year presentation.
NOTE B--INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
----------------
Cost Gains Losses Value
---------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1999:
U.S. Government obligations maturing in over
one year but within five years $1,449,495 $ --- $(28,621) $1,420,874
State and municipal securities maturing in over
one year but within five years 199,181 2,147 --- 201,328
---------- ------ -------- ----------
Total investment securities maturing in over
one year but within five years 1,648,676 2,147 (28,621) 1,622,202
State and municipal securities maturing in over
five years but within 10 years 99,516 1,147 --- 100,663
---------- ------ -------- ----------
Total investment securities, available-for-sale $1,748,192 $3,294 $(28,621) $1,722,865
========== ====== ======== ==========
June 30, 1998:
U.S. Government obligations maturing within
one year $ 948,689 $1,587 $ --- $ 950,276
========== ====== ======== ==========
</TABLE>
Actual maturities of investment securities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with call or prepayment penalties.
No investment securities were pledged to secure deposits at June 30, 1999. At
June 30, 1998, investment securities with a carrying value of $582,000 and a
fair value of $582,486 were pledged to secure deposits.
NOTE C--LOANS RECEIVABLE
Loans receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family residences $ 61,527,280 $54,664,341
Multi-family 6,197,638 6,038,504
Commercial 12,386,969 12,011,013
Construction 17,697,572 11,319,713
Land 5,055,513 4,402,215
------------ -----------
102,864,972 88,435,786
Less undisbursed portion of mortgage loans 11,408,642 8,196,732
------------ -----------
91,456,330 80,239,054
</TABLE>
F-11
<PAGE>
NOTE C--LOANS RECEIVABLE - Cont'd
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Consumer and other loans:
Consumer 5,392,437 5,180,374
Automobile 1,775,892 1,746,597
Savings 310,923 343,471
Commercial 576,716 427,152
Equity line of credit 387,489 422,706
Education 490,578 650,490
Other 5,315 3,730
------------ -----------
8,939,350 8,774,520
------------ -----------
100,395,680 89,013,574
Net deferred loan-origination fees 80,216 61,237
Allowance for loan losses (1,171,116) (970,584)
------------ -----------
Loans receivable, net $ 99,304,780 $88,104,227
============ ===========
</TABLE>
In the normal course of business, the Company 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
$131,800 and $241,800 at June 30, 1999 and 1998, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balance of
mortgage loans serviced for others was $98,895,447 and $104,078,886 at June 30,
1999 and 1998, respectively.
Advances from borrowers for property taxes and insurance maintained in
connection with the foregoing loan servicing were $759,222 and $642,061 at June
30, 1999 and 1998, respectively.
Mortgage servicing rights of $332,190 and $475,730 were capitalized during the
years ended June 30, 1999 and 1998, respectively. Amortization of mortgage
servicing rights totaled $94,550 and $45,314 for the years ended June 30, 1999
and 1998, respectively. The unamortized balance of $583,842 and $472,094
approximated the fair value of such rights at June 30, 1999 and 1998,
respectively, and is included in other assets in the accompanying consolidated
statement of financial condition.
The Company had loans serviced by others amounting to $3,304,357 and $2,103,342
at June 30, 1999 and 1998, respectively.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 970,584 $919,315 $799,861
Provision for loan losses 210,000 70,000 120,000
Charge-offs (13,393) (18,840) (16,207)
Recoveries 3,925 109 15,661
---------- -------- --------
BALANCE, END OF YEAR $1,171,116 $970,584 $919,315
========== ======== ========
</TABLE>
F-12
<PAGE>
NOTE C--LOANS RECEIVABLE - Cont'd
The recorded investment in impaired loans, for which there is no need for a
valuation allowance based upon the measure of the loan's fair value of the
underlying collateral at June 30, 1999 and 1998, was $9,000 and $-0-,
respectively. The average recorded investment in impaired loans during the year
ended June 30, 1999 and 1998, was $7,272 and $91,732, respectively. 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 and
$6,000 at June 30, 1999 and 1998, respectively. The amount of interest included
in interest income on such loans for the year ended June 30, 1999 and 1998,
amounted to approximately $8,000 and $4,000, respectively.
The allowance for losses on foreclosed real estate was $40,000 at June 30, 1999
and 1998.
