As filed with the Securities and Exchange Commission on November 5, 1997
Registration No. 333-36141
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
GUARANTY FEDERAL BANCSHARES, INC.
(Exact name of registrant as specified in charter)
Delaware 6035 43-1792717
- ------------------------------- ----------------- -------------------
(State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
1341 W. Battlefield, Springfield, Missouri 65807
(417) 889-2494
--------------
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Mr. James E. Haseltine
President and Chief Executive Officer
Guaranty Federal Bancshares, Inc.
1341 W. Battlefield, Springfield, Missouri 65807
(417) 889-2494
--------------
(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Charles E. Sloane, Esq.
Gregory J. Rubis, Esq.
Jean A. Milner, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
^
<PAGE>
Guaranty Federal Bancshares, Inc.
(Proposed Holding Company for Guaranty Federal Savings Bank)
LOGO] Up to 5,410,019 Shares of Common Stock (Anticipated Maximum)
Guaranty Federal Bancshares, Inc. (the "Company"), a Delaware
corporation, is offering up to 5,410,019 shares (which may be increased up to
6,221,522 shares under certain circumstances described below) of its common
stock, par value $0.10 per share (the "Common Stock"), in connection with (i)
the Offerings and (ii) the Exchange to be effected in connection with the
reorganization of Guaranty Federal Savings Bank ("Guaranty Federal" or the
"Bank"), and conversion of its mutual holding company into a stock holding
company structure, as a subsidiary of the Company as described herein. All
references herein to price or number of shares of the common stock of the Bank
are stated giving retroactive effect to the exercise of stock options.
References herein to the Bank or Guaranty Federal refer to Guaranty Federal
Savings Bank either prior to the Conversion and Reorganization or following the
Conversion and Reorganization, as the context may indicate. See "Glossary" for
an explanation of certain capitalized terms.
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE
CALL THE STOCK CENTER AT (417) ____________.
For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" beginning on page __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<TABLE>
<CAPTION>
====================================================================================================================================
Minimum Midpoint Maximum Adjusted
Maximum(4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price Per Share ....................... $10.00 $10.00 $10.00 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Shares (1)................... 2,805,000 3,300,000 3,795,000 4,364,250
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting Fees, Commissions $915,000 $915,000 $915,000 $915,000
and Expenses (2)..................... ($0.33 per share) ($0.28 per share) ($0.24 per share) ($0.21 per share)
- ------------------------------------------------------------------------------------------------------------------------------------
$27,135,000 $32,085,000 $37,035,000 $42,727,500
Net proceeds to Company (3)............ ($9.67 per share) ($9.72 per share) ($9.76 per share) ($9.79 per share)
====================================================================================================================================
</TABLE>
(1) Based upon the minimum, midpoint, maximum and 15% above the maximum of
the Offering Range, respectively. Does not include shares of Common
Stock issued to Public Stockholders in the Exchange.
(2) Consists of the estimated costs to the Primary Parties to be incurred
in connection with the Conversion and Reorganization of $915,000,
including marketing fees and expenses of $200,000 to be paid to
Friedman, Billings, Ramsey & Co., Inc. ("FBR") in connection with the
Offerings. See "The Conversion and Reorganization -Marketing
Arrangements." The actual fees and expenses may vary substantially from
the estimates. See "Pro Forma Data." The fees paid to FBR may be deemed
to be underwriting fees.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in the Offerings and other
factors. Does not give effect to purchases of shares of Conversion
Stock by the ESOP, which initially will be deducted from the Company's
stockholders' equity. For the effects of such purchases, see
"Capitalization" and "Pro Forma Data."
(4) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation
due to an increase in the Offering Range of up to 15% above the maximum
of the Offering Range to reflect changes in market and financial
conditions following commencement of the Offerings or to fill in part
or in whole the stock order of the ESOP. See "The Conversion and
Reorganization - Stock Pricing and Number of Shares To Be Issued."
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is _________ ___, 1997
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
This summary highlights selected information from this Prospectus and
may not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire Prospectus,
including the consolidated financial statements and the notes to the
consolidated financial statements of Guaranty Federal Savings Bank.
<TABLE>
<CAPTION>
<S> <C>
Common Stock to be Outstanding After
the Offerings and Exchange................................... 3,998,709 to 5,410,019 shares (1)
Common Stock Offered in the Offerings
("Conversion Stock")......................................... 2,805,000 to 3,795,000 shares (2)
Common Stock to be Received in Exchange...................... 1,193,709 to 1,615,019 shares (3)
Number of Shares of Bank to be Exchanged..................... 972,365 shares
Shares of Bank to be Canceled................................ 2,152,635 shares
Exchange Ratio............................................... From 1.2276 to 1.6609 for each Public Bank
Share (4)
Use of Proceeds.............................................. Purchase of all of the capital stock of the
Bank, and for general corporate purposes.
Dividends................................................... Expected annual rate of $0.30 per share to
be paid semi-annually.
Nasdaq National Market Symbol................................ GFED
Issuer....................................................... Guaranty Federal Bancshares, Inc.
Selling Agent................................................ Friedman, Billings, Ramsey & Co., Inc.
Issue Price.................................................. $10.00
Offering Period.............................................. The subscription offering will terminate at
__________ on December _____, and
1997 and the public stockholders' offering and
community offering will terminate no later
than January _____ 1998.
Purchase and Ownership Limitations........................... $250,000 of ^ Conversion Stock for any one
person (including Exchange Shares) ^;
$320,850 of Conversion Stock for ^ persons
associated or acting together (including
Exchange Shares).
</TABLE>
- ----------------------
(1) Represents the minimum and maximum of the Total Valuation Range. At the
maximum, as adjusted, of the Total Valuation Range, 6,221,522 shares
would be outstanding.
(2) Represents the minimum and maximum of the Offering Range. At the
maximum, as adjusted, of the Offering Range, 4,364,250 shares would be
offered. Excludes shares of Common Stock to be issued in exchange for
Public Bank Shares.
(3) Represents the minimum and maximum of the Total Valuation Range. At the
maximum, as adjusted, of the total Valuation Range, 1,857,272 shares
could be received in exchange of existing Bank Common Stock.
(4) Represents the minimum and maximum of the Total Valuation Range. At the
maximum, as adjusted, of the Total Valuation Range, 1.9101 shares would
be exchanged.
1
- --------------------------------------------------------------------------------
<PAGE>
The Companies
Guaranty Federal Bancshares, Inc.
1341 W. Battlefield
Springfield, Missouri 65807
(417) 889-2494
Guaranty Federal Bancshares, Inc. is not an operating company and has
not engaged in any significant business to date. It was formed in September 1997
as a Delaware-chartered corporation to be the holding company for Guaranty
Federal Savings Bank. The holding company structure will provide greater
flexibility in terms of operations, expansion and diversification. See page
_____.
Guaranty Federal Savings Bank
1341 W. Battlefield
Springfield, Missouri 65807
(417) 889-2494
Guaranty Federal Savings Bank is a community and customer oriented
federal savings bank. The Bank provides financial services to individuals,
families and small businesses. Historically, the Bank has emphasized residential
mortgage lending, primarily originating one- to four-family mortgage loans. See
pages _____ to _____.
Guaranty Federal Bancshares, M.H.C.
1341 W. Battlefield
Springfield, Missouri 65807
(417) 889-2494
Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company") was
formed in April 1995 as part of the Bank's reorganization into the mutual
holding company structure. The Mutual Holding Company owns 68.9% of the Bank's
issued and outstanding shares. See page _____.
Stock Purchases
The shares of Conversion Stock will be offered on the basis of
priorities. The shares will be offered first in a Subscription Offering to
depositor and borrower members. Any remaining shares will be offered first to
public stockholders of the Bank in a Public Stockholders' Offering and then to
certain members of the general public in a Community Offering. See pages ______
to _____.
Subscription Rights
Subscription rights may neither be sold nor assigned. Any transfer of
subscription rights is prohibited by law.
The Exchange
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Offering Range, the following: (i) the
total number of shares of Common Stock and Exchange Shares to be issued in the
Conversion and Reorganization, (ii) the percentage of the total
2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Common Stock represented by the Common Stock and the Exchange Shares, and (iii)
the Exchange Ratio. The table assumes that there is no cash paid in lieu of
issuing fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock to Exchange Shares to
be Issued(1) be Issued(1) Total Shares of
-------------------- -------------------- Common Stock Exchange
Amount Percent Amount Percent to be Outstanding(1) Ratio(1)
------ ------- ------ ------- -------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum................. 2,805,000 70.15% 1,193,709 29.85% 3,998,709 1.2276
Midpoint................ 3,300,000 70.15 1,404,364 29.85 4,704,364 1.4443
Maximum................. 3,795,000 70.15 1,615,019 29.85 5,410,019 1.6609
15% above maximum....... 4,364,250 70.15 1,857,272 29.85 6,221,522 1.9101
</TABLE>
- ------------------
(1) Assumes that exercisable options to purchase 14,383 shares of Bank
Common Stock at June 30, 1997 are not exercised prior to consummation
of the Conversion and Reorganization. Assuming that all of such options
are exercised prior to such consummation, the percentages represented
by the Conversion Stock and the Exchange Shares would amount to 69.84%
and 30.16%, respectively, and the Exchange Ratio would amount to
1.2222, 1.4379, 1.6536, and 1.9016, at the minimum, midpoint, maximum
and 15% above the maximum of the Offering Range, respectively.
Procedure for Purchasing Shares in the Offerings.
To help ensure that each purchaser receives a Prospectus at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery of the Prospectus in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus.
To purchase Conversion Stock in the Offerings, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks on the order form), must be received
by the Bank at any of its offices by 12:00 p.m., Missouri Time, on the
Expiration Date. Order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. In addition, the Bank may not
accept orders submitted or photocopied or telecopied order forms. The Primary
Parties have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. The waiver
of an irregularity on an order form, the allowance by the Primary Parties of a
correction of an incomplete or improperly executed order form, or the acceptance
of an order after 12:00 p.m. on the Expiration Date in no way obligates the
Primary Parties to waive an irregularity, allow a correction, or accept an order
with respect to any other order form. The interpretation by the Primary Parties
of the acceptability of an order form will be final. Once received, an executed
order form may not be modified, amended or rescinded without the consent of the
Primary Parties, unless the Offerings have not been completed within 45 days
after the end of the Subscription, Public Stockholders, and Community Offerings,
unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (December 31, 1995) or the Supplemental Eligibility Record Date
(September 30, 1997) or the voting record date (___________, 1997) must list on
the order form all
3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
accounts in which they have an ownership interest at the applicable eligibility
date, giving all names in each account and the account numbers.
Payment for subscriptions and orders may be made (i) in cash if
delivered in person at any office of the Bank, (ii) by check or money order or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. The Primary Parties also may elect to receive payment for shares of
Conversion Stock by wired funds, but are not required to do so. Funds will be
deposited in a segregated account at the Bank and interest will be paid on funds
made by cash, check or money order at the Bank's passbook rate of interest from
the date payment is received until completion or termination of the Conversion
and Reorganization. If payment is made by authorization of withdrawal from
certificate accounts, the funds authorized to be withdrawn from a Bank deposit
account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion and Reorganization, but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Conversion and Reorganization. The Bank will waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will be returned to the
subscriber.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for upon consummation of the Offerings, provided that there is in
force from the time of its subscription until such time, a loan commitment from
an unrelated financial institution or the Company to lend to the ESOP, at such
time, the aggregate purchase price of the shares for which it has subscribed.
A depositor interested in using his or her IRA funds to purchase
Conversion Stock must do so through a self-directed IRA. Since the Bank does not
offer such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Conversion Stock in
the Offerings. There will be no early withdrawal or IRS interest penalties for
such transfers. The new trustee would hold the Conversion Stock in a
self-directed account in the same manner as the Bank now holds the depositor's
IRA funds. An annual administrative fee may be payable to the new trustee.
Depositors interested in using funds in a Bank IRA to purchase Conversion Stock
should contact the Stock Center as soon as possible so that the necessary forms
may be forwarded for execution and returned prior to the Expiration Date.
4
<PAGE>
- --------------------------------------------------------------------------------
Structure of the Conversion and Reorganization. The following diagram
outlines the organizational structure of the Primary Parties prior to the
adoption of the Plan and their ownership interests:
-------------------------------------- --------------------------------
| | | |
|Guaranty Federal Bancshares, M.H.C. | | Holders of Public Bank Stock |
| | | |
-------------------------------------- --------------------------------
| |
| |
| 68.88% 31.12% |
| |
----------------------------------------------------------
| |
| Guaranty Federal Savings Bank |
| |
----------------------------------------------------------
In order to complete the Conversion and Reorganization, (i) Mutual
Holding Company (following its conversion to an interim federal stock savings
bank ("Interim A")) will merge with and into the Bank, with the Bank surviving
the merger (ii) the Company will form a subsidiary interim federal stock savings
bank ("Interim B") and Interim B will merge with the Bank, with the Bank
surviving the merger, resulting in the Bank as a subsidiary of the Company,
pursuant to which the Public Bank Shares will be converted into Exchange Shares,
and (iii) the Company will offer Common Stock.
The following diagram reflects the organizational structure and
ownership interests (after adjustment to give effect to the market value of
assets held by the Mutual Holding Company) after the Conversion and
Reorganization and assumes that there are no fractional shares and does not give
effect to purchases of Common Stock by Public Stockholders or the exercise of
outstanding stock options.
- --------------------------------- ----------------------------------------
| | | |
| Purchasers of Conversion Stock| | Former Holders of Public Bank Stock |
| | | |
- --------------------------------- ----------------------------------------
| |
| |
| 70.15% 29.85% |
| |
-------------------------------------------------------
| |
| Guaranty Federal Bancshares, Inc. |
| |
-------------------------------------------------------
|
| 100%
|
-------------------------------------------------------
| |
| Guaranty Federal Savings Bank |
| |
-------------------------------------------------------
For further information see "The Conversion and Reorganization."
5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Benefits to Management from the Conversion and Reorganization
Employees of the Bank will participate in the Conversion and
Reorganization through individual stock purchases and stock purchases by the
employee stock ownership plan, which is a form of retirement plan. The Company
intends to implement a restricted stock plan (in an amount equal to 4% of the
shares sold in the Offerings) and a stock option plan (in an amount equal to 10%
of the shares sold in the Offerings) following completion of the conversion,
which may benefit the President and other officers and directors. However, the
restricted stock plan and stock option plan may not be adopted until after the
conversion and are subject to stockholder approval and compliance with OTS
regulations. Officers and directors may be granted common stock under a
restricted stock plan without payment of cash. See page ____.
Risks in Owning Common Stock
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages _____ - _____^.
6
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables include certain information concerning the
financial position of the Bank (including consolidated data from operations of
subsidiaries) as of the dates indicated. Certain amounts have been reclassified
to conform to the current presentation. Dollar amounts are expressed in
thousands except per share data. This information is derived in part from, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes thereto of the Bank presented elsewhere in this Prospectus.
Selected Consolidated Financial Condition Data
The following table sets forth certain information concerning the
financial position of the Bank at the dates indicated:
<TABLE>
<CAPTION>
As of June 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................... $ 3,817 $ 2,675 $ 4,350 $ 3,569 $ 11,012
Investment securities....................................... 11,946 17,708 24,118 28,899 22,753
Mortgage-backed securities.................................. 15,814 20,067 13,855 14,138 24,101
Loans receivable, net....................................... 158,135 135,029 119,842 105,265 96,142
Accrued interest receivable................................. 1,312 1,381 1,274 1,124 1,066
Prepaid and other assets.................................... 1,964 1,913 1,802 2,675 60
Foreclosed assets............................................ 210 2 656 805 936
Premises and equipment....................................... 6,267 6,392 4,987 2,375 2,241
------- ------- ------- ------- -------
Total assets........................................ $199,465 $185,167 $170,884 $158,850 $158,311
======= ======= ======= ======= =======
LIABILITIES
Deposits..................................................... $151,246 $157,008 $139,595 $ 141,017 $142,529
Federal Home Loan Bank advances.............................. 18,151 -- 4,000 -- --
Other liabilities............................................ 2,578 1,573 1,245 1,271 1,265
------- ------- ------- ------- -------
Total liabilities................................... 171,975 158,581 144,840 142,288 143,794
------- ------- ------- ------- -------
STOCKHOLDERS' EQUITY
Common stock................................................. 3,125 3,125 3,125 --(1) --(1)
Additional paid-in capital................................... 3,687 3,556 3,900 --(1) --(1)
Retained earnings............................................ 18,620 18,646 17,892 16,562 14,517
------- ------- ------- ------- -------
25,432 25,327 24,917 16,562 14,517
Unrealized appreciation on available-for-sale securities, net 2,058 1,259 1,127 -- --
------- ------- ------- --------- -------
Total stockholders' equity.......................... 27,490 26,586 26,044 16,562 14,517
------- ------- ------- ------- -------
Total liabilities and stockholders' equity.......... $199,465 $185,167 $170,884 $158,850 $158,311
======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) The Bank had no common stock or capital prior to its conversion from the
mutual to stock form in April 1995.