NOTE D--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at June 30:
1999 1998
------------------------
Loans $ 717,051 $ 662,982
Investments securities 23,139 15,328
---------- ----------
$ 740,190 $ 678,310
========== ==========
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at June 30:
1999 1998
------------------------
Land $ 129,705 $ 129,705
Building and improvements 1,217,224 1,217,224
Furniture and equipment 1,412,315 1,320,642
----------- ----------
2,759,244 2,667,571
Less accumulated depreciation and amortization 1,383,456 1,248,158
----------- ----------
$ 1,375,788 $1,419,413
=========== ==========
NOTE F--DEPOSITS
Deposit account balances are summarized as follows at June 30:
<TABLE>
<CAPTION>
Weighted
Average Rate
At June 30, 1999 1998
------------------ ------------------
1999 Amount % Amount %
--------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing --- % $ 2,261,046 3.1% $ 1,880,089 2.7%
NOW 2.40 5,768,145 7.9 4,963,807 7.2
Money Market 3.30 3,408,708 4.7 2,640,176 3.8
Passbook savings 3.00 6,747,257 9.3 6,287,701 9.1
----------- ---- ----------- ----
18,185,156 25.0 15,771,773 22.8
</TABLE>
F-13
<PAGE>
NOTE F--DEPOSITS - Cont'd
<TABLE>
<CAPTION>
Weighted
Average Rate 1999 1998
At June 30, ---------------------- ------------------------
1999 Amount % Amount %
---------------- ---------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Certificates of deposit:
3.00 to 3.99% 3.43 32,705 0.1 7,036 ---
4.00 to 4.99% 4.76 18,499,455 25.5 92,616 0.1
5.00 to 5.99% 5.52 24,067,133 33.1 36,754,829 53.2
6.00 to 6.99% 6.17 11,505,633 15.8 15,623,561 22.6
7.00 to 7.99% 7.05 335,304 0.5 899,920 1.3
8.00 to 8.99% 8.00 14,107 --- 14,107 ---
----------- ----- ----------- -----
5.41 54,454,337 75.0 53,392,069 77.2
----------- ----- ----------- -----
$72,639,493 100.0% $69,163,842 100.0%
=========== ===== =========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $6,302,700 and $6,124,800 at June 30, 1999 and 1998,
respectively. Deposits over $100,000 are not federally insured.
The Company held deposits of approximately $1,544,800 and $1,628,700 for its
directors and officers at June 30, 1999 and 1998, respectively.
At June 30, 1999, contractual maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Stated Year ended June 30
Interest Rate 2000 2001 2002 2003 2004 After
- --------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 32,705 $ --- $ --- $ --- $ --- $ ---
4.00 to 4.99% 15,772,778 2,632,204 94,473 --- --- ---
5.00 to 5.99% 13,836,965 5,574,498 2,402,937 1,545,864 706,869 ---
6.00 to 6.99% 6,283,730 2,796,258 1,289,871 1,064,772 26,002 45,000
7.00 to 7.99% 335,304 --- --- --- --- ---
8.00 to 8.99% --- --- --- 14,107 --- ---
----------- ----------- ---------- ---------- -------- -------
$36,261,482 $11,002,960 $3,787,281 $2,624,743 $732,871 $45,000
=========== =========== ========== ========== ======== =======
</TABLE>
Interest expense on deposits are as follows:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NOW, Money Market and
Passbook savings accounts $ 416,420 $ 403,971 $ 449,175
Certificate accounts 3,054,834 3,068,967 3,056,011
---------- ---------- ----------
$3,471,254 $3,472,938 $3,505,186
========== ========== ==========
</TABLE>
F-14
<PAGE>
NOTE G--INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Current $ 798,000 $740,400 $479,500
Deferred (benefit) (151,400) (83,400) (8,500)
--------- -------- --------
$ 646,600 $657,000 $471,000
========= ======== ========
</TABLE>
In addition, the Company recorded deferred income tax (benefit) to equity
relating to unrealized gains and losses on investment securities available-for-
sale of $(9,993), $350, and $(7,719) for the years ended June 30, 1999, 1998
and 1997, respectively.