7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Selected Operating Data
The following table summarizes the Bank's results of operations for
each of the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Interest income.................................. $14,711 $13,702 $11,637 $10,858 $11,480
Interest expense................................. 8,310 8,239 6,595 5,924 6,657
------ ------ ------ ------ ------
Net interest income.............................. 6,401 5,463 5,042 4,934 4,823
Provision (credit) for loan losses.............. -- (1,212) 16 14 (98)
-------- ------ ------ ------ ------
Net interest income after provision
(credit) for loan losses....................... 6,401 6,675 5,026 4,920 4,921
Noninterest income (loss)........................ 530 221 71 (50) 269
Noninterest expense (1).......................... 5,105 4,117 3,077 2,815 2,514
------ ------ ------ ------ ------
Income before income taxes....................... 1,826 2,779 2,020 2,055 2,676
Provision for income taxes....................... 664 1,026 690 637 815
------- ------ ------ ------ ---
Income before change in accounting principle..... 1,162 1,753 1,330 1,418 1,861
Change in accounting principle................... -- -- -- 628 --
-------- -------- ------ ------ ------
Net income....................................... $ 1,162 $ 1,753 $ 1,330 $ 2,046 $ 1,861
====== ====== ====== ====== ======
Earnings per common share ....................... $ 0.37 $ 0.56 $ 0.10(2) -- (3) -- (3)
======= ======= ====== ====== ======
Shares used to calculate earnings per share...... 3,149,062 3,125,933 3,125,000 -- (3) -- (3)
</TABLE>
- ----------------
(1) For 1997, includes a $932,000 special assessment for the recapitalization
of the SAIF.
(2) Consists of earnings following the conversion of the Bank from mutual to
stock form on April 7, 1995 through June 30, 1995.
(3) The Bank had no common shares prior to its conversion from the mutual to
stock form in April 1995.
8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Key Operating Ratios and Other Data
The table below sets forth certain performance ratios and other data of the
Bank for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net earnings
divided by average total assets) (1) .............. 0.61% 0.96% 0.81% 0.89% 1.19%
Return on average equity (net earnings
divided by average equity) (1) .................... 4.34 6.61 6.67 9.12 13.70
Net interest rate spread ............................ 2.87 2.48 2.71 2.86 2.96
Net interest margin (net interest income
as a percentage of average interest-earning assets) 3.53 3.13 3.19 3.18 3.24
Net interest income to average assets ............... 3.37 2.99 3.08 3.07 3.09
Average interest-earning assets to average
interest-bearing liabilities ...................... 114.16 113.80 111.57 108.53 106.78
Noninterest expense/average assets .................. 2.69 2.25 1.88 1.75 1.61
Efficiency ratio(2) ................................. 73.65 72.43 60.18 57.64 49.37
Quality Ratios:
Non-performing loans to total loans (3) ............. 0.74 0.27 1.47 1.92 2.25
Non-performing assets to total assets ............... 0.74 0.21 1.51 2.02 2.09
Allowance for loan losses to total loans (3) ........ 1.27 1.45 1.34 1.48 1.64
Capital Ratios:
Average equity to average assets ratio (average
equity divided by average total assets) ........... 14.10 14.49 12.16 9.96 8.75
Equity to assets at period end ...................... 13.78 14.36 15.24 10.43 9.17
Number of:
Mortgage loans serviced ............................. 2,476 2,280 2,211 2,120 1,988
Non-mortgage loans serviced ......................... 566 315 127 106 112
Deposit accounts .................................... 17,223 15,039 13,477 13,284 13,349
Offices (all full service) .......................... 4 4 3 3 3
Per Share Data(4)(5):
Book value per share ................................ $ 8.80 $ 8.51 $ 8.33 N/A N/A
Earnings per share .................................. 0.37 0.56 0.10 N/A N/A
Dividends declared per share ........................ 0.38 0.32 N/A N/A N/A
Dividend payout ratio (dividends declared
per share divided by net income per share)(6) ....... 102.70 57.14 N/A N/A N/A
</TABLE>
- -------------
(1) For 1997, had the $932,000 special assessment for the recapitalization of
the SAIF not been incurred, the return on average assets would have been
0.92% and the return on average equity would have been 6.42%.
(2) Noninterest expense to sum of net interest income and noninterest income.
(3) Total loans exclude mortgage/asset-backed securities.
(4) Based on outstanding shares at period end.
(5) The Bank had no common stock or capital prior to its conversion from the
mutual to stock form in April 1995.
(6) Includes dividends received by the Mutual Holding Company. Represents
dividends declared divided by net income.
- --------------------------------------------------------------------------------
9
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected financial data for the Bank at
September 30, and June 30, 1997, as well as a summary of operations and certain
performance ratios and other data for the three-month periods ended September
30, 1997 and 1996. The following information is derived from the unaudited
consolidated financial statements of the Bank, which in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial information for such
period. The operating data for the three month period ended September 30, 1997,
is not necessarily indicative of results to be expected for the fiscal year
ending June 30, 1998.
Selected Financial Condition Data
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash................................................................... $ 498,085 $ 417,485
Interest-bearing deposits in other financial institutions.............. 7,112,759 3,399,866
------------ ------------
Cash and cash equivalents......................................... 7,610,844 3,817,351
Available-for-sale securities.......................................... 3,384,000 3,360,000
Held-to-maturity securities............................................ 6,493,137 8,585,753
Mortgage-backed securities, held-to-maturity........................... 15,017,762 15,813,890
Loans held for sale.................................................... 5,141,247 5,903,002
Loans receivable, net.................................................. 162,705,674 152,232,295
Accrued interest receivable............................................
Loans............................................................. 1,038,505 996,014
Investments....................................................... 105,339 165,949
Mortgage-backed securities........................................ 143,320 149,598
Prepaid expenses and other assets...................................... 2,051,905 1,963,875
Foreclosed assets held for sale........................................ 210,155 210,155
Premises and equipment................................................. 6,236,696 6,267,157
------------ ------------
$210,138,584 $199,465,039
============ ============
LIABILITIES
Deposits............................................................... $147,078,478 $151,246,482
Federal Home Loan Bank advances........................................ 32,140,970 18,150,844
Advances from borrowers for taxes and insurance........................ 864,780 674,618
Accrued expenses and other liabilities................................. 1,215,292 666,427
Accrued interest payable............................................... 197,728 131,245
Income taxes payable................................................... 455,181 289,268
Deferred income taxes.................................................. 826,000 816,000
------------ ------------
Total liabilities................................................. 182,778,429 171,974,884
------------ ------------
STOCKHOLDERS' EQUITY
Capital Stock..........................................................
Common stock, $1 par value; authorized 8,000,000 shares; 3,125,000 3,125,000
issued and outstanding 3,125,000 shares.........................
Additional paid-in capital............................................. 3,713,233 3,687,356
Retained earnings, substantially restricted............................ 18,449,222 18,620,219
------------ ------------
25,287,455 25,432,575
Unrealized appreciation on available-for-sale securities, net of tax... 2,072,700 2,057,580
------------ ------------
27,360,155 27,490,155
------------ ------------
$210,138,584 $199,465,039
============ ============
</TABLE>
10
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Selected Operating Data
The following table summarizes the Bank's results of operations for
each of the periods indicated:
<TABLE>
<CAPTION>
Three Months Ending September 30,
------------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
INTEREST INCOME
Loans.................................................................. $3,451,331 $2,876,848
Investment securities.................................................. 97,250 144,744
Mortgage-backed securities............................................. 297,898 392,196
Other.................................................................. 93,023 84,303
---------- ----------
Total interest income............................................. 3,939,502 3,498,091
---------- ----------
INTEREST EXPENSE
Deposits............................................................... 1,830,713 1,913,929
Federal Home Loan Bank advances........................................ 357,445 51,899
---------- ----------
Total interest expense............................................ 2,188,158 1,965,828
---------- ----------
NET INTEREST INCOME 1,751,344 1,532,263
PROVISION FOR LOAN LOSSES.............................................. 33,352 --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES................................................................. 1,717,992 1,532,263
---------- ----------
NONINTEREST INCOME (LOSS)
Service charges........................................................ 120,895 42,188
Late charges and other fees............................................ 25,262 19,307
Gain on loans, investment securities and mortgage-backed securities.... 38,131 25,178
Income (expense) on foreclosed assets.................................. (92) (591)
Other income........................................................... 27,270 23,524
---------- ----------
Total noninterest income.......................................... 211,466 109,606
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits......................................... 581,274 628,795
Occupancy.............................................................. 163,256 164,171
SAIF deposit insurance premiums (1).................................... 22,970 1,022,492
Data processing fees................................................... 87,312 89,737
Advertising............................................................ 87,042 43,066
Other expense.......................................................... 178,909 112,339
---------- ----------
Total noninterest expense......................................... 1,120,763 2,060,600
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES..................................... 808,695 (418,731)
PROVISION (CREDIT) FOR INCOME TAXES.................................... 292,192 (169,331)
---------- ----------
NET INCOME (LOSS)...................................................... $ 516,503 $ (249,400)
========== ==========
EARNINGS (LOSS) PER SHARE.............................................. $ 0.17 $ (0.08)
========== ==========
</TABLE>
- -----------------
(1) For 1996, includes a $932,000 special assessment for the recapitalization
Of the SAIF.
11
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Key Operating Ratios and Other Data
The table below sets forth certain performance ratios and other data of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ending September 30,
---------------------------------
1997 1996
------------------ -------------
<S> <C> <C>
Performance Ratios:
Return on average assets (net earnings divided by average total assets) (1)(2) 1.03% (0.55)%
Return on average equity (net earnings divided by average equity) (1)(2)..... 6.87 (3.74)
Net interest rate spread..................................................... 3.01 2.85
Net interest margin (net interest income as a percentage
of average interest-earning assets)........................................ 3.68 3.54
Net interest income to average assets (2).................................... 3.51 3.37
Average interest-earning assets to average interest-bearing liabilities...... 114.20 115.05
Noninterest expense/average assets (2)....................................... 2.24 4.53
Efficiency ratio(3).......................................................... .57 1.26
Quality Ratios:
Non-performing loans to total loans (4)...................................... .63 .07
Non-performing assets to total assets........................................ .64 .20
Allowance for loan losses to total loans (4)................................. 1.21 1.40
Capital Ratios:
Average equity to average assets ratio (average equity divided by average total
assets).................................................................... 15.05 14.64
Equity to assets at period end............................................... 13.02 14.49
Number of:
Mortgage loans serviced...................................................... 2,532 2,336
Non-mortgage loans serviced.................................................. 571 371
Deposit accounts............................................................. 18,288 14,565
Offices (all full service)................................................... 4 4
Per Share Data(5)(6):
Book value per share......................................................... $8.76 $8.49
Earnings per share........................................................... 0.17 (0.08)
Dividends declared per share................................................. 0.22 --
Dividend payout ratio (dividends declared per share
divided by net income per share)(7)........................................ 129.41% --
</TABLE>
- ---------------------
(1) For 1996, had the $932,000 special assessment for the recapitalization of
the SAIF not been incurred, the return on average assets would have been
0.68% and the return on average equity would have been 4.64%.
(2) Annualized for both periods.
(3) Noninterest expense to sum of net interest income and noninterest income.
(4) Total loans exclude mortgage/asset-backed securities.
(5) Based on outstanding shares at period end.
(6) The Bank had no common stock or capital prior to its conversion from the
mutual to stock form in April 1995. (7) Includes dividends received by the
Mutual Holding Company. Represents dividends declared divided by net
income.
12
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Financial Condition
The Bank's total assets increased $10,673,545, or 5.4%, from
$199,465,039 as of June 30, 1997, to $210,138,584 as of September 30, 1997.
Securities available-for-sale increased $24,000, or 0.7% from
$3,360,000 as of June 30, 1997, to $3,384,000 as of September 30, 1997, and
securities held-to-maturity decreased $2,092,616, or 24.4%, from $8,585,753 as
of June 30, 1997 to $6,493,137 as of September 30, 1997. The Bank deployed these
funds to higher yielding loans. The Bank continues to hold 96,000 shares of
Federal Home Loan Corporation ("FHLMC") stock with a amortized cost of $94,000
in the available-for-sale category. As of September 30, 1997, the gross
unrealized gain on the stock was $3,290,000 an increase from $3,266,000 as of
June 30, 1997.
Mortgage-backed securities, held-to-maturity, decreased $796,128 or
5.0%, from $15,813,890 as of June 30, 1997, to $15,017,762, as of September 30,
1997. The decrease is attributable to prepayments received on various pools of
mortgage-backed securities during the three months ending September 30, 1997. As
of September 30,1997, and June 30, 1997, there were no mortgage-backed
securities classified as available-for-sale.
Net loans receivable increased by $10,473,379, or 6.9%, from
$152,232,295, as of June 30, 1997, to $162,705,674, as of September 30, 1997,
and loans held-for-sale decreased by $791,755, or 12.9% from $5,903,002 as of
June 30, 1997 to $5,141,247 as of September 30, 1997. Growth consisted of loans
secured by both owner and non-owner occupied residential real estate, which
increased by $3,139,000. In addition, construction loans increased by
$2,179,000, this was primarily due to an increase of $1,508,000 on loans for the
construction of multi-family units. Also, the Bank is participating in a loan
secured by three motels located in the Kansas City, Missouri area. This resulted
in a $3,294,000 increase in nonresidential real estate loans. Growth in loans
receivable is anticipated to continue and represents a major part of the Bank's
planned asset growth.
Allowance for loan losses increased $12,991 or 0.6% from $2,177,009 as
of June 30, 1997, to $2,190,000 as of September 30, 1997. The allowance
increased due to an increase in the provision for loan losses in excess of
charge-offs for the period. The allowance for loan losses as of September 30,
1997 and June 30, 1997 was 1.2%, and 1.3% respectively, of total loans
outstanding. As of September 30, 1997, the allowance for loan losses was 321.4%
of loans past due 90 days or more versus 262.8% as of June 30, 1997.
Fair value of foreclosed assets held-for-sale as of June 30, 1997 and
September 30, 1997, was $210,155. The properties in this category include a
duplex acquired in July 1996, and a single family residence acquired in June
1997. Management believes that these units will sell with no further loss to the
Bank.
Premises and equipment decreased $30,461, or 0.5%, from $6,267,157 as
of June 30, 1997, to $6,236,696 as of September 30, 1997.
The Bank intends to open a new branch office location in the southern
section of Springfield during the second quarter of fiscal year 1998. This
branch, located on a site of land purchased for a
13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
permanent branch office facility, will be a modular building leased for a two
year period, thus requiring only moderate investment in fixed assets and
equipment. The Bank estimates the investment will be approximately $50,000.
During the two year lease, the Bank intends to examine whether to extend the
lease of the modular office, or commence construction of a permanent branch
office facility.
Deposits decreased $4,168,004 or 2.8%, from $151,246,482 as of June 30,
1997, to $147,078,478 as of September 30, 1997. For the three months ending
September 30, 1997, checking and passbook accounts increased by $3,878,115, or
13.5% while certificates of deposits decreased by $8,046,119, or 6.6%. The
majority of this increase in checking and passbook accounts can be attributed to
an aggressive marketing campaign initiated in early 1997 designed to attract
checking deposit customers. The decrease in certificate of deposits can be
attributed to management's decision to allow high cost certificate of deposit
accounts to run off and replace these funds with FHLB advances at an overall
lower marginal cost.
As a result of the decrease in deposits, and the continued increase in
loan demand, FHLB advances increased $13,990,126 or 77.1%, from $18,150,844 as
of June 30, 1997, to $32,140,970 as of September 30, 1997. As of September 30,
1997, the Bank had the ability to borrow an additional $60.0 million from the
FHLB.
Accrued expenses and other liabilities increased $548,865 or 82.4% from
$666,427 as of June 30, 1997, to $1,215,292 as of September 30, 1997. The
majority of this increase is due to a $0.22 per share dividend payable to
stockholders of record September 12, 1997, totaling $687,500.
Stockholders' equity (including unrealized appreciation on securities
available-for-sale, net of tax) decreased $130,000, or 0.5%, from $27,490,155 as
of June 30, 1997, to $27,360,155 as of September 30, 1997. On a per share basis,
stockholders' equity decreased from $8.80 as of June 30, 1997 to $8.75 as of
September 30, 1997. This decrease is primarily due to declaration of dividends
totaling $687,500. Stockholders' equity includes no contributed capital from the
issuance of 2,152,635 shares of common stock to Guaranty Federal Bancshares, M.
H. C..
Results of Operations - Comparison of Three Month Periods
Ended September 30, 1997 and 1996
Net income for the three months ended September 30, 1997 was $516,503,
as compared to net loss of $249,400 for the three months ended September 30,
1996 which represents a increase in earnings of $765,903 for the three month
period. This increase is primarily due to the one-time assessment by the Federal
Deposit Insurance Corporation ("FDIC") on Savings Association Insurance Fund
("SAIF") assessable deposits. Legislation was signed into law on September 30,
1996, requiring all SAIF-insured institutions to pay a one-time special
assessment of 65.7 cents for every $100 of deposits. This special assessment
decreased net income for the quarter ended September 30, 1996 by approximately
$559,000.
Interest Income. Total interest income for the three months ended
September 30, 1997, increased $441,411 or 12.6% as compared to the three months
ended September 30, 1996. For the three month period, the average yield on
interest earning assets increased 16 basis points to 8.23% and the average
balance outstanding increased $18,050,000.
14
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Interest Expense. Total interest expense for the three months ended
September 30, 1997, increased $222,330 or 11.3% when compared to the three
months ended September 30, 1996. For the three month period, the average cost of
interest bearing liabilities increased 6 basis points to 5.22% while the average
balance outstanding increased $16,926,000.
Net Interest Income. Net interest income for the three months ended
September 30,1997, increased $219,081, or 14.3% when compared to the three
months ended September 30, 1996. The increase in net interest income was the
result of the increase in interest rate spread from 2.91 basis points for the
quarter ending September 30, 1996, to 3.01 basis points for the quarter ending
September 30, 1997.
Provision for Loan Losses. Based primarily on the continued growth of
the loan portfolio management decided to increase the loan loss reserve through
a provision for loan loss of $33,352. There were no provisions for loan losses
made during the three months ended September 30, 1996. The Bank will continue to
monitor its allowance for loan losses and make future additions based on
economic and regulatory conditions. Although the Bank maintains its allowance
for loan losses at a level which it considers to be sufficient to provide for
losses, there can be no assurance that future losses will not exceed internal
estimates. In addition, the amount of the allowance for loan losses is subject
to review by regulatory agencies which can order the establishment of additional
loss provisions.
Noninterest Income. Noninterest income increased $101,860 for the three
months ended September 30, 1997, or 92.9% compared to the three months ended
September 30, 1996. The increase was primarily due to the increase in checking
account customers which has resulted in more service charge income. Service
charges on checking accounts increased $78,707 for the three months ended
September 30, 1997, or 186.6% compared to the three months ended September 30,
1996.
Noninterest Expense. Noninterest expense decreased $939,837 for the
three months ended September 30, 1997 or 45.6% as compared to the three months
ended September 30, 1996. The primary cause for this decrease was the one-time
assessment by the FDIC on all SAIF assessable deposits as of March 31, 1995.
This assessment resulted in a $931,989 addition to SAIF premiums during the
three month period ended September 30, 1996. The total SAIF premiums for the
three month period ending September 30, 1996, was $1,022,492, as compared to
$22,970 for the three month period ending September 30, 1997.
Advertising expense increased $43,976 for the three months ended
September 30, 1997, or 102.1% when compared to the same period in 1996. The
primarily reason for this increase was the additional expense in connection with
the marketing campaign designed to attract checking accounts which was initiated
in early 1997.
Total noninterest expenses excluding SAIF premiums increased $59,685 or
5.7% over the same period in 1996.
Provision for Income Taxes. There was a $461,523 increase in the
provision for income taxes for the three months ended September 30, 1997, as
compared to the same period in 1996. This increase was primarily due to the
decrease in before tax income due to the FDIC assessment for the three month
period ended September 30, 1996.
15
- --------------------------------------------------------------------------------
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby,
prospective investors should carefully consider the matters presented below in
addition to those discussed elsewhere in this Prospectus.
Intent to Remain Independent; Unsuitability as Short-Term Investment
The directors and executive officers of the Company and the Bank
believe that it is in the best interests of the Bank, the Company and the
Company's shareholders for the Company and the Bank to remain independent, with
the objective of long-term enhancement of shareholder value. Accordingly, an
investment in the Common Stock of the Company may not be suitable for investors
who are seeking short-term returns through a sale of the Company.
Certain Anti-Takeover Provisions
Certain provisions of the Company's certificate of incorporation and
bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation and serve to
render a hostile takeover more difficult. These provisions provide for, among
other things, limits on voting rights, supermajority voting, authorized but
unissued shares of common and preferred stock, staggered terms for members of
the board of directors, noncumulative voting for directors, limits on the
calling of special meetings, and restrictions on certain business combinations.
In particular, the Company's Certificate of Incorporation provides that
beneficial owners of more than 10% of the Company's outstanding common stock may
not vote the shares owned in excess of the 10% limit, and for a period of five
years from the completion of the Conversion and Reorganization, no person may
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of the Company. The impact of
these provisions on the submission of a proxy on behalf of a beneficial holder
of more than 10% of the Common Stock is to disregard for voting purposes and
require divestiture of the amount of stock held in excess of 10% (if within five
years of the Conversion and Reorganization more than 10% of the Common Stock is
beneficially owned by a person). Unless the grantor of a revocable proxy is an
affiliate or an associate of a 10% holder or there is an arrangement, agreement,
or understanding with such 10% holder, these provisions would not restrict (1)
the ability of a 10% holder of revocable proxies to exercise revocable proxies
for which the 10% holder is neither a beneficial nor record owner or (2) the
ability of a beneficial owner of less than 10% of the Common Stock to solicit
revocable proxies during a public proxy solicitation for a particular meeting of
stockholders and vote such proxies. However, these provisions may discourage
potential proxy contests. Additional restrictions apply after the completion of
the Conversion and Reorganization.
Furthermore, the Bank intends to enter into employment agreements with
nine members of management of the Bank whereby such individuals would be
entitled to lump sum compensation in the event of termination of employment
following a change-in-control of the Bank or the Company. Assuming there was a
change-in-control on June 30, 1997, and the agreements were triggered, the eight
individuals would be entitled to aggregate compensation of approximately $1.2
million. See "Management of the Bank - Executive Compensation - Employment
Agreements."
Despite the belief of the Bank and the Company that such anti-takeover
provisions benefit stockholders of the Company, such provisions may have the
effect of discouraging a future takeover
16
<PAGE>
attempt not approved by the Company's Board of Directors, pursuant to which
stockholders might receive a substantial premium for their shares over
then-current market prices. As a result, stockholders who might desire to
participate in such a transaction might not have any opportunity to do so. Such
provisions will also render the removal of the Company's Board of Directors and
management more difficult and, therefore, may serve to perpetuate current
management. The Boards of Directors of the Bank and the Company, however, have
concluded that the potential benefits outweigh the possible disadvantages,
because they believe that such provisions encourage potential acquirors to
negotiate directly with the Boards of Directors. The Boards of Directors believe
that they are in the best position to act on behalf of all stockholders.
Further, the Board of Directors of the Company has the ability to waive certain
restrictions on acquisition, provided that the proposed acquisition is approved
by a majority of the disinterested members of the Board of Directors. See
"Certain Restrictions on Acquisition of the Company."
Construction Lending Risks
Prompted by demand for new residential housing units in its market
area, the Bank has been an active originator of residential construction loans,
predominantly speculative loans to approximately 48 local residential builders.
Residential construction loans constituted $25,149,000 or 14.71% of the loan
portfolio at June 30, 1997. Subject to market conditions, the Bank intends to
continue originating residential construction loans.
Construction lending generally involves greater credit risk than one-to
four-family mortgage lending. Construction loans generally have higher loan
balances than one-to four-family mortgage loans. In addition, the potential for
cost overruns because of the inherent difficulties in estimating construction
costs and, therefore, collateral values and the difficulties and costs
associated with monitoring construction progress, among other things, are major
contributing factors to this greater credit risk. Speculative construction loans
have the added risk that there is not an identified buyer for the completed home
when the loan is originated, with the risk that the builder will have to service
the construction loan debt and finance the other carrying costs of the completed
home for an extended time period until a buyer is identified. Furthermore, the
demand for construction loans and the ability of construction loan borrowers to
service their debt depends on the state of the local economy, and market
interest rate levels. A material downturn in economic conditions would be
expected to have a material adverse effect on the credit quality of the
construction loan portfolio, and may require management to establish additional
provisions for loan losses, which would have a material adverse effect on net
income. See "Business of the Bank - Lending Activities - Construction Loans."
Potential Impact of Changes in Interest Rates
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, primarily loans and securities, and its interest
expense on interest-bearing liabilities, primarily deposits and other borrowings
(the interest rate spread). The Bank's loans and investments generally have
longer effective maturities than its deposits. As a result, the yield on
interest-earning assets will adjust to changes in interest rates at a slower
rate than the cost of the Bank's interest-bearing liabilities. During periods of
increasing interest rates, net interest income is likely to be negatively
affected because the Bank's interest rate sensitive liabilities would be
expected to reprice faster than its interest rate sensitive assets, causing a
decline in the Bank's interest rate spread and margin. This would result from an
increase in the Bank's cost of funds that would not be immediately offset by an
increase in its yield on loans and investments. An increase in
17
<PAGE>
the cost of funds without an equivalent increase in the yield on funds would
tend to reduce net interest income. In times of falling interest rates, the lag
in repricing of interest rate sensitive assets could be expected to have the
opposite effect on the Bank. However, falling interest rates may result in the
refinancing by customers of loans at lower interest rates or the investment of
funds by the Bank at lower interest rates, either of which would reduce the
interest rate spread and margin of the Bank and, therefore, reduce net interest
income. For additional discussion of interest rate risk and the Bank's
management of its interest-bearing liabilities and interest-earning assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management Strategy" and "- Asset/Liability Management." As
discussed under "Business of the Bank," more than 87% of the mortgage loan
portfolio consists of adjustable rate loans due more than one year after June
30, 1997, and more than 53% of the mortgage-backed securities portfolio are
secured by adjustable rate loans.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion and Reorganization
Return on average equity (net income divided by average equity) is a
ratio used by many investors to compare the performance of a savings institution
to its peers. As a result of the Conversion and Reorganization, the Company's
equity will increase substantially. The Company's expenses also will increase
because of the costs associated with the employee stock ownership plan,
restricted stock ownership plan, and the costs of being a public company.
Because of the increases in equity and expenses, return on equity may decrease
as compared to performance in previous years. Initially, the Company and the
Bank intend to invest the net proceeds in short term investments which generally
have lower yields than residential mortgage loans. For the years ended June 30,
1997 and 1996, return on average equity was 4.3% (6.4% without the SAIF
assessment) and 6.6%, respectively. A lower return on equity could reduce the
trading price the Company's shares. See "Use of Proceeds."
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of common stock could dilute the
interests of prospective stockholders of the Company or existing stockholders of
the Bank who will become stockholders of the Company following consummation of
the Conversion and Reorganization, as noted below.
The number of shares to be sold in the Conversion and Reorganization
may be increased to up to 4,364,250 shares as a result of an increase in the
Offering Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Offerings, or to fill in whole or
in part the stock order of the ESOP. An increase in the number of shares will
decrease net income per share and stockholders' equity per share. See
"Capitalization" and "Pro Forma Data."
The ESOP intends to purchase 8% of the Conversion Stock to be issued in
the Offerings (excluding exchanged shares). In the event that there are
insufficient shares available to fill the ESOP's order due to an
oversubscription by Eligible Account Holders, and the ESOP is unable to fulfill
its subscription through the use of its first priority with respect to Common
Stock sold above the maximum of the Offering Range, the Company may issue
authorized but unissued shares of common stock to the ESOP after the conclusion
of the Offerings in an amount sufficient to fill the ESOP's order or the ESOP
may purchase shares in the open market. In the event that additional shares of
Common Stock are issued to the ESOP to fill its order, stockholders would
experience dilution of their ownership interests by 5.3%, assuming the ESOP
purchased no shares in the Offerings) and per share stockholders' equity and per
share net income would decrease as a result of an increase in the number of
outstanding shares
18
<PAGE>
of Common Stock. See "Management of the Bank - Certain Benefits - Employee Stock
Ownership Plan" and "The Conversion and Reorganization - The Offerings -
Subscription Offering - ESOP (Second Priority)."
The 1998 RSP intends to acquire an amount of common stock equal to 4.0%
of the shares of Conversion Stock issued in the Offerings. Such shares of common
stock may be acquired in the open market with funds provided by the Company, if
permissible, or from authorized but unissued shares of Common Stock. In the
event that additional shares of common stock are issued to the 1998 RSP,
resulting in a 2.8% overall increase in outstanding shares of common stock,
stockholders would experience dilution of their ownership interests by 2.7% and
per share stockholders' equity and per share net income would decrease. See "Pro
Forma Data" and "Management of the Company - Proposed Future Stock Benefit Plans
- - 1998 Management Recognition Plan."
The Company intends to reserve for future issuance pursuant to the 1998
Option Plan a number of authorized shares of common stock equal to an aggregate
of 10% of the Conversion Stock issued in the Offerings (330,000 shares, based on
the midpoint of the Offering Range). In the event that such shares are issued,
resulting in a 7.0% overall increase in outstanding shares of common stock,
stockholders would experience dilution of their ownership interests by 6.6% and
per share stockholders' equity and per share net income would decrease. See "Pro
Forma Data" and "Management of the Company - Proposed Future Stock Benefit Plans
- - 1998 Stock Option Plan."
The Bank previously adopted and maintains the 1994 Stock Option Plan
("1994 Option Plan"), which reserved for issuance 97,237 shares of Bank Common
Stock. As of June 30, 1997, no shares had been issued as a result of the
exercise of options granted under the 1994 Option Plan. Upon consummation of the
Conversion and Reorganization, this plan will become a plan of the Company and
common stock of the Company will be issued in lieu of Bank Common Stock pursuant
to the terms of such plans. Assuming an exchange ratio of 1.4443, the 97,237
unexercised options under the 1994 Option Plan at June 30, 1997 would be
converted into options to purchase 140,439 shares of common stock. See
"Management of the Bank - Certain Benefits -1994 Stock Option Plan."
Voting Power of Directors and Executive Officers
Directors and executive officers of the Company, who currently hold
135,205 shares (including unexercised stock options) or 4.3% of the outstanding
Bank Common Stock, expect to hold approximately 5.5% to 5.1% of the shares of
common stock outstanding upon consummation of the Conversion and Reorganization
(based upon the exchange of Bank Common Stock and anticipated purchases of
Conversion Stock at the minimum and the maximum of the Offering Range,
respectively). See "Beneficial Ownership of Capital Stock." Executive officers
of the Company, as well as other eligible employees of the Company, also will
hold shares of common stock which are allocated to the accounts established for
them pursuant to the ESOP. The ESOP intends to purchase 8% of the Conversion
Stock to be issued in the Offerings (264,000 shares based on the midpoint of the
Offering Range). Under the terms of the ESOP, shares of common stock that have
not yet been allocated to the accounts of employee participants in the ESOP, or
for which no voting instructions have been received, will be voted by the
trustees of the ESOP, who are directors of the Company in accordance with the
direction of the ESOP Committee.
The Bank's 1994 Recognition and Retention Plan and Trust ("1994 RRP")
purchased 38,895 shares of Bank Common Stock in connection with the MHC
Reorganization. In addition, subject to
19
<PAGE>
stockholder approval following the consummation of the Conversion and
Reorganization, the Company expects to acquire common stock on behalf of the
1998 RSP, a non-tax qualified restricted stock plan, in an amount equal to 4.0%
of the Conversion Stock issued in the Offerings (132,000 shares based on the
midpoint of the Offering Range). Under the terms of the 1994 RRP and 1998 RSP,
directors and executive officers are allocated shares of common stock over which
they have voting power and the trustees of such plan, who also are directors of
the Company, will have authority to vote all shares held by such plan that have
not been earned and distributed, as directed by the trustees of the plan.