The provision for income taxes as shown on the consolidated statements of income
differs from amounts computed by applying the statutory federal income tax rate
of 34% to income before taxes as follows:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at
statutory rates $557,618 34.0% $610,702 34.0% $439,618 34.0%
Increase (decrease) resulting
from:
State income taxes, net
of federal benefit 63,716 3.9 51,874 2.9 31,020 2.4
Non-deductible merger expenses 28,208 1.7 --- --- --- ---
Other, net (2,942) (.2) (5,576) (.3) 362 ---
-------- ---- -------- ---- -------- ----
$646,600 39.4% $657,000 36.6% $471,000 36.4%
======== ==== ======== ==== ======== ====
</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
assets at June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 399,830 $ 315,430
Accrued compensation and benefits 309,654 211,720
Unrealized loss on available-for-sale securities 9,403 ---
Deferred tax liabilities
Depreciation (137,049) (131,450)
FHLB stock dividend (76,029) (76,040)
Unrealized gain on available-for-sale securities --- (590)
Gain on sale of loans (200,564) (175,260)
--------- ---------
NET DEFERRED TAX ASSET $ 305,245 $ 143,810
========= =========
</TABLE>
During 1996, the Small Business Job Protection Act (the "Act") was signed into
law. The Act eliminated the percentage of taxable income bad debt deductions
for thrift institutions for tax years beginning after December 31, 1995. The
Act provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture.
The Bank has provided for deferred income taxes for the reserve recapture after
1987; therefore the impact of this legislation will not have a material effect
on the Bank's financial statements.
F-15
<PAGE>
NOTE G--INCOME TAXES - Cont'd
Prior to the enactment of the Act, the Bank accumulated approximately $1,900,000
of retained earnings for which no deferred income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for income tax purposes only. If any of this amount is used other
than to absorb loan losses (which is not anticipated), the amount will be
subject to income tax at the current corporate rates.
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from FHLB, consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
5.81% due on or before November 19, 1998 $ --- $ 1,000,000
5.96% due on or before October 16, 1998 --- 1,000,000
5.95% due on or before November 19, 1999 1,000,000 1,000,000
6.00% due on or before November 17, 2000 1,000,000 1,000,000
6.10% due on or before November 19, 2002 1,000,000 1,000,000
6.79% due on or before August 15, 2012 924,953 967,040
6.61% due on or before September 19, 2012 927,560 969,975
6.35% due on or before October 3, 2012 929,793 972,803
6.31% due on or before November 19, 2012 1,866,547 1,952,373
5.98% due on or before January 8, 2013 2,817,153 2,947,816
5.99% due on or before August 9, 2013 964,801 ---
5.79% due on or before August 28, 2013 3,856,899 ---
5.39% due on or before October 21, 2013 2,911,719 ---
----------- -----------
$18,199,425 $12,810,007
=========== ===========
</TABLE>
Scheduled maturities of FHLB advances are as follows:
<TABLE>
<CAPTION>
Year ending
June 30 Amount
----------------------------------------------
<S> <C>
2000 $1,730,442
2001 1,775,308
2002 822,943
2003 $1,873,519
2004 927,218
Thereafter 11,069,995
-----------
$18,199,425
===========
</TABLE>
The Company has signed a blanket pledge agreement with the FHLB under which it
can draw advances of unspecified amounts. The Company 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-16
<PAGE>
NOTE I--REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgment by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and tier I capital to risk-weighted assets, and tier I capital to average
assets (all as defined in the regulations). Management believes, as of June 30,
1999, that the Bank meets all capital adequacy requirements to which it is
subject.
Based on its regulatory capital ratios at June 30, 1999, the Bank is categorized
as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain minimum
total risk-based, tier I risk-based, and tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
---------------------- ------------------------------------------
Amount Ratio Amount Ratio
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of June 30, 1999
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) $20,933,345 30.80% or equal to)$5,437,902 or equal to)8.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets) 20,079,704 29.54% or equal to) 2,718,951 or equal to)4.0%
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) 20,079,704 16.96% or equal to) 3,552,540 or equal to)3.0%
Tangible Capital (greater than (greater than
(to Adjusted Assets) 20,079,704 16.96% or equal to) 1,776,270 or equal to)1.5%
As of June 30, 1998
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) 19,381,304 30.44% or equal to) 5,094,366 or equal to)8.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets) 18,583,154 29.18% or equal to) 2,547,183 or equal to)4.0%
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) 18,583,154 16.89% or equal to) 3,299,938 or equal to)3.0%
Tangible Capital (greater than (greater than
(to Adjusted Assets) 18,583,154 16.89% or equal to) 1,649,969 or equal to)1.5%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------------------
Amount Ratio
----------------------------------------------
<S> <C> <C>
As of June 30, 1999
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) or equal to)$6,797,378 or equal to)10.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets) or equal to) 4,078,427 or equal to) 6.0%
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) or equal to) 5,920,900 or equal to) 5.0%
Tangible Capital (greater than (greater than
(to Adjusted Assets) or equal to) N/A or equal to) N/A
As of June 30, 1998
Total Risk-Based Capital
(to Risk Weighted Assets) (greater than (greater than
Tier 1 Capital or equal to) 6,367,958 or equal to)10.0%
(to Risk Weighted Assets) (greater than (greater than
Tier 1 Capital or equal to) 3,820,775 or equal to) 6.0%
(to Adjusted Assets) (greater than (greater than
Tangible Capital or equal to) 5,499,897 or equal to) 5.0%
(to Adjusted Assets) (greater than (greater than
or equal to) N/A or equal to) N/A
</TABLE>
NOTE J--EMPLOYEE BENEFITS
The Company has a 401(k) salary reduction plan that covers all employees meeting
specific age and length of service requirements. Under the plan, the Company
matches up to 3 percent of participating employees' salaries. Pension costs
recognized under the plan totaled $20,945, $20,982 and $19,215 for the years
ended June 30, 1999, 1998 and 1997, respectively.
F-17
<PAGE>
NOTE J--EMPLOYEE BENEFITS - Cont'd
In connection with the conversion from mutual to stock form, the Company
established an employee stock ownership plan for the benefit of participating
employees. Employees are eligible to participate upon attaining age twenty-one
and completing one year of service.
The ESOP borrowed $1,375,400 from the Company to fund the purchase of 137,540
shares of the Company's common stock. The purchase of shares of the ESOP was
recorded in the consolidated financial statements through a credit to common
stock and additional paid-in capital with a corresponding charge to a contra
equity account for the unreleased shares. The loan is secured solely by the ESOP
common stock and is to be repaid in equal quarterly installments of principal
and interest payable through September 2006 at 8.25% interest. The intercompany
ESOP note and related interest were eliminated in consolidation.
The Company makes quarterly contributions to the ESOP which are equal to the
debt service less dividends on unallocated ESOP shares used to repay the loan.
Dividends on allocated shares will be paid to participants of the ESOP. Shares
are released from collateral and allocated to participating employees based on
the proportion of loan principal and interest repaid and compensation of the
participants. Forfeitures will be reallocated to participants on the same basis
as other contributions in the plan year. Benefits are payable upon a
participant's retirement, death, disability or separation from service.
Effective with the date of the stock conversion, the Company adopted Statement
of Position ("SOP") 93-6. As shares are committed to be released from
collateral, the Company reports compensation expense equal to the average fair
value of the shares committed to be released. Dividends on allocated shares will
be charged to stockholders' equity. Dividends on unallocated shares are recorded
as a reduction to the ESOP loan. ESOP expense for the years ended June 30, 1999,
1998 and 1997 was $194,892, $263,733 and $242,004 respectively. The fair value
of unreleased shares based on market price of the Company's stock was
$1,787,604, and $2,082,567 at June 30, 1999 and 1998, respectively.
The number of ESOP shares at June 30, 1999, are summarized as follows:
Shares distributed to terminated participants 208
Allocated shares 30,910
Shares released for allocation 6,915
Unreleased shares 99,507
-------
137,540
=======
The Board of Directors has approved the adoption of a MRDP. Under the MRDP,
Common stock aggregating 68,761 shares may be awarded to certain officers and
directors of the Company and the Bank. All shares were awarded at June 30, 1999
and 1998. The awards will not require any payment by the recipients and will
vest over five years beginning one year after shareholder approval of the MRDP
(October 23, 1997). The Company purchased 22,600 shares of treasury stock and
issued 46,161 additional shares from authorized shares in August, 1998 to fully
fund the plan. At June 30, 1999, the Company had 1,650 shares forfeited by
terminated employees which had not been reallocated.