Subject to stockholder approval, the Company also intends to reserve for future
issuance pursuant to the 1998 Option Plan a number of authorized shares of
common stock equal to an aggregate of 10% of the Conversion Stock issued in the
Offerings (330,000 shares, based on the midpoint of the Offering Range). These
options are in addition to the unexercised options for 97,237 shares of Bank
Common Stock previously granted under the 1994 Option Plan at June 30, 1997
adopted in connection with the MHC Reorganization. See "Management of the
Company - Proposed Future Stock Benefit Plans" and "Management of the Bank -
Certain Benefits."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management. Moreover, such voting control will enable the
Company's Board of Directors and management to block approval of transactions
requiring the approval of 80% of the stockholders. See "Comparison of
Stockholders' Rights Amendment of Governing Instruments" and "Certain
Restrictions on Acquisition of the Company.
Competition
The Bank faces significant competition both in making loans and in
attracting deposits. The State of Missouri has a high density of financial
institutions, several of which are branches of significantly larger institutions
that have greater financial resources than the Bank. All of these institutions
are competitors of the Bank to varying degrees including large commercial banks
and thrift institutions with headquarters outside of Missouri that have branch
offices in the market area. The Bank's competition for loans comes principally
from other savings institutions, credit unions, regional bank and thrift holding
companies and commercial banks located in its primary market area. Significant
competition for the Bank's other deposit products and services comes from money
market mutual funds, brokerage firms, and insurance companies. The primary
factors in competing for loans are interest rates and loan origination fees and
the range of services offered by various financial institutions. Competition for
origination of real estate loans normally comes from other savings institutions,
commercial banks, mortgage bankers, mortgage brokers and insurance companies.
The Bank's primary competition consists of financial institutions with
offices located near the Bank's branch offices and includes five thrift
institutions and 17 commercial banks and 12 credit unions.
See "Business of the Bank - Competition."
Geographic Concentration
The primary market area of the Bank is Greene County, Missouri. As a
result, economic conditions in this one county can significantly impact the
deposit and loan activities of the Bank. Although this area is economically
diversified, an economic downturn in this area could negatively impact the
operations of the Bank. See "Business of the Bank - Market Area."
20
<PAGE>
Expected Increase in the Provision for Loan Losses
The Bank recorded no provisions for loan losses during the 1997 fiscal
year and recorded a $1,211,502 credit to the provision for the 1996 fiscal year
due to net recoveries of amounts previously charged to income. As a result, net
income reported during recent years by the Bank has been favorably impacted by
the nonrecurring credit and the lack of provisions. Provisions for loan losses
reduce net income and credits increase net income.
It is expected that provisions for loan losses will be taken within the
next year if the past growth in the loan portfolio continues or if conditions
otherwise necessitate additional provisions. These expected provisions will
negatively impact net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operation -
Comparison of Years Ended June 30, 1997 and 1996 - Provision for Loan Losses."
Possible Delay in Completing the Offerings
The Bank intends to end the Offerings on _________________ and complete
the Conversion and Reorganization before _____________. However, certain events
are beyond the control of the Primary Parties, including, among other things,
market conditions, subscriber interest, an update of the appraisal after the end
of the Offerings, the results of meetings of stockholders and members of the
Bank and Mutual Holding Company, and regulatory review and approval. If the
Offerings are extended beyond _____________, completion of the Conversion and
Reorganization will be delayed. See "The Conversion - Required Approvals." The
Offerings may not extend beyond ___________ without the approval of the OTS and
the OTS may require a resolicitation of subscribers if the Conversion and
Reorganization cannot be completed before __________________. Solely in the
event of a resolicitation, subscribers will have the right to confirm, increase,
decrease, or rescind their subscription and the failure of a subscriber to
provide an affirmative response will result in the rescission of the
subscription and the prompt return of funds, including interest at the Bank's
passbook rate, following the end of the resolicitation period.
Subscribers should be aware that payment for shares, whether made by
check, money order, or authorization for withdrawal from accounts maintained at
the Bank, will be unavailable to the subscriber until the Offerings are
completed or terminated.
Regulatory Oversight and Proposed Legislation
The Bank is subject to extensive regulation, supervision, and
examination by the OTS as its chartering authority and primary federal
regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which
insures its deposits up to applicable limits. The Bank is a member of the
Federal Home Loan Bank ("FHLB") of Des Moines. As the savings and loan holding
company of the Bank, the Company is also subject to regulation and oversight by
the OTS. Such regulation and supervision governs the activities in which an
institution can engage and is intended primarily for the protection of the FDIC
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities. See "Regulation."
A bill has been passed by the House Banking Committee that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC")
and eliminate the federal thrift charter. All federal thrifts, such as the Bank,
would be forced to convert to national banks, state banks or state
21
<PAGE>
thrifts. Under current law and regulations, a unitary savings and loan holding
company, such as the Company, which has only one thrift subsidiary that meets
the qualified thrift lender ("QTL") test, such as the Bank, has essentially
unlimited investment authority. See "Regulation - Company Regulation."
Legislation has also been proposed which, if enacted, would limit the
non-banking related activities of the savings and loan holding company to those
activities permitted for bank holding companies.
Lack of IRS Private Letter Ruling
The IRS has placed transactions which involve certain "downstream
mergers" (such as the merger of the Mutual Holding Company, after the
Conversion, into the Bank) into a "no rule" area. However, the Bank has obtained
a tax opinion from counsel, which supports the tax-free nature of the
transaction, but is not binding upon the IRS. Management does not believe the
fact that the IRS has placed this transaction into a "no rule" area will result
in the IRS treating the Conversion and the Reorganization as taxable
transactions. If the IRS determines that the tax effects of the transaction are
to be treated differently from that presented in the tax opinion, the Mutual
Holding Company, Bank and stockholders may be subject to adverse tax
consequences as a result of the Conversion and Reorganization.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Primary Parties have received an opinion of RP Financial that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members have no value. However, this opinion is not
binding on the IRS. If the subscription rights granted are deemed to have an
ascertainable value, receipt of such rights likely would be taxable in an amount
equal to such value (as capital gain or ordinary income) only to those Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members who
exercise the subscription rights. Whether subscription rights are considered to
have ascertainable value is an inherently factual determination. See "The
Conversion and Reorganization - Effects of the Conversion and Reorganization"
and "- Tax Aspects."
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Bank. Data
processing is also essential to most other financial institutions and many other
companies.
All of the material data processing of the Bank that could be affected
by this problem is provided by a third party service bureau. The service bureau
of the Bank has advised the Bank that it expects to resolve this potential
problem before the year 2000. However, if the service bureau is unable to
resolve this potential problem in time, the Bank would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial condition
and results of operation of the Bank.
22
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
The Company was organized in September 1997 at the direction of the
Board of Directors of the Bank for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the Conversion and Reorganization.
The Company has applied for the approval of the OTS to become a savings and loan
holding company and as such will be subject to regulation by the OTS. After
completion of the Conversion and Reorganization, the Company will conduct
business initially as a unitary savings and loan holding company. See
"Regulation - Company Regulation." Upon consummation of the Conversion and
Reorganization, the Company will have no significant assets other than (i) all
of the outstanding shares of stock of the Bank, (ii) notes evidencing the
Company's loans to the ESOP and to the Bank, (iii) real estate (with a carrying
value of $1.2 million at June 30, 1997) purchased by the Mutual Holding Company
and partially funded with a loan from the Bank (the Mutual Holding Company
expects to repay this loan prior to the completion of the Conversion and
Reorganization), and (iv) the portion of the net proceeds from the Offerings
retained by the Company, and the Company will have no significant liabilities.
See "Use of Proceeds." Initially, the management of the Company and the Bank
will be substantially similar, and the Company will use the premises, equipment
and furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than executive officers who are also executive officers
of the Bank, and the Company will utilize the support staff of the Bank from
time to time. Additional employees will be hired as appropriate to the extent
the Company expands or changes its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities or transactions,
the Company will be in a position after the Conversion and Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company and earnings thereon, as well as
dividends from the Bank. See "Dividend Policy."
The Company's principal executive office is located at the home office
of the Bank at 1341 W. Battlefield, Springfield, Missouri 65807, and its
telephone number is (417) 889-2494.
THE BANK
Guaranty Federal is a federally chartered stock savings bank that was
formed as a result of the reorganization of Guaranty Federal Savings and Loan
Association of Springfield (the "Mutual Association") from a federal mutual
savings association into a federal mutual holding company structure in April
1995 (the "MHC Reorganization"). The current name was obtained during the MHC
Reorganization. The Bank was originally chartered in 1913 by the State of
Missouri as Guaranty Savings and Loan Association. A federal charter was granted
to the Mutual Association in 1935, the same year that its deposit accounts
became federally insured and the Mutual Association became a member of the FHLB
System. The Bank's deposits are now insured by the FDIC under the Savings
Association Insurance Fund (the "SAIF"), and the Bank is regulated by the OTS.
The principal business of the Bank consists of attracting deposits from
the general public and using such deposits to originate mortgage loans secured
by one- to four-family residences and, to a
23
<PAGE>
lesser extent, multi-family, construction and commercial real estate loans and
consumer and business loans. The Bank also uses these funds to purchase loans
secured by one- to four-family residences, mortgage-backed securities, US
government and agency obligations and other permissible securities. When cash
outflows exceed inflows, the Bank uses borrowings as an additional financing
source. Guaranty Federal's income is derived largely from interest on
interest-earning assets such as loans, mortgage-backed securities and
investments. Its principal expenses are interest paid on deposits and
borrowings, operating expenses and provisions for loan losses.
GUARANTY FEDERAL BANCSHARES, M.H.C.
The Mutual Holding Company is a federally chartered mutual holding
company that was chartered in April 1995, in connection with the MHC
Reorganization. Pursuant to the MHC Reorganization, (i) the Bank was formed as a
new federal stock savings bank subsidiary of the Mutual Association, (ii) the
Mutual Association transferred substantially all of its assets and all of its
liabilities to the Bank, and (iii) the Mutual Association amended its mutual
savings bank charter into a mutual holding company charter and was renamed
Guaranty Federal Bancshares, M.H.C. Concurrently with the MHC Reorganization,
972,365 shares of the Bank Common Stock representing 31.1% of the then issued
and outstanding shares of the Bank Common Stock were issued in a subscription
and community offering to certain depositor and borrower members of Guaranty
Federal and certain other persons. Each share of Bank Common Stock was issued
and sold at a price of $8.00 per share. As of June 30, 1997, the Mutual Holding
Company owned 68.9% (2,152,635 shares) of the outstanding Bank Common Stock,
which is the Mutual Holding Company's primary asset. At June 30, 1997, the
Mutual Holding Company's other assets included real property with a carrying
value of $1.2 million for which a $600,000 loan balance existed with the Bank,
cash and cash equivalents of $691,000, and equity securities in the amount of
$116,000.
Pursuant to applicable regulations, the Mutual Holding Company is
required to own at least a majority of the Common Stock, and therefore the
Mutual Holding Company is able to elect the Board of Directors and otherwise
direct the affairs of the Bank. Voting and liquidation rights in the Mutual
Holding Company are held by the depositors and certain borrowers of the Bank.
Accordingly, the depositors and certain borrowers indirectly control the affairs
of the Bank as a result of their authority to direct the Board of Directors and
otherwise control the affairs of the Mutual Holding Company. As part of the
Reorganization, the Mutual Holding Company will convert from mutual to stock
form and simultaneously merge into the Bank, with the Bank being the surviving
entity.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $27,135,000 and $37,035,000 ($42,727,500 assuming an increase in the
Offering Range by 15%). See "Pro Forma Data" as to the assumptions used to
arrive at such amounts.
The Company will use at least 50% of the net proceeds to purchase all
of the capital stock of the Bank and will use the balance of the net proceeds,
less the amount of the loan by the Company to the ESOP, as its initial
capitalization. The net proceeds contributed to the Bank will become part of the
Bank's general funds for use in its business, through its current activities,
subject to applicable regulatory restrictions. The portion of the net proceeds
retained by the Company initially may be used to, among other possible
investments, invest in U.S. Government and federal agency securities of various
maturities, high-grade short-term and medium-term marketable securities,
adjustable and fixed
24
<PAGE>
rate mortgage-backed securities, equity securities, deposits of or loans to the
Bank, a combination thereof or to repay existing borrowings. The Bank may
likewise use the proceeds it receives to, among other things, repay a portion of
its borrowings from the FHLB, invest in high grade securities of various
maturities, including federal government and agency securities, and
mortgage-backed securities or it may use the proceeds in a combination thereof.
Ultimately, the portion of net proceeds retained by the Company may be used: (i)
to fund the 1998 RSP ($1,122,000 and $1,518,000 based on the sale of 2,805,000
and 3,795,000 shares of Conversion Stock at $10.00 per share at the minimum and
maximum of the Offering Range, respectively), (ii) to support the Bank's lending
activities, (iii) to support future expansion of operations through
establishment of additional branch offices or other customer facilities, (iv) to
support acquisitions of other financial service organizations, such as other
mutual or stock savings institutions and commercial banks, (v) to support future
expansion into other lending markets, (vi) to support future diversification
into other banking related businesses (although no such transactions are
specifically being considered at this time), and (vii) for other business and
investment purposes, including the possible payment of dividends, and
repurchases of the Common Stock. The Company intends to lend funds to the ESOP
sufficient to enable the ESOP to purchase up to 8% of the Conversion Stock.
Based upon the sale of 2,805,000 or 3,795,000 shares of Conversion Stock at the
minimum and maximum of the Offering Range, respectively, the loan to the ESOP to
purchase 8% of the Conversion Stock would be approximately $2,244,000 or
$3,036,000, respectively. The ESOP loan is currently expected to be for 10 years
at an adjustable interest rate approximately equal to the prime rate published
in The Wall Street Journal.
Upon completion of the Conversion and Reorganization, the Board of
Directors will have the authority to adopt stock repurchase plans, subject to
any applicable statutory and regulatory requirements. Based upon facts and
circumstances which may arise following Conversion and Reorganization, the Board
of Directors may determine to repurchase stock in the future. Such facts and
circumstances may include, but are not limited to, (i) market and economic
factors such as the price at which the stock is trading in the market, the
volume of trading, the attractiveness of other investment alternatives in terms
of the rate of return and risk involved in the investment, the ability to
increase the book value and/or earnings per share of the remaining outstanding
shares, and an improvement in the Company's return on equity; (ii) the avoidance
of dilution to stockholders by not having to issue additional shares to cover
the exercise of stock options or to fund employee stock benefit plans; or (iii)
any other circumstances in which repurchases would be in the best interests of
the Company and its shareholders. Any stock repurchases will be subject to the
determination of the Board of Directors that both the Company and the Bank will
be capitalized in excess of all applicable regulatory requirements after any
such repurchases and that capital will be adequate taking into account, among
other things, the level of non-performing and other risk assets, the Company's
and the Bank's current and projected results of operations and asset/liability
structure, the economic environment, and tax and other considerations. For a
discussion of regulatory restrictions on the repurchase of stock during the
first three years after the Conversion and Reorganization, see "The Conversion
and Reorganization - Certain Restrictions on Purchase or Transfer of Shares
After the Conversion and Reorganization."
25
<PAGE>
DIVIDEND POLICY
Upon completion of the Conversion and Reorganization, the Board of
Directors of the Company will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. Following
consummation of the Conversion and Reorganization, the Board of Directors of the
Company intends to pay semi-annual cash dividends on the Common Stock commencing
with the second quarter of the calendar year, in an annual amount of
approximately $0.30 per share. Declarations of dividends by the Board of
Directors will depend upon a number of factors, including, but not limited to:
(i) the amount of net proceeds from the Offerings retained by the Company, (ii)
investment opportunities available to the Company or the Bank, (iii) capital
requirements, (iv) regulatory limitations, (v) the Company's and the Bank's
financial condition and results of operations, (vi) tax considerations, and
(vii) general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods.