Deferred compensation, representing the shares market value at the date of award
has been recorded as a reduction of stockholders' equity and is being amortized
over a five year vesting period using an accelerated method. The unamortized
balance was $536,821 and $1,006,062 at June 30, 1999 and 1998 respectively. The
Company recognized $469,241 and $524,070 as salaries and benefits expense
relating to this plan for the years ended June 30, 1999 and 1998, respectively.
The Company has authorized and the shareholders have approved (October 23, 1997)
the adoption of a stock option plan. Under the stock option plan, options to
acquire 171,925 shares of the Company's stock may be granted to certain
officers, directors and employees of the Company and the Bank. The options will
enable the recipient to purchase stock at an exercise price equal to the fair
market value of the stock at the date of grant. On October 23, 1997 the Company
granted options for 171,925 shares for $19.75 per share. The options will vest
over the five years following the date of grant and are exercisable for up to 10
years.
F-18
<PAGE>
NOTE J--EMPLOYEE BENEFITS - Cont'd
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period, the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to disclose pro forma net income and income per share as if the
fair value-based method defined in SFAS No. 123 has been applied, while
continuing to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, under which
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
The Company has elected to apply the recognition provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. If the
Company's compensation expense for the incentive and nonstatutory stock options
had been determined based upon the fair value of the grant date consistent with
the methodology prescribed under SFAS No. 123, the Company's net earnings and
diluted earnings per share would have been reduced by approximately $172,000 or
$0.11 per share and $119,000 or $0.07 per share, for the year ended June 30,
1999 and 1998, respectively.
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model:
<TABLE>
<CAPTION>
1999 1998
-------------------
<S> <C> <C>
Fair value at grant date $ 8.09 $ 8.09
Assumptions:
Dividend yield 0.52% 0.52%
Volatility 30.98% 30.98%
Risk-free interest rate 5.37% 5.37%
Expected life 10 years 10 years
</TABLE>
Pro forma net earnings reflect only options granted and vested in fiscal 1999
and 1998. Therefore, the full impact of calculating compensation expense for
stock options under SFAS is not reflected in the pro forma net earnings amount
presented above because compensation expense is reflected over the options'
vesting period.
NOTE K--INCOME PER SHARE
The shares used in calculation of basic and diluted income per share are as
follows:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding 1,526,725 1,591,224 1,584,902
Stock options and MRDP 22,540 28,065 ---
--------- --------- ---------
1,549,265 1,619,289 1,584,902
========= ========= =========
</TABLE>
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company 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 Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The Company's exposure to credit
loss in the event of nonperformance by the other party is represented by the
contractual amount of those instruments. The Company does not generally require
collateral or other security on unfunded loan commitments until such time that
loans are funded.
F-19
<PAGE>
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - Cont'd
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 Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty. Such
collateral consists primarily of residential properties.
The Company had the following outstanding commitments at June 30, 1999:
<TABLE>
<S> <C>
Undisbursed portion of mortgage loans $11,409,230
Undisbursed equity line of credit 1,653,799
Commitments to originate mortgage loans with variable or pending interest rates 1,221,500
Commitments to originate mortgage loans with fixed interest rates ranging
from 6.625% to 8.50% 2,071,075
-----------
TOTAL $16,355,604
===========
</TABLE>
At June 30, 1999, the Company had amounts on deposit at banks and federal
agencies in excess of federally insured limits of approximately $12,984,000.
NOTE M--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company from
time to time becomes a defendant in certain claims and legal actions arising in
the ordinary course of business. At June 30, 1999 there were no such claims and
legal actions.
NOTE N--SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the Deposit Insurance Fund Act authorized the Federal
Deposit Insurance Corporation to impose a special one-time assessment on each
depository institution to recapitalize the Savings Association Insurance Fund to
a level commensurate with the Bank Insurance Fund. The special assessment
amounted to $427,263 and is included in federal insurance premiums in the
consolidated statement of income for June 30, 1997.
NOTE O--CONVERSION TO STOCK OWNERSHIP
On January 9, 1995, the Board of Directors of the Bank adopted a plan of
conversion pursuant to which the Bank converted from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank with the
concurrent formation of the holding company which acquired all of the common
stock of the Bank. On October 17, 1996, the Company sold 1,719,250 shares of
common stock at $10 per share to eligible purchasers, including depositors of
the Bank. Total proceeds from the conversion, after deducting conversion
expenses of $643,370 were $16,549,130 and are reflected as common stock and
additional paid-in capital in the accompanying consolidated statements of
financial condition. The Company utilized $8,274,565 of the net proceeds to
acquire all of the common stock of the Bank. The Company was also authorized to
issue 1,000,000 shares of $.01 par value preferred stock. At June 30, 1999, no
shares of preferred stock had been issued.
F-20
<PAGE>
NOTE O--CONVERSION TO STOCK OWNERSHIP - Cont'd
As part of the conversion, the Bank established a liquidation account for the
benefit of eligible depositors who continue to maintain their deposit accounts
in the Bank after conversion. In the unlikely event of a complete liquidation
of the Bank, and only in such event, each eligible depositor will be entitled to
receive a liquidation distribution from the liquidation account in the
proportionate amount of the then-current adjusted balance for deposit accounts
held before distribution may be made with respect to the Bank's capital stock.
The Bank may not declare or pay a cash dividend to the Company on, or repurchase
any of, its capital stock if the effect thereof would cause the retained
earnings of the Bank to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the liquidation account
does not restrict the use or application of retained earnings.
The Bank may not declare or pay cash dividends on, or repurchase any of, its
shares of common stock, if the effect would cause stockholder's equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
NOTE P--PLAN OF MERGER
The Company has entered into a plan of merger ("plan"), dated as of May 18,
1999, with Central Bancompany, Inc. ("Central"). The plan was subsequently
ratified by the shareholders on September 14, 1999. The plan is still subject
to regulatory approval.
Under the plan, the Company will merge with a subsidiary of Central, with the
Company being the surviving corporation. The Company will then merge into
Central, with Central being the surviving corporation. Immediately after the
merger the Bank will merge with The Central Trust Bank, with The Central Trust
Bank being the surviving institution. As a result of this transaction, the
Company and the Bank will cease to exist. Under the merger agreement, each
outstanding share of common stock will automatically become exchangeable for
$19.15 in cash.
As a result of the merger, the unvested restricted MRDP shares of the Company's
common stock will become vested and each share will be converted into the right
to receive $19.15 cash. The ESOP will be terminated by action of the Board of
Directors of the Company and the allocated and unallocated shares of common
stock will be converted into the right to receive $19.15 cash. The proceeds
from the unallocated shares will first be used to repay the full amount of the
outstanding ESOP indebtedness and any surplus cash remaining shall be allocated
as investment earnings to the participants to the extent permitted by applicable
law.
Through June 30, 1999, the Company has incurred $82,964 of cost associated with
the merger which are included in noninterest expenses. The Company anticipates
that the total expenses associated with the merger will amount to approximately
$353,000.
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No, 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of estimated fair value for financial instruments held by the
Company. Fair value estimates of the Company's financial instruments as of June
30, 1999 and 1998, including methods and assumptions utilized, are set forth
below.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein.
Cash and due from depository institutions: The carrying amounts approximate
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.
F-21
<PAGE>
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS - Cont'd
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
Company 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.
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 FHLB: The fair value is estimated by discounting the future cash
flows using the rates currently offered by the FHLB for advances of similar
maturities.
Advances from borrowers for taxes and insurance: The carrying value
approximates fair value.
Accrued interest payable: The carrying value approximates fair value.