Dividends from the Company will depend, in part, upon receipt of
dividends from the Bank, because the Company initially will have no source of
income other than dividends from the Bank, earnings from the investment of
proceeds from the sale of Common Stock retained by the Company, and principal
and interest payments with respect to the Company's loan to the ESOP. A
regulation of the OTS imposes limitations on "capital distributions" by savings
institutions, including cash dividends, payments by savings institution to
repurchase or otherwise acquire its stock, payments to stockholders of another
savings institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system, with the greatest
flexibility being afforded to well-capitalized or Tier 1 savings institutions
and the least flexibility being afforded to under-capitalized or Tier 3 savings
institution. As of June 30, 1997, the Bank was a Tier 1 savings institution and
is expected to continue to so qualify immediately following the consummation of
the Conversion and Reorganization.
Any payment of dividends by the Bank to the Company which would be
deemed to be a distribution from the Bank's bad debt reserves for federal income
tax purposes would require a payment of taxes at the then-current tax rate by
the Bank on the amount of earnings deemed to be removed from the reserves for
such distribution. At June 30, 1997, the Bank's bad debt reserves for which no
federal deferred tax liabilities are recorded amounted to $5.1 million, and as a
result for tax purposes (but not regulatory purposes) the Bank could declare
approximately $22.4 million of dividends without having to recognize additional
Federal income tax expense on its bad debt reserves for federal income tax
purposes. The Bank has no current intention of making any distribution that
would create such a federal tax liability either before or after the Conversion
and Reorganization. See "Federal and State Taxation" and "Risk Factors -
Regulatory Oversight and Possible Recapture of Bad Debt Reserve."
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Bank in addition to the net proceeds retained by the Company and
earnings thereon. The Company is subject, however, to the requirements of
Missouri law. See "Comparison of Stockholders' Rights - Payments of Dividends."
26
<PAGE>
MARKET FOR COMMON STOCK
There is an established, but relatively illiquid, market for the Bank
Common Stock, which is currently listed on the National Market of The Nasdaq
Stock Market under the symbol "GFED." At June 30, 1997, there were 3,125,000
shares of Bank Common Stock outstanding including 972,365 Public Bank Shares,
which were held of record by 637 stockholders. The Bank Common Stock had 12
market makers as of June 30, 1997. The Company, however, is newly formed and has
never issued capital stock. Consequently, there is no market for the Company's
Common Stock. It is expected that the Company's Common Stock will be more liquid
than the Bank Common Stock because there will be significantly more outstanding
shares owned by the public. However, there can be no assurance that an active
and liquid trading market for the Common Stock will develop or, if developed,
will be maintained.
The Company expects to have the Common Stock succeed the Bank Common
Stock in being quoted on the National Market of The Nasdaq Stock Market under
the Bank's current symbol, "GFED." The Company expects to obtain several market
makers in the Common Stock. FBR has advised the Company that upon completion of
the conversion it intends to continue as a market maker in the Common Stock
depending upon the volume of trading and subject to compliance with applicable
laws and regulatory requirements. FBR will assist the Company in obtaining
additional market makers, but there can be no assurance that additional market
makers will be identified. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements.
The following table shows the high and low per share sales prices of
the Bank Common Stock as reported by The Nasdaq Stock Market and the dividends
declared per share during the periods indicated.
High Low Dividends(1)
---- --- ------------
Fiscal Year Ended June 30, 1997
- -------------------------------
Quarter Ended June 30, 1997 $21.50 $12.38 $0.20
Quarter Ended March 31, 1997 13.00 11.50 --
Quarter Ended December 31, 1996 12.25 10.25 0.18
Quarter Ended September 30, 1996 11.75 9.75 --
Fiscal Year Ended June 30, 1996
- -------------------------------
Quarter Ended June 30, 1996 $12.25 $11.25 $0.16
Quarter Ended March 31, 1996 12.50 11.50 --
Quarter Ended December 31, 1995 12.25 9.25 0.16
Quarter Ended September 30, 1995 9.75 8.00 --
- ------------------
(1) The aggregate dividends paid were $1,000,000 for the 1996 fiscal year and
$1,187,500 for the 1997 fiscal year.
The closing price of a share of Public Bank Shares was $15.62 on May
20, 1997, the most recent day on which trading of the Bank Common Stock occurred
preceding the Bank's announcement of the Conversion and Reorganization and
______ on ___________, 1997, the date of this Prospectus. There can be no
assurances as to future prices of the Bank Common Stock prior to completion of
the Conversion and Reorganization or the Common Stock of the Company upon
consummation of the Conversion and Reorganization.
27
<PAGE>
CAPITALIZATION
The following table presents, as of June 30, 1997, the unaudited
historical capitalization of the Bank and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion and
Reorganization, and other assumptions set forth below and under "Pro Forma Data"
based upon the sale of shares at the minimum, midpoint, maximum, and 15% above
the maximum of the Offering Range:
<TABLE>
<CAPTION>
Minimum Midpoint Maximum Maximum,
2,805,000 3,300,000 3,795,000 as adjusted
Shares at a Shares at a Shares at a 4,364,250
Guaranty Price of Price of Price of
Federal $10.00 $10.00 $10.00 Price of $10.00
Historical Per Share Per Share Per Share Per Share(1)
---------- --------- --------- --------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2).............................. $151,246 $151,246 $151,246 $151,246 $151,246
Borrowings............................... 18,151 18,151 18,151 18,151 18,151
------- ------- ------- ------- -------
^ Total interest-bearing liabilities.... ^ $169,397 $169,397 $169,397 $169,397 $169,397
======= ======= ======= ======= =======
Stockholders' equity:(3)
Common stock(4)........................ 3,125 400 470 541 622
Preferred stock(5)..................... -- -- -- -- --
Additional paid-in capital (6)......... 3,687 33,547 38,427 43,306 48,918
Retained earnings, substantially
restricted (6)......................... 18,620 20,055 20,055 20,055 20,055
Unrealized gain on securities
available-for-sale..................... 2,058 2,058 2,058 2,058 2,058
Less: Proposed Plans
Common Stock acquired by ESOP(7)..... -- (2,244) (2,640) (3,036) (3,491)
Common Stock acquired by RSP(7)...... -- (1,122) (1,320) (1,518) (1,746)
--------- ------ ------ ------ ------
Total stockholders' equity (6)........... $ 27,490 $ 52,694 $ 57,050 $ 61,406 $ 66,416
======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% to
reflect changes in market and financial conditions following the
commencement of the ^ Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such wi^ thdrawals.
(3) Assumes (i) that the 972,365 Public Bank Shares outstanding at June 30,
1997 are converted into 1,193,709, 1,404,364, 1,615,019 and 1,857,272
Exchange Shares at the minimum, midpoint, maximum and 15% above the maximum
of the Offering Range, respectively, and (ii) that no fractional shares of
Exchange Shares will be issued by t^ he Company.
(4) ^ The Bank has 8,000,000 shares of common stock authorized with a par value
of $1.00 per share. The Company has 10,000,000 shares of Common Stock
authorized with a par value of $0.10 per share.
28
<PAGE>
(5) The Bank has 2,000,000 shares of Preferred Stock authorized with a par
value of $1.00 per share and none outstanding. The Company has 2,000,000
shares of Preferred Stock authorized, $.10 par value per share, none of
which are currently outstanding or will be outstanding after the completion
of the Conversion and Reorganization.
(6) The pro forma retained earnings include $1,435,000 of assets of the Mutual
Holding Company. The pro forma additional paid in capital and retained
earnings reflect a restriction of the original retained earnings of the
Bank prior to the conversion into the mutual holding company form in April
1995.
(7) Assumes that 8% and 4% of the shares sold in the Offerings will be
purchased by the ESOP and 1998 RSP, respectively, although no shares will
be purchased by the RSP in the Offerings. Such purchases by the 1998 RSP
would occur upon receipt of stockholder approval no earlier than six months
after completion of the Conversion and Reorganization. A purchase by the
RSP in the Offerings has been included on a pro forma basis to give an
indication of its effect on capitalization. The pro forma presentation does
not show the impact of (a) results of operations after the Conversion and
Reorganization, (b) changing market prices of shares of Common Stock after
the Conversion and Reorganization, (c) a smaller than 4% purchase by the
1998 RSP, or (d) the purchase by the RSP of Common Stock out of authorized
but unissued shares. Assumes that the funds used to acquire the ESOP shares
will be borrowed from the Company for a ten year term at the prime rate.
For an estimate of the impact of the loan on earnings, see "Pro Forma
Data." If the ESOP obtained a loan from a third party, other borrowings
would increase by the amount of Common Stock acquired by the ESOP. The Bank
intends to make contributions to the ESOP sufficient to service and retire
its debt. The amount to be acquired by the ESOP and 1998 RSP is reflected
as a reduction of stockholders' equity. The issuance of authorized but
unissued shares for the 1998 RSP in an amount equal to 4% of the
outstanding shares of Conversion Stock issued in the Offerings could have
the effect of diluting existing shareholders by approximately 2.7%. There
can be no assurance that stockholder approval of the 1998 RSP will be
obtained. See "Management of the Bank - Certain Benefits - Employee Stock
Ownership Plan" and "Management of the Company - Proposed Future Stock
Benefit Plans - 1998 Management Recognition Plan."
29
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the historical regulatory capital of the
Bank at June 30, 1997, and the pro forma regulatory capital of the Bank as of
that date, after giving effect to the Conversion and the Reorganization, based
upon the minimum, midpoint, maximum and 15% above the maximum of the Offering
Range, respectively. For a discussion of the assumptions underlying the pro
forma capital calculations presented below, see "Use of Proceeds,"
"Capitalization" and "Pro Forma Data." The definitions of the terms used in the
table are those provided in the capital regulations issued by the OTS. For a
discussion of the capital standards applicable to the Bank, see "Regulation -
Regulation of the Bank - Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma as of June 30, 1997
---------------------------------------------------------------------------------
Historical, as of $28,050,000 $33,000,000 $37,950,000 $43,642,500
June 30, 1997 Minimum Midpoint Maximum Maximum, as adjusted
------------------ ----------------- ----------------- ------------------- --------------------
Percent Percent Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets Amount of Assets Amount of Assets
------ --------- ------- --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital......... $27,490 13.78% $39,126 18.34% $41,007 19.02% $42,888 19.68% $45,052 20.43%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible
Capital(1)(2)...... $25,432 12.96% $37,068 17.64% $38,949 18.34% $40,830 19 .02% $42,994 19.79%
Tangible Capital
Requirement........ 2,943 1.50 3,151 1.50 3,185 1.50 3,220 1 .50 3,259 1.50
------ ----- ------ ----- ------ ----- ------ ------ ------ -----
Excess............... $22,489 11.46% $33,917 16.14% $35,764 16.84% $37,610 17.52% $39,735 18.29%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core Capital
(1)(2)(3).......... $25,432 12.96% $37,068 17.64% $38,949 18.34% $40,830 19.02% $42,994 19 .79%
Core Capital
Requirement........ 5,886 3.00 6,302 3.00 6,371 3.00 6,439 3.00 6,518 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess............... $19,546 9 .96% $30,766 14.64% $32,578 15.34% $34,391 16.02% $36,476 16.79%
====== ====== ====== ===== ====== ===== ====== ===== ====== =====
Total Risk-Based
Capital
(1)(2)(4)(5)..... $26,872 23.32% $38,508 32.63% $40,389 34.09% $42,270 35.55% $44,434 37.20%
Risk-Based Capital
Requirement....... 9,218 8.00 9,441 8.00 9,477 8.00 9,513 8.00 9,555 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess............... $17,654 15 .32% $29,067 24.63% $30,912 26.09% $32,757 27.55% $34,879 29.20%
====== ====== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- -----------------
(1) Net unrealized gains or losses on securities classified a available
for sale are excluded from regulatory capital when computing core and
risk-based capital. The net unrealized gain on securities classified as
available for sale amounted to $2,058,000 as of June 30, 1997.
(2) Tangible capital is computed as a percentage of adjusted total assets
of $196.2 million prior to the consummation of the Offerings and $210.1
million, $212.4 million, $214.6 million and $217.3 million following
the issuance of 3,998,709, 4,704,364, 5,410,019 and 6,221,522 shares of
Common Stock in the Conversion and Reorganization, respectively. Core
capital is computed as a percentage of adjusted total assets of $196.2
million prior to the consummation of the Offerings and $210.1 million,
$212.4 million, $214.6 million and $217.3 million following the
issuance of 3,998,709, 4,704,364, 5,410,019 and 6,221,522 shares of
Common Stock in the Conversion and Reorganization, respectively.
Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $115.2 million prior to the consummation of the
Offerings and $118.0 million, $118.5 million, $118.9 million and $119.4
million following the issuance of 3,998,709, 4,704,364, 5,410,019 and
6,221,522 shares of Common Stock in the Conversion and Reorganization,
respectively.
(3) Does not reflect proposed amendments to regulatory capital requirements
or, in the case of the core capital requirement, the 4.0% requirement
to be met in order for an institution to be "adequately capitalized"
under applicable laws and regulations. See "Regulation - Regulation o
the Bank - Regulatory Capital Requirements."
(4) The pro forma risked-based capital ratios (i) reflect the receipt by
the Bank of the assets held by the Mutual Holding Company and of 50% of
the estimated net proceeds from the Offerings, and a reduction due to
the 1998 RSP purchase and the ESOP purchase, (ii) assume no repayment
of FHLB advances, and (iii) assume the investment of the net remaining
proceeds received by the Bank in assets that have a 20% risk-weighting,
as if such net proceeds had been received and so applied at June 30,
1997.
(5) Risk-weighted assets on a pro forma basis are calculated based on the
percentage of risk-weighted assets to leveraged assets at June 30,
1997. Includes the $1.44 million of general allowance for loaN losses
that was included in risk-based capital as of June 30, 1997.
30
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $27.14 million and $37.04
million. Actual Conversion and Reorganization expenses may vary from those
estimated. Under the Plan of Conversion, the Conversion Stock must be sold in
the Offerings at an aggregate subscription price not less than nor greater than
the Offering Range, which is subject to adjustment. The Offering Range, as
established by the Board of Directors is between a minimum of $28.05 million and
a maximum of $37.95 million, with a midpoint of $33.00 million. This represents
a range between a minimum of 2,805,000 shares and a maximum of 3,795,000 shares,
based upon the Purchase Price of $10.00 per share. If the Offering Range is
increased by up to 15% to reflect market or general financial conditions
following the commencement of the Offerings, the adjusted maximum number of
shares of Conversion Stock to be sold would be 4,364,250, for estimated net
proceeds of $42.73 million.
Pro forma consolidated net income of the Company for the fiscal year
ended June 30, 1997 has been calculated as if the Company had been in existence
and estimated net proceeds received by the Company and the Bank had been
invested at an assumed interest rate of 6.62% for the fiscal year ended June 30,
1997. The assumed interest rates for the Bank were calculated as the arithmetic
average of the weighted average yield earned by the Bank on its interest-earning
assets and weighted average rate paid on its interest-bearing deposits, as is
required by OTS regulations. The effect of withdrawals from deposit accounts for
the purchase of Common Stock has not been reflected. The earning assets to be
consolidated from the Mutual Holding Company have not been reflected. The pro
forma blended after-tax yield on the estimated net proceeds is assumed to be
4.17% for the fiscal year ended June 30, 1997, based on an effective tax rate of
37.0%. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. It is assumed that
the Company will retain 50% of the estimated adjusted net proceeds, less the
amount of the ESOP loan.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation. The
following table includes assets held by the Mutual Holding Company that have
been consolidated into the financial condition of the Bank.
The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the year ended June 30, 1997, based on
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion and
Reorganization. No effect has been given in the tables to the possible issuance
of additional shares reserved for future issuance pursuant to currently
outstanding stock options or the 1998 Option Plan, nor does book value give any
effect to the liquidation account to be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders or the bad debt
reserve in liquidation. See "The Conversion and Reorganization - Liquidation
Rights," and "Management of the Bank - Directors' Compensation," "- Executive
Compensation," and "- Certain Benefits."