Off-balance sheet instruments: The fair value of a loan commitment and a letter
of credit is determined based on the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreement and
the present creditworthiness of the counterparties. Neither the fees earned
during the year on these instruments nor their value at year-end are significant
to the Company'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 judgments 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 Company 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 June 30, 1999 and 1998 (dollars in thousands) are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------- ------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from depository institutions $13,290 $13,290 $13,778 $13,778
Investment securities 1,723 1,723 950 950
Stock in FHLB 986 986 643 643
Loans held-for-sale, net --- --- 3,649 3,649
Loans receivable, net 99,305 99,875 88,104 88,392
Accrued interest receivable 740 740 678 678
</TABLE>
F-22
<PAGE>
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS - Cont'd
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ -----------------
<S> <C> <C> <C> <C>
LIABILITIES
Transaction accounts 18,185 18,185 15,772 15,772
Certificates of deposit 54,454 54,771 53,392 53,509
Advances from FHLB 18,199 17,291 12,810 12,890
Advances from borrowers for property taxes
and insurance 1,136 1,136 985 985
Amounts collected for others on loans sold 681 681 499 499
Accrued interest payable 84 84 84 84
</TABLE>
NOTE R--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and
cash flows for Fulton Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30
1999 1998
-------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,023,411 $ 6,224,861
ESOP note receivable 1,094,975 1,202,372
Other assets 435,745 359,217
Investment in subsidiary 20,063,779 18,584,145
----------- -----------
TOTAL ASSETS $25,617,910 $26,370,595
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities $ 3,504 $ 26,854
Accrued MRDP --- 848,374
Stockholders' equity 25,614,406 25,495,367
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,617,910 $26,370,595
=========== ===========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Inception
Oct. 17, 1996
Year ended June 30 to June 30,
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Interest income $ 361,021 $ 465,280 $ 345,894
Expenses 733,828 694,694 106,334
----------- ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (372,807) (229,414) 239,560
Equity in undistributed earnings of subsidiary 1,267,662 1,281,596 694,526
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 894,855 1,052,182 934,086
----------- ----------- -----------
Income taxes (benefit) (98,600) (87,000) 91,000
----------- ----------- -----------
NET INCOME $ 993,455 $ 1,139,182 $ 843,086
=========== =========== ===========
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FULTON BANCORP, INC.
Date: September 24, 1999 By: /s/ Kermit D. Gohring
------------------------------------------
Kermit D. Gohring
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Kermit D. Gohring President, Chief September 24, 1999
- ----------------------------
Kermit D. Gohring Executive Officer and
Director (Principal
Executive Officer)
/s/ Richard W. Gohring Vice President and Director September 24, 1999
- ----------------------------
Richard W. Gohring (Principal Financial
Officer)
/s/ Bonnie K. Smith Secretary-Treasurer and September 24, 1999
- ----------------------------
Bonnie K. Smith Director (Principal
Accounting Officer)
/s/ Clifford E. Hamilton Director September 24, 1999
- ----------------------------
Clifford E. Hamilton
/s/ Billy Conner Director September 24, 1999
- ----------------------------
Billy Conner
/s/ David West Director September 24, 1999
- ----------------------------
David West
/s/ Dennis Adrian Director September 24, 1999
- ----------------------------
Dennis Adrian
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
<S> <C> <C>
Fulton Savings Bank, FSB 100% United States
Multi-Purpose Service Agency, Inc.(b) 100% Missouri
</TABLE>
______________
(a) The operations of the Company's subsidiaries are included in the Company's
consolidated financial statements.
(b) Owned directly by Fulton Savings Bank, FSB.
<PAGE>
EXHIBIT 23
[Moore, Horton & Carlson, P.C. Letterhead]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fulton Bancorp, Inc.
Fulton, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement Form S-8 of Fulton Bancorp, Inc. (File No. 333-39343) of our report
dated August 27, 1999 except for Note P, as to which the date is September 14,
1999, appearing in Form 10-KSB on pages F-2.
/s/ Moore, Horton & Carlson, P.C.
---------------------------------
Mexico, Missouri
September 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF FULTON BANCORP, INC. FOR THE YEAR ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 596
<INT-BEARING-DEPOSITS> 12,694
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,708
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 100,476
<ALLOWANCE> 1,171
<TOTAL-ASSETS> 118,651
<DEPOSITS> 74,456
<SHORT-TERM> 0
<LIABILITIES-OTHER> 381
<LONG-TERM> 18,199
0
0
<COMMON> 18
<OTHER-SE> 25,597
<TOTAL-LIABILITIES-AND-EQUITY> 118,651
<INTEREST-LOAN> 8,235
<INTEREST-INVEST> 142
<INTEREST-OTHER> 515
<INTEREST-TOTAL> 8,892
<INTEREST-DEPOSIT> 3,472
<INTEREST-EXPENSE> 4,543
<INTEREST-INCOME-NET> 4,349
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,054
<INCOME-PRETAX> 1,640
<INCOME-PRE-EXTRAORDINARY> 993
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 993
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 7.80
<LOANS-NON> 234
<LOANS-PAST> 215
<LOANS-TROUBLED> 644
<LOANS-PROBLEM> 989
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 14
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,171
<ALLOWANCE-DOMESTIC> 1,009
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 162
</TABLE>