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1997
---------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
2,805,000 3,300,000 3,795,000 4,364,250
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share(1)
----------- ----------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds .................................... $ 28,050 $ 33,000 $ 37,950 $ 43,642
Less expenses ..................................... 915 915 915 915
----------- ----------- ----------- -----------
Estimated net proceeds .......................... 27,135 32,085 37,035 42,727
Less: Common Stock purchased by ESOP(2) ........ (2,244) (2,640) (3,036) (3,491)
Less: Common Stock purchased by RSP(3) ......... (1,122) (1,320) (1,518) (1,746)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ........... $ 23,769 $ 28,125 $ 32,481 $ 37,490
=========== =========== =========== ===========
Consolidated net income
Historical ...................................... $ 1,162 $ 1,162 $ 1,162 $ 1,162
Pro forma income on net proceeds ................ 991 1,173 1,355 1,564
Pro forma ESOP adjustment(2) .................... (141) (166) (191) (220)
Pro forma RSP adjustment(3) ..................... (141) (166) (191) (220)
----------- ----------- ----------- -----------
Pro forma net income .......................... $ 1,871 $ 2,003 $ 2,135 $ 2,286
=========== =========== =========== ===========
Per share net income (reflects SOP 93-6)(4)(5)(6):
Historical ...................................... $ 0.31 $ 0.26 $ 0.23 $ 0.20
Pro forma income on net proceeds ................ 0.26 0.27 0.27 0.27
Pro forma ESOP adjustment(2) .................... (0.04) (0.04) (0.04) (0.04)
Pro forma RSP adjustment(3) ..................... (0.04) (0.04) (0.04) (0.04)
----------- ----------- ----------- -----------
Pro forma net income per share(4) ............. $ 0.49 $ 0.45 $ 0.42 $ 0.39
=========== =========== =========== ===========
Purchase Price as a multiple of pro forma earnings 20.41x 22.22x 23.81x 25.64x
=========== =========== =========== ===========
Number of shares used in earnings per share
calculations .................................... 3,796,749 4,466,764 5,136,779 5,907,296
=========== =========== =========== ===========
Stockholders' equity(7):
Historical ...................................... $ 27,490 $ 27,490 $ 27,490 $ 27,490
Estimated net proceeds .......................... 27,135 32,085 37,035 42,727
Add: Assets consolidated from MHC .............. 1,435 1,435 1,435 1,435
Less: Common Stock acquired by ESOP(2) ......... (2,244) (2,640) (3,036) (3,491)
Less: Common Stock acquired by RSP(3) .......... (1,122) (1,320) (1,518) (1,746)
----------- ----------- ----------- -----------
Pro forma stockholders' equity ................ $ 52,694 $ 57,050 $ 61,406 $ 66,415
=========== =========== =========== ===========
Stockholders' equity per share(4)(5)(6):
Historical combined ............................. $ 6.87 $ 5.84 $ 5.08 $ 4.42
Estimated net proceeds .......................... 6.79 6.82 6.84 6.87
Add: Assets consolidated from MHC .............. 0.36 0.31 0.27 0.23
Less: Common Stock acquired by ESOP(2) ......... (0.56) (0.56) (0.56) (0.56)
Less: Common Stock acquired by RSP(3) .......... (0.28) (0.28) (0.28) (0.28)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4) ... $ 13.18 $ 12.13 $ 11.35 $ 10.68
=========== =========== =========== ===========
Purchase Price as a percent of pro forma equity ... 75.87% 82.44% 88.11% 93.63%
=========== =========== =========== ===========
Number of shares used in book value per share
calculations .................................... 3,998,709 4,704,364 5,410,019 6,221,522
Pro forma equity as a percent of pro forma assets . 23.45% 24.91% 26.31% 27.86%
</TABLE>
(footnotes on following page)
32
<PAGE>
- --------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market and financial conditions following the commencement of the
Offerings.
(2) Assumes that 8% of shares of Conversion Stock offered in the Offerings will
be purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
net proceeds of the Offerings retained by the Company. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to the
principal of the debt and interest due. The ESOP debt is payable over 10
years. Statement of Position ("SOP") 93-6 requires that an employer record
compensation expense in an amount equal to the fair value of the shares
committed to be released to employees. The pro forma adjustments assume
that the ESOP shares are allocated in ten equal annual installments and the
fair value of the Company's stock remains at the Purchase Price and the
effective tax rates are assumed to be 37.0%. The unallocated ESOP shares
are reflected as a reduction of stockholders' equity. No reinvestment is
assumed on proceeds contributed to fund the ESOP. The pro forma net income
further assumes (i) that 22,440, 26,400, 30,360 and 34,914 shares were
committed to be released during the fiscal year ended June 30, 1997, in
each case at the minimum, midpoint, maximum, and 15% above maximum,
respectively, and (ii) in accordance with SOP 93-6, only the ESOP shares
committed to be released during the respective periods were considered
outstanding for purposes of net income per share calculations. See
"Management of the Bank - Certain Benefits - Employee Stock Ownership
Plan."
(3) Subject to the approval of the Company's stockholders, the 1998 RSP intends
to purchase an aggregate number of shares of Common Stock equal to 4% of
the shares of Conversion Stock to be sold in the Offerings. The shares may
be acquired directly from the Company, or through open market purchases.
The funds to be used by the RSP to purchase the shares will be provided by
the Bank or the Company. See "Management of the Company - Proposed Future
Stock Benefit Plans - 1998 Management Recognition Plan." Assumes that the
1998 RSP acquires the shares through open market purchases at the Purchase
Price with funds contributed by the Bank, and that 20% of the amount
contributed to the 1998 RSP is amortized as an expense during the fiscal
year ended June 30, 1997. If the 1998 RSP purchases authorized but unissued
shares instead of making open market purchases, (i) the voting interests of
then existing stockholders would be diluted by approximately 2.7%, (ii) the
pro forma net income per share for the fiscal year ended June 30, 1997
would be $0.47, $0.43, $0.40 and $0.37 and pro forma stockholders' equity
at June 30, 1997 would be $13.09, $12.07, $11.31 and $10.66 in each case at
the minimum, midpoint, maximum, and 15% above maximum of the Offering
Range, respectively.
(4) Per share figures include shares of Exchange Stock that will be exchanged
for Public Bank Shares in the Exchange. Net income per share computations
are determined by taking the number of shares of Common Stock assumed to be
issued in the Conversion and Reorganization and, in accordance with SOP
93-6, subtracting the ESOP shares that have not been committed for release
during the respective period. See Note 2 above. The number of Exchange
Shares to be issued were then added to such amounts. The number of shares
of Conversion Stock actually sold and the corresponding number of Exchange
Shares may be more or less than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1998 Option Plan, which is expected to be adopted by
the Company following the Offerings and presented to stockholders for
approval at the Company's 1998 Annual Meeting. An amount equal to 10% of
the Conversion Stock sold in the Offerings will be reserved for future
issuance upon the exercise of options to be granted under the 1998 Option
Plan, if approved by stockholders. The issuance of authorized but
previously unissued shares of Common Stock pursuant to the exercise of
options under such plan would dilute existing stockholders' interests.
Assuming stockholder approval of the 1998 Option Plan, that all the options
were exercised at the end of the period at an exercise price equal to the
Purchase Price per share shown for each column, and that the 1998 RSP
purchases shares in the open market at such purchase price per share, (i)
pro forma net income per share for the year ended June 30, 1997 would be
$0.46, $0.43, $0.40 and $0.37, and pro forma stockholders' equity per share
at June 30, 1997 would be $12.97, $11.99, $11.26 and $10.63, in each case
at the minimum, midpoint, maximum and 15% above maximum of the Offering
Range, respectively.
(6) Per share figures include shares of Common Stock that will be exchanged for
Public Bank Shares in the Exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of shares of
Conversion Stock assumed to be sold in the Offering, and (ii) Exchange
Shares equal to the minimum, midpoint, maximum and 15% above maximum of the
Offering Range, respectively. The Exchange Shares reflect an Exchange Ratio
of 1.2276, 1.4443, 1.6609, and 1.9101, respectively, at the minimum,
midpoint, maximum, and 15% above maximum of the Offering Range,
respectively. The number of Conversion Stock actually sold and the
corresponding number of Exchange Shares may be more or less than the
assumed amounts.
(7) The retained earnings of the Bank will be substantially restricted after
the Conversion and Reorganization. See "Dividend Policy," "The Conversion
and Reorganization - Effects of the Conversion and Reorganization - Effect
on Liquidation Rights" and "Regulation - Regulation of the Bank - Dividend
and Other Capital Distribution Limitations."
33
<PAGE>
GUARANTY FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
Years Ended June 30, 1997, 1996 and 1995
The following Consolidated Statements of Income of the Bank for the
years ended June 30, 1997, 1996 and 1995 have been audited by Baird Kurtz &
Dobson, independent accountants, whose report thereon appears elsewhere in this
Prospectus. These statements should be read in conjunction with the Consolidated
Financial Statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 12,346,820 $10,534,323 $ 8,638,585
Investment securities 551,741 1,317,152 1,529,819
Mortgage-backed securities 1,412,302 1,370,770 1,175,826
Other 400,422 479,911 293,320
------------- ------------ ------------
14,711,285 13,702,156 11,637,550
------------- ------------ ------------
INTEREST EXPENSE
Deposits 7,471,093 8,200,026 6,443,596
Federal Home Loan Bank advances 839,082 39,077 151,752
------------- ------------ ------------
8,310,175 8,239,103 6,595,348
------------- ------------ ------------
NET INTEREST INCOME 6,401,110 5,463,053 5,042,202
PROVISION (CREDIT) FOR LOAN LOSSES -- (1,211,502) 16,350
-------------- ------------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,401,110 6,674,555 5,025,852
------------- ------------ ------------
NONINTEREST INCOME (LOSS)
Service charges 264,649 97,092 65,869
Late charges and other fees 85,673 69,754 49,444
Gain (loss) on loans, investment
securities and mortgage-backed securities 61,468 43,065 (103,473)
Income on foreclosed assets 17,896 -- 16,843
Other income 100,115 11,492 42,478
------------- ------------ ------------
529,801 221,403 71,161
------------- ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,030,213 1,992,534 1,660,790
Occupancy 653,851 655,783 275,349
SAIF deposit insurance premiums 1,141,148 338,697 324,037
Data processing 359,403 222,097 175,823
Advertising 319,162 316,556 244,877
Other expense 600,854 590,879 396,152
------------- ------------ ------------
5,104,631 4,116,546 3,077,028
------------- ------------ ------------
INCOME BEFORE INCOME TAXES 1,826,280 2,779,412 2,019,985
PROVISION FOR INCOME TAXES 664,500 1,026,000 690,000
------------- ------------ ------------
NET INCOME $ 1,161,780 $ 1,753,412 $ 1,329,985
============= ============ ============
EARNINGS PER COMMON SHARE
Since conversion$ 0.37 $ 0.56 $ 0.10
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Guaranty Federal's results of operations are primarily dependent on its
net interest income, which is the difference between interest income earned on
its loan, mortgage-backed and other asset-backed securities and investment
portfolios, and its cost of funds, consisting of interest paid on deposits and
borrowings. Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities as well as the relative
yields and costs of those assets and liabilities. The Bank's net income also is
affected by its provision for loan losses, as well as the amount of noninterest
income, including service charges and late fees, and noninterest expense.
Operating results are also affected to a lesser extent by the type of lending,
fixed rate versus adjustable or long-term versus short-term, each of which has a
different rate and fee structure. The Bank's operating expenses principally
consist of employee compensation, occupancy expenses, federal insurance premiums
and other general and administrative expenses. Earnings of the Bank are also
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The principal business of the Bank consists of attracting deposits from
the general public and using such deposits to originate mortgage loans secured
by one-to four-family residences and, to a lesser extent, multi-family,
construction and commercial real estate loans and consumer and business loans.
The Bank also uses these funds to purchase loans secured by one- to four-family
residences, mortgage-backed securities, US government and agency obligations and
other permissible securities. When cash outflows exceed inflows, the Bank uses
borrowings as an additional financing source.
The Bank derives revenues principally from interest earned on loans and
investments and, to a lesser extent, from fees charged for services. General
economic conditions and policies of the financial institution regulatory
agencies, including the OTS and the FDIC significantly influence the Bank's
operations. Interest rates on competing investments and general market interest
rates influence the Bank's cost of funds. Lending activities are affected by the
interest rates at which such financing may be offered. The Bank intends to
continue to focus on its lending programs for both one- to four-family lending
and consumer lending throughout southwestern Missouri.
Financial Condition
The Bank's total assets increased $14,297,932 (8%), from $185,167,107
as of June 30, 1996, to $199,465,039 as of June 30, 1997.
^ Due to an increased emphasis on lending and an increase in staff, as
well as growth in the Greene County market, net loans receivable increased by
$20,619,460 (16%), from $131,612,835 as of June 30, 1996, to $152,232,295 as of
June 30, 1997. During this period, permanent loans secured by both owner and
non-owner occupied one- to four- unit residential real estate increased by
$15,036,217 (16%) and construction loans increased by $3,419,080 (16%). Loans
past maturity and past due 90 days or more decreased $949,000 from $1,777,000
(1.4% of net loans) as of June 30, 1996, to $828,000 (0.5% of net loans) as of
June 30,1997. Of these loans, a loan of $113,200 is past maturity and still on
accrual status as management believes the loan is well secured and expects full
collection of principal and interest. As of June 30, 1997, management considers
$1,257,352 as impaired with a related allowance for loan losses of $206,897.
Growth in loans receivable is anticipated to continue and represents a major
part of the Bank's planned asset growth.
35
<PAGE>
Securities available-for-sale decreased $4,482,380 (57%) from
$7,842,380 as of June 30 1996, to $3,360,000 as of June 30, 1997, and securities
held-to-maturity decreased $1,279,966 (13%), from $9,865,719 as of June 30,
1996, to $8,585,753 as of June 30, 1997. The Bank redeployed these funds to
higher yielding loans. The Bank continues to hold 96,000 shares of Federal Home
Loan Mortgage Corporation ("FHLMC") stock with an amortized cost of $94,000 in
the securities available-for-sale category. As of June 30, 1997, the gross
unrealized gain on the stock was $3,266,000, an increase from $1,958,000 as of
June 30, 1996.
Mortgage-backed securities, held-to-maturity, decreased $4,253,359
(21%), from $20,067,249 as of June 30, 1996, to $15,813,890 as of June 30, 1997.
This decrease is attributable to repayments received during the year. There were
no purchases of mortgage-backed securities during the year ended June 30, 1997.
As of June 30, 1997, and June 30, 1996, there were no mortgage-backed securities
classified as available-for-sale.
The Bank increased the allowance for loan losses $389,743 (23%) in
fiscal year 1996, and $68,950 (3%) in fiscal year 1997. During fiscal year 1996,
the Bank recovered $1,406,860 primarily on a large commercial loan and after
evaluating the adequacy of the allowance, the Bank reduced the allowance by
crediting income $1,211,502. During fiscal year 1997, the allowance increased
due to recoveries net of charge-offs of $68,950. The allowance for loan losses
as of June 30, 1997, was 1.49% of average net loans outstanding versus 1.66% as
of June 30, 1996. As of June 30, 1997, the allowance for loan losses was 173% of
impaired loans versus 536% as of June 30, 1996.
Foreclosed assets held for sale as of June 30, 1997, include a duplex
acquired in July 1996, and a single family residence acquired in June 1997. The
Bank carries these properties at their fair value of $210,155 as of June 30,
1997.
Premises and equipment decreased $124,586 (2%), from $6,391,743 as of
June 30, 1996, to $6,267,157 as of June 30, 1997. In September 1995, the Bank
completed construction of a new main office facility. The facility is expected
to assist with planned growth by attracting new customers and providing
additional work space for employees. The Bank does not currently require full
use of the new facility and it leases the excess space. As of June 30, 1997, the
Bank had signed leases for all 8,938 square feet of excess space available for
lease in the building.
Deposits decreased $5,761,408 (4%), from $157,007,890 as of June 30,
1996, to $151,246,482 as of June 30, 1997. During this period, core deposit
accounts increased by $4,944,356 (21%), while certificates of deposit decreased
by $10,705,764 (8%). The majority of this increase in checking and passbook
accounts can be attributed to an aggressive marketing campaign initiated in
early 1997 designed to attract checking deposit customers. The decrease in
certificate deposits can be attributed to management's decision to allow high
cost accounts to run off and replace these funds with FHLB advances at a lower
marginal cost.
As a result of the overall decrease in deposits and the continued
increase in loan demand, the Bank increased borrowings from the FHLB to
$18,150,844 as of June 30, 1997. There were no outstanding FHLB advances as of
June 30, 1996. The Bank has the ability to borrow additional funds from the FHLB
should the need arise. As of June 30, 1997, the Bank had the ability to borrow
an additional $55.1 million from the FHLB.
36
<PAGE>
Stockholders' equity (including unrealized appreciation on securities
available-for-sale, net of tax) increased $903,991 (3%), from $26,586,164 as of
June 30, 1996, to $27,490,155 as of June 30, 1997. Unrealized appreciation on
securities available-for-sale, net of tax, contributed $798,169 ($0.26 per
share) to the increase in stockholders' equity. On a per share basis,
stockholders' equity increased from $8.51 per share as of June 30, 1996, to
$8.80 per share as of June 30, 1997. Stockholders' equity includes no
contributed capital from the issuance of 2,152,635 shares of common stock to
Guaranty Federal Bancshares, M.H.C.
The Bank has contacted its major computer service vendors and has
received assurances that those computer services will properly function on
January 1, 2000, the date that computer problems are expected to develop
worldwide. Internally, the Bank has determined that certain computer programs
must be revised in advance of the year 2000. The Bank does not believe that the
costs associated with its actions and those of its vendors will be material to
be Bank. However, in the event a major vendor of the Bank is unable to fulfill
its contractual obligation to the Bank, the Company and the Bank could
experience material costs. See "Risk Factors - Possible Year 2000 Computer
Program Problems"
37
<PAGE>
Average Balances, Interest and Average Yields
The following tables show (1) the average monthly balances of various
categories of interest-earning assets and interest-bearing liabilities, (2) the
total interest earned or paid thereon, and (3) the resulting weighted average
yields and costs. In addition, the table shows the Bank's rate spreads and net
yields. Average balances are based on daily balances. Tax-free income is not
material; accordingly, interest income and related average yields have not been
calculated on a tax equivalent basis. Average loan balances include non-accrual
loans.
<TABLE>
<CAPTION>
As of June 30, 1997 Year Ended June 30, 1997 Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------- --------------------------- --------------------------- -------------------------
Yield Average Yield Average Yield Average Yield
Balance /Cost Balance Interest /Cost Balance Interest /Cost Balance Interest /Cost
------- ----- ------- -------- ----- ------- -------- ----- ------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning assets:
Loans.............. $158,135 8.43% $146,468 $12,347 8.43% $127,485 $10,534 8.26% $113,134 $8,638 7.64%
Investment
securities....... 8,586 6.13 8,879 552 6.22 19,271 1,317 6.83 24,715 1,530 6.19
Mortgage-backed
securities....... 15,814 7.70 18,032 1,412 7.83 18,522 1,371 7.40 13,964 1,176 8.42
Other assets....... 8,494 4.51 8,160 400 4.90 9,494 480 5.06 6,126 293 4.78
------- ------- ------ ------- ------ ------- ------
Total interest-
earning assets... 191,029 8.09 181,539 14,711 8.10 174,772 13,702 7.84 157,939 11,637 7.37
------ ------ ------
Non-interest-
earning assets... 8,436 8,387 8,137 6,009
------- ------- ------- -------
$199,465 $189,926 $182,909 $163,948
======= ======= ======= =======
Interest-bearing
liabilities:
Savings accounts... $ 8,621 2.76 $ 9,191 258 2.81 $10,272 315 3.07 $12,976 462 3.56
Transaction
accounts......... 17,674 2.94 13,846 406 2.93 10,355 276 2.67 9,524 245 2.57
Certificates
of Deposit...... 122,617 5.58 122,219 6,807 5.57 132,265 7,609 5.75 116,477 5,736 4.92
FHLB advances...... 18,151 6.12 13,767 839 6.09 690 39 5.65 2,583 152 5.88
------- ------- ----- ------ ----- -------- ------
Total interest-
bearing
liabilities...... 167,063 5.21 159,023 8,310 5.23 153,582 8,239 5.36 141,560 6,595 4.66
----- ------ ------
Non-interest-
bearing
liabilities...... 4,912 4,122 2,821 2,460
------- ------- ------- -------
Total
liabilities...... 171,975 163,145 156,403 144,020
Stockholders'
equity........... 27,490 26,781 26,506 19,928
------- ------ ------ ------
$199,465 $189,926 $182,909 $163,948
======= ======= ======= =======
Net
earning
balance.......... $ 23,966 $ 22,516 $21,190 $ 16,379
======= ======= ====== =======
Earning
yield
less
costing
rate............. 2.88% 2.87% 2.48% 2.71%
==== ==== ==== ====
Net interest
income,
and net
yield
spread on
interest-
earning
assets........... 3.52% $6,401 3.53% $5,463 3.13% $5,042 3.19%
==== ===== ==== ===== ==== ===== ====
Ratio of
interest-
earning
assets to
interest-
bearing
liabilities...... 114% 114% 114% 112%
=== === === ===
</TABLE>
38
<PAGE>
The following table sets forth information regarding changes in
interest income and interest expense for the periods indicated resulting from
changes in average balances and average rates shown above. For each category of
interest-earning assets and interest-bearing liabilities information is provided
with respect to changes attributable to: (i) changes in balance (change in
balance multiplied by the old rate), (ii) changes in interest rates (change in
rate multiplied by the old balance); and (iii) the combined effect of changes in
balance and interest rates (change in balance multiplied by change in rate).
<TABLE>
<CAPTION>
Year Ended June 30, 1997 versus 1996 Year Ended June 30, 1996 versus 1995
---------------------------------------- ----------------------------------------
Rate & Rate &
Balance Rate Balance Total Balance Rate Balance Total
------- ---- ------- ----- ------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ...................... $ 1,568 $ 213 $ 31 $ 1,813 $ 1,096 $ 710 $ 90 $ 1,896
Investment securities ...... (710) (119) 64 (765) (337) 159 (35) (213)
Mortgage-backed securities . (36) 79 (2) 41 384 (142) (47) 195
Other assets ............... (67) (15) 2 (80) 161 17 9 187
------- ------- ------- ------- ------- ------- ------- -------
Net change in interest income 755 158 96 1,009 1,304 744 17 2,065
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Savings accounts ........... (33) (27) 3 (57) (96) (64) 13 (147)
Transaction accounts ....... 93 29 8 130 21 9 1 31
Certificates of deposit .... (578) (245) 21 (802) 777 965 131 1,873
Advances ................... 739 3 58 800 (111) (6) 4 (113)
------- ------- ------- ------- ------- ------- ------- -------
Net change in interest expense 221 (240) 90 71 591 904 149 1,644
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income $ 534 $ 398 $ 6 $ 938 $ 713 $ (160) $ (132) $ 421
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Results of Operations - Comparison of Years Ended June 30, 1997 and 1996
Interest Income - ^ Total interest income increased $1,009,129 (7%) as
the average balance of interest-earning assets increased $6,767,000 (4%) while
the average yield on those interest-earning assets increased 26 basis points
from 7.84% to 8.10%. This increase was due primarily to an increase in loan
interest of $1,812,497 (17%). ^ The weekly average yield for US Treasury
securities adjusted to a constant maturity of one year increased 21 basis points
from 5.48% for the year ended June 30, 1996, to 5.69% for the year ended June
30, 1997. During the year ended June 30, 1997, the average loan receivable
balance increased $18,983,000 (15%) at the same time the average yield on loans
increased 17 basis points from 8.26% to 8.43%. Average balances of investment
securities declined $10,392,000 (54%) during the year as the Bank replaced
securities with higher yielding loans. To the extent possible, subject to market
conditions and competition, the Bank intends to emphasize loan production and
will purchase investment securities and mortgage-backed securities only if
spreads between the asset yield and the liability cost net an arbitrage profit
over a range of potential interest rate scenarios.
Interest Expense. Total interest expense increased $71,072 (1%) as the
average balance of interest-bearing liabilities increased $5,441,000 (3%) while
the average cost of those interest-bearing liabilities decreased 13 basis points
from 5.36% to 5.23%. The average balances of certificates of deposit decreased
$10,046,000 (8%) and the average cost of those certificates decreased 18 basis
points from 5.75% to 5.57%. The decrease in the average balances of certificates
of deposit was partially offset by an increase in the average balances of
checking accounts of $3,491,000 (34%). The average cost of these checking
accounts increased 26 basis points from 2.67% to 2.93%. In order to fund the
increase in assets and decrease in deposits, the Bank borrowed additional funds
from the FHLB. The average
39
<PAGE>
balance of FHLB advances increased by $13,077,000 from $690,000 to $13,767,000.
Management attempts to price certificates of deposit so that the marginal cost
of attracting deposits is equal to the marginal cost of FHLB advances on a
duration adjusted basis.
Net Interest Income. The Bank's net interest income increased $938,057
(17%) from $5,463,053 to $6,401,110. During the year ended June 30, 1997, the
average balance of interest-earning assets exceeded the average balance of
interest-bearing liabilities by $22,516,000, an increase in the average net
earning balance of $1,326,000 (6%). At the same time the spread between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities increased by 39 basis points from 2.48% to 2.87%.
Provision for Loan Losses. Provisions for loan losses are charged or
credited to earnings to bring the total allowance to a level considered adequate
by the Bank to provide for ^ loan losses in the existing portfolio. When making
the assessment, the Bank considers prior loss experience, volume and type of
lending, industry standards and past due loans in the Bank's portfolio. In
addition, the Bank considers general economic conditions and other factors
related to collectibility of the Bank's portfolio^.
During fiscal year 1996 the Bank recovered $1,211,502 on a commercial
loan which was previously partially charged off. The loan recovery represents
amounts recovered in excess of the carrying balance of the loan as reflected by
the original terms of the loan, including accrued interest and previously
charged-off principal. Consequently, the Bank determined that the allowance for
loan losses was sufficient prior to the recovery, and credited the provision for
loan losses. During the fiscal year 1997, the bank again experienced a net
recovery and based on a review as discussed above, elected to make no further
addition to the allowance.^
Non-Interest Income. Non-interest income, which consists of service
charges and other fees, income from foreclosed assets and gains or losses on
sale of assets, increased $308,393 (139%) from $221,403 to $529,801. This
increase is primarily due to the increase in service charges on checking
accounts which increased $167,557 (172%) due to the success of the Bank's new
checking account promotion in generating new checking accounts.
Non-Interest Expense. Non-interest expense increased $988,085 (24%),
from $4,116,546 to $5,104,631. This increase was primarily due to a special
one-time assessment by the FDIC on all assessable deposits as of March 31, 1995.
This assessment resulted in a $802,451 (237%) increase in SAIF premiums. While
this special assessment had a negative impact on earnings for fiscal year 1997,
deposit premiums in the future are expected to be materially lower. Beginning
January 1, 1997, deposit premiums declined from an average of 23.4 basis points
to an average of 6.4 basis points. Data processing expense increased $137,306
(62%) due to the increased volume of transactions handled. Excluding the
increase in SAIF premiums, non-interest expense increased by $185,634 (5%).
Income Taxes. The change in income tax is a direct result of changes in
the Bank's taxable income and allowable bad debt deduction.
Cash Dividends Paid. The Bank paid cash dividends of $562,500 ($0.18
per share) on December 2, 1996, to the stockholders of record as of November 1,
1996, and of $625,000 ($0.20 per share) on May 30, 1997, to the stockholders of
record as of May 2, 1997. Of these dividends, $818,001 in total were paid to the
Mutual Holding Company. At an assumed annual dividend rate of $0.30 per share
after the Offerings, annual dividends would be between $1,199,613 and $1,623,006
at the minimum and maximum, respectively, of the Total Valuation Range.
40
<PAGE>
Results of Operations - Comparison of Years Ended June 30, 1996 and 1995
Interest Income.^ Total interest income increased $2,064,606 (18%) as
the average balance of interest-earning assets increased $16,833,000 (11%) while
the average yield on those interest-earning assets increased 47 basis points
from 7.37% to 7.84%. This increase was due primarily to an increase in loan
interest of $1,895,738 (22%). ^ Due to an increased emphasis on lending and
growth in the Greene County market, year end balances of one to four unit
residential loans increased $6,557,395 (7%), real estate construction loans
increased $3,842,183 (21%) and commercial real estate loans increased $3,576,288
(69%). As a result, during the year ended June 30, 1996, the average loan
receivable balance increased $14,351,000 (13%) and the average yield on loans
increased 62 basis points from 7.64% to 8.26%. The weekly average yield for US
Treasury securities adjusted to a constant maturity of one year decreased 71
basis points from 6.19% for the twelve months ended June 30, 1995, to 5.48% for
the twelve months ended June 30, 1996. Average balances of investment securities
declined $5,444,000 (22%) during the year as the Bank replaced securities with
higher yielding loans and mortgage-backed securities, which mortgage-backed
securities increased $4,558,000 (33%).
Interest Expense. Total interest expense increased $1,643,755 (25%) as
the average balance of interest-bearing liabilities increased $12,022,000 (8%)
while the average cost of those interest-bearing liabilities increased 70 basis
points from 4.66% to 5.36%. The increase in interest expense was primarily due
to the increase in average balances of certificates of deposit of $15,788,000
(14%) combined with the increase in average cost of those certificates of 83
basis points from 4.92% to 5.75%. The increase in certificate balances and rates
can be attributed primarily to a promotion related to the opening of the main
office facility.
Net Interest Income. The Bank's net interest income increased $420,851
(8%) from $5,042,202 to $5,463,053. During the year ended June 30, 1996, the
average balance of interest-earning assets exceeded the average balance of
interest-bearing liabilities by $21,190,000, an increase in the average net
earning balance of $4,811,000 (29%). This increase more than off-set the decline
in the spread between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities of 23 basis points from 2.71% to
2.48%.
Provision for Loan Losses. Refer to the prior discussion of the fiscal
year 1996 loan loss recovery. In fiscal year 1995, the provision was $16,350.
Non-Interest Income. Non-interest income, which consists of service
charges and other fees, income from foreclosed assets^ and gain or losses on
sale of assets ^, increased $150,242 (211%) from $71,161 to $221,403. This
increase was due primarily to the gain on asset sales in 1996 ^ of $43,065
versus a loss of $103,473 in 1995 which accounts for $146,538 of the change.
Non-Interest Expense. Non-interest expense increased $1,039,518 (34%),
from $3,077,028 to $4,116,546. The increases in salaries and employee benefits
of $331,744 (20%), occupancy of $380,434 (138%), and advertising of $71,679
(29%) were primarily the result of increased staffing and other costs related to
opening a new facility in September 1995.
Income Taxes. The change in income tax is a direct result of changes in
the Bank's taxable income and allowable bad debt deduction.
41
<PAGE>
Cash Dividends Paid. On December 6, 1995, the Bank paid a cash dividend
of $500,000 ($0.16 per share) to the stockholders of record as of November 17,
1995, and again on May 31, 1996, the Bank paid a cash dividend of $500,000
($0.16 per share) to the stockholders of record as of May 3, 1996. Of these
dividends, $688,843 were paid to the Mutal Holding Company.
Asset/Liability Management
The goal of the Bank's asset/liability policy is to manage interest
rate risk so as to maximize net interest income over time in changing interest
rate environments. Management monitors the Bank's net interest spreads (the
difference between yields received on assets and paid on liabilities) and,
although constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates in an attempt to
maximize net interest income. Management also attempts to fund the Bank's assets
with liabilities of a comparable duration to minimize the impact of changing
interest rates on the Bank's net interest income. Since the relative spread
between financial assets and liabilities is constantly changing, the Bank's
current net interest income may not be an indication of future net interest
income.
The Bank's initial efforts to manage interest rate risk included
implementing an adjustable rate mortgage loan ("ARM") program beginning in the
early 1980s. The ARMS have met with excellent customer acceptance. As of June
30, 1997, ARMs constituted 75% of the Bank's mortgage loan portfolio.
The Bank is also managing interest rate risk by the origination of
construction loans. As of June 30, 1997, such loans made up 15% of the Bank's
loan portfolio. In general, these loans have higher yields, shorter maturities
and greater interest rate sensitivity than other real estate loans. If the
demand for new single family housing were to decline, the Bank would likely
originate fewer construction loans which would reduce the amount of loans, or
potential growth, in the loan portfolio, reduce the net interest margin, and
reduce interest rate sensitivity in the loan portfolio.
The Bank constantly monitors its deposits in an effort to decrease
their interest rate sensitivity. Rates of interest paid on deposits at the Bank
are priced competitively in order to meet the Bank's asset/liability management
objectives and spread requirements. As of June 30, 1997, the Bank's savings
accounts, checking accounts and money market deposit accounts totaled
$28,629,148 or 19% of its total deposits. The Bank believes, based on historical
experience, that a substantial portion of such accounts represent non-interest
rate sensitive core deposits.
Interest Rate Sensitivity Analysis
The value of the Bank's loan portfolio will change as interest rates
change. Rising interest rates will decrease the Bank's net portfolio value,
while falling interest rates increase the value of that portfolio.
The following table sets forth as of June 30, 1997, (the most recent
available) OTS estimate of the projected changes in net portfolio value ("NPV")
in the event of 100, 200, 300, and 400 basis points ("bp") instantaneous and
permanent increases and decreases in market interest rates. Dollar amounts are
expressed in thousands.
42
<PAGE>
<TABLE>
<CAPTION>
Estimated Net Portfolio Value NPV as % of PV of Assets
BP Change -------------------------------------------------------- ---------------------------------
in Rates $ Amount $ Change % Change NPV Ratio BP Change
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
+400 bp $24,395 $-9,913 -29% 12.82% -393 bp
+300 27,754 -6,554 -19 14.26 -250
+200 30,698 -3,610 -11 15.45 -130
+100 32,933 -1,375 -4 16.30 -46
NC 34,308 16.75
-100 34,817 510 +1 16.84 +9
-200 34,904 597 +2 16.75 0
-300 35,180 872 +3 16.74 -2
-400 35,898 1,590 +5 16.89 +14
</TABLE>
Computations of prospective effects of hypothetical interest rate
changes are calculated by the OTS from data provided by the Bank and are based
on numerous assumptions, including relative levels of market interest rates,
loan repayments and deposit runoffs, and should not be relied upon as indicative
of actual results. Further, the computations do not contemplate any actions the
Bank may undertake in response to changes in interest rates.
Management cannot predict future interest rates or their effect on the
Bank's NPV in the future. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in differing degrees to changes in market interest rates.
Additionally, certain assets, such as adjustable rate loans, which represent the
bank's primary loan product, have features which restrict changes in interest
rates during the initial term and over the remaining life of the asset. In
addition, the proportion of adjustable rate loans in the Bank's portfolio could
decrease in future periods due to refinancing activity if market interest rates
remain or decrease in future periods due to refinancing activity. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an interest rate increase.
The Bank's Board of Directors is responsible for reviewing the asset
and liability policies. The Board meets quarterly to review interest rate risk
and trends, as well as liquidity and capital ratios and requirements. The Bank's
management is responsible for administering the policies and determinations of
the Board of Directors with respect to the Bank's asset and liability goals and
strategies. Management expects that the Bank's asset and liability policies and
strategies will continue as described above so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets. Currently, specified liquid assets must be at least
equal to 5% of deposits and short-term borrowings. The Bank's liquidity ratio as
of June 30, 1997, was 8.2%.
The Bank's principal sources of funds for investments and operations
are net income, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities,
43
<PAGE>
and proceeds from maturing investment securities. The Bank considers deposits as
the primary, and FHLB advances as the secondary, source of funds.
The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, and certificates of
deposit with other financial institutions that have an original maturity of
three months or less. The levels of such assets are dependent on the Bank's
operating, financing and investment activities at any given time. Then Bank's
cash and cash equivalents totaled $3,817,351 as of June 30, 1997. The variations
in levels of cash and cash equivalents are influenced by deposit flows and
anticipated future deposit flows.
As of June 30, 1997, the Bank had no conditional commitments in the
form of letters of credit. Outstanding loan commitments were $2,084,000. As of
June 30, 1997, the Bank had granted unused lines of credit to borrowers
aggregating approximately $266,000 and $2,275,000 for commercial lines and
open-end consumer lines, respectively. As of June 30, 1997, the Bank had
$81,479,645 in certificates of deposit which were scheduled to mature in one
year or less. It is anticipated that the majority of these certificates will be
renewed in the normal course of operations.
The Bank's capital position of $27,490,155 is 14% of total assets on
June 30, 1997. The Bank has an excess of $22,489,000, $19,546,000 and
$17,654,000 of required regulatory levels of tangible, core and risk-based
capital, respectively. Under current regulatory guidelines, the Bank is
classified as well-capitalized.
Other than the stock offering, which will significantly increase both
the liquidity and capital resources of the Bank, the Bank is not aware of any
trends or uncertainties that will have or are likely to have a material effect
on the Bank's liquidity or capital resources.
Impact of Inflation and Changing Prices
The Bank prepared the consolidated financial statements and related
data presented herein in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Impact of New Accounting Pronouncements
During the fiscal year ended June 30, 1997, the Bank implemented the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS
122 requires that mortgage banking enterprises recognize as separate assets,
rights to service mortgage loans for others. The balance sheet as of June 30,
1997, includes an asset representing such mortgage servicing rights in the
amount of $39,006.
44
<PAGE>
During the fiscal year ended June 30, 1997, the Bank implemented the
FASB SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." This accounting statement extends the rules
in SFAS 122 to all loan servicing. The implementation of SFAS No,. 125 had no
impact on the financial statements of the Bank.
The FASB has issued SFAS No. 123, "Accounting for Stock-based
Compensation." This statement establishes a fair value method of accounting for
stock-based compensation plans. It encourages entities to adopt that method in
place of the provisions of Accounting Principles Board Opinion No,. 25,
"Accounting for Stock Issued to Employees," for all arrangements under which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
its stock. Management has elected to continue to account for its stock-based
compensation plans in accordance with the provision of APB No. 25 and therefore
SFAS 123 had no impact on the Bank's consolidated financial statements. A
footnote to the consolidated financial statements discloses the pro forma impact
of SFAS 123, if the Bank would have elected to adopt SFAS 123.
The FASB recently adopted SFAS 128, "Earnings Per Share." This
statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Management has not determined the impact, if any, of adopting SFAS 128
on the Bank's financial statements.
The FASB recently adopted SFAS 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS 129 is effective for financial
statements issued for periods ending after December 15, 1997. The adoption of
SFAS 129 is not expected to have a material impact on the Bank's financial
statements.
The FASB recently adopted SFAS 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. It does not
address issues of recognition or measurement. SFAS is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 is not expected to
have a material impact on the Bank's financial statements.
The FASB recently adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in both annual financial statements and interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for financial statements issued for periods beginning
after December 15, 1997. The adoption of SFAS 131 is not expected to have a
material impact on the Bank's financial statements.
BUSINESS OF THE BANK
In April 1995, Guaranty Federal Savings & Loan Association reorganized
from a mutual savings and loan association into a mutual holding company,
Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company"). Concurrent
with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock
savings bank was chartered. The Bank issued 3,125,000 shares of common stock in
connection
45
<PAGE>
with the reorganization, the majority of which are owned by the Mutual Holding
Company (68.88% of the outstanding shares).
The principal business of the Bank consists of attracting deposits from
the general public and using such deposits to originate mortgage loans secured
by one- to four-family residences and, to a lesser extent, multi-family,
construction and commercial real estate loans and consumer and business loans.
The Bank also uses these funds to purchase loans secured by one- to four-family
residences, mortgage-backed securities, US government and agency obligations and
other permissible securities. The Bank's revenues are derived principally from
interest on its investments and fees charged for services provided. The Bank's
primary sources of funds are: deposits; borrowings; amortization and prepayments
of loan principal; and amortizations, prepayments and maturing of
mortgage-backed securities.
In May 1997, the Boards of Directors of the Bank and the Mutual Holding
Company announced a plan whereby the Bank would be wholly owned by a newly
formed stock holding company. Each share of Bank Common Stock currently owned by
Public Stockholders will be automatically converted into shares of the holding
company Common Stock based upon an Exchange Ratio. Subscription rights to
purchase the remainder of the conversion stock will be granted to certain
eligible depositors and other members of the Bank and Mutual Holding Company.
Any shares not sold in the subscription offering will be offered to certain
persons in a community offering. The Conversion and Reorganization are subject
to several contingencies, including the receipt of regulatory approval, the
approval of the depositors of the Bank and the approval of the stockholders of
the Bank.
Market Area
The Bank's primary market area is Greene County, which is in the
southwestern corner of Missouri. While the population of Greene County increased
12.4% between 1980 and 1990 and its per capita income grew approximately 32%
between 1985 and 1990, the average per capita income in 1990 still was lower
than the average per capita income for Missouri and the United States.
Springfield has a Metropolitan Statistical Area population of approximately
250,000. The local economy is well diversified with the majority of jobs in
light manufacturing and service industries. There is a large regional health
care presence with two large regional hospitals employing over 8,000 persons.
There also are four accredited colleges and one major university with total
enrollment approaching 25,000. Part of Greene County's growth can be attributed
to its proximity to Branson, Missouri, which has developed a strong tourism
industry related to country music and entertainment. Branson is located 30 miles
south of Springfield, and has between five and six million tourist visitors each
year, many of which pass through Springfield.
46
<PAGE>
Lending Activities
Set forth below is selected data relating to the composition of the
Bank's loan portfolio at the dates indicated:
Composition of Loan Portfolio
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------- ----------------
$ % $ % $ %
--- --- --- --- --- --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loans:
Mortgage loans (includes loans held-for-sale):
One- to four-family....................... $116,441 68.11% $ 98,918 68.26% $92,104 71.84%
Multi-family.............................. 15,457 9.04 13,701 9.45 12,169 9.49
Construction.............................. 25,149 14.71 21,729 14.99 17,887 13.95
Commercial real estate.................... 8,323 4.87 8,739 6.03 5,162 ^ 4.02
------- ---- ------- ---- --------- --------
Total mortgage loans................... 165,370 96.73 143,087 98.73 127,322 99.30
------- ----- ------- ----- --------- ------
Commercial business loans................... 383 0.22 255 0.18 219 0.17
Share loans................................. 720 0.42 530 0.37 522 0.41
Automobile loans............................ 1,765 1.03 1,005 0.69 106 0.08
Other....................................... 2,727 1.60 48 0.03 45 0.04
------- ---- ------- ---- --------- ------
Total consumer and other loans......... 5,595 3.27 1,838 1.27 892 0.70
------- ------ ------- ------ --------- ------
Total loans.......................... 170,965 100.00% 144,925 100.00% 128,214 100.00%
====== ====== ======
Less:
Loans in process.......................... 10,476 7,572 6,537
Deferred loan costs, net.................. (39) (22) (116)
Unearned discounts........................ 216 238 233
Allowance for loan losses................. 2,177 2,108 1,718
------- ------- ------
Total loans, net............................ $158,135 $135,029 $119,842
======= ======= =======
</TABLE>
The following table sets forth the dollar amount, before deductions for
unearned discounts, deferred loan costs and allowance for loan losses, at June
30, 1997 of all loans due after June 30, 1998, which have pre-determined
interest rates and which have adjustable interest rates.
Fixed and Adjustable Rate Loans by Type
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family.................. $13,728 $ 98,344 $112,072
Multi-family........................ 1,187 13,709 14,896
Construction......................... 308 2,632 2,940
Commercial real estate............... 790 4,741 5,531
Consumer and Other................... 1,601 2,303 3,904
--------- --------- ----------
Total (1).......................... $17,614 $121,729 $139,343
====== ======= =======
</TABLE>
- ------------
(1) Before deductions for unearned discounts, deferred loan costs, net and
allowances for loan losses.
47
<PAGE>
The following table sets forth the Bank's loan originations and loan
purchases, sales and principal repayments.
Origination, Purchase and Sale of Loans
Year Ended June 30,
----------------------------------
1997 1996 1995
------ ------ -----
(In Thousands)
Total gross loans receivable at
beginning of period ........ $ 144,925 $ 127,981 $ 115,380
--------- --------- ---------
Loans originated:
One- to four-family ......... 47,942 32,448 26,078
Multi-family ................ 2,259 2,903 --
Construction ................ 28,863 26,680 22,824
Commercial real estate ...... 3,398 7,053 241
Consumer and other .......... 4,499 3,521 1,636
--------- --------- ---------
Total loans originated ........ 86,961 72,605 50,779
Loans purchased:
Total loans purchased ......... -- -- --
Loans sold:
Whole loans ................. (4,134) (5,319) --
Loan principal repayments ..... (45,923) (41,867) (28,864)
Other (net)(1) ................ (10,864) (8,475) (9,314)
--------- --------- ---------
Net loan activity ............. 26,040 16,944 12,601
--------- --------- ---------
Total gross loans receivable at
end of period ............. $ 170,965 $ 144,925 $ 127,981
========= ========= =========
- --------------------
(1) Includes non-cash portion of loan originations.
48
<PAGE>
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 1997. The table shows loans that have adjustable-rates as
due in the period during which they contractually mature. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal repayments on loans totaled $45.9 million and $41.8 million
for the years ended June 30, 1997 and 1996, respectively.
Loan Maturities
<TABLE>
<CAPTION>
1-4 Family
Residential Multi-family Commercial
Real Residential Real Consumer
Estate Real Estate Construction Estate and Other Total
------ ----------- ------------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
1 Year or less.................. $ 4,355 $ 561 $12,307 $2,232 $1,691 $ 21,146
----- ------ ------ ----- ----- ------
After 1 year:
1 to 5 years.................. 12,106 2,425 935 1,796 3,895 21,157
Over 5 years.................. 99,966 12,471 2,005 3,735 9 118,186
------- ------ ------ ----- ------ -------
Total due after one year........ 112,072 14,896 2,940 5,531 3,904 139,343
-------- ------ ------ ----- ----- -------
Total amount due................ $116,427 $15,457 $15,247 $7,763 $5,595 160,489
======= ====== ====== ===== =====
Less:
Allowance for loan losses....... 2,177
Unearned discounts.............. 216
Deferred loan costs, net........ (39)
-------
Loans receivable, net......... $158,135
=======
</TABLE>
One- to Four-Family Mortgage Loans. The Bank offers fixed- and
adjustable-rate first mortgage loans secured by one- to four-family residences
in the Bank's primary lending area. Typically, such residences are single family
homes that serve as the primary residence of the owner. However, there are a
significant number of loans originated by the Bank which are secured by
non-owner occupied properties due to the large student population and high
number of service sector jobs. Loan originations are generally obtained from
existing or past customers, members of the local community, referrals from
attorneys, established builders, and realtors within the Bank's market area.
Originated mortgage loans in the Bank's portfolio include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event that the borrower transfers ownership of the
property without the Bank's consent.
As of June 30, 1997, 68.1% of ^ total loans receivable consisted of
one- to four-family residential loans, of which 86.3% were ARM loans. The Bank
offers ARM loans that have fixed interest rates for either one, three or five
years and, following that initial fixed period, adjust annually. The Bank has
also offered ARM loans for which interest rates adjust every one, three or five
years. Generally, ARM loans provide for limits on the maximum interest rate
adjustment ("caps") that can be made at the end of each applicable period and
throughout the duration of the loan. ARM loans are originated for a term of up
to 30 years on owner-occupied properties and generally up to 25 years on
non-owner occupied properties. Typically, interest rate adjustments are
calculated based on U.S. treasury securities adjusted to a constant maturity of
one year (CMT), plus a 2.75% margin. Interest rates charged on fixed-rate loans
are
49
<PAGE>
competitively priced based on market conditions and the cost of funds. The
Bank's fixed-rate mortgage loans currently are made for terms of 15 and 30
years.
Generally, ARM loans pose credit risks different from the risks
inherent in fixed-rate loans, primarily because as interest rates rise the
underlying payments of the borrower rise, thereby increasing the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. The Bank does not originate ARM
loans which provide for negative amortization.
The Bank generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the appraised value or the selling price of the
mortgaged property, whichever is lower. The Bank typically requires private
mortgage insurance for the excess percentage over 80% of mortgage loans with
loan to value percentages over 80%. The Bank originates mortgage loans secured
by non-owner occupied, one- to four-family residential properties at typically
up to 75% of the appraised value or the selling price of the mortgaged property,
whichever is lower. The Bank, however, may on occasion make such investor loans
with higher loan-to-value ratios. The Bank has two separate investors who have
accumulated, primarily, single family rental properties with mortgages totalling
$7.7 million as of June 30, 1997. Both borrowers are current as of June 30, 1997
and are in good standing with the Bank. Such loans represent a risk to the Bank
in that the borrowers' ability to make monthly payments is to an extent
dependent on the rental market for one- to four-family homes in Springfield,
Missouri.
Multi-Family Mortgage Loans. The Bank originates multi-family mortgage
loans in its primary lending area. As of June 30, 1997, $15.5 million or 9.0% of
the Bank's total loan portfolio consisted of multi-family residential loans.
With regard to multi-family mortgage loans, the Bank generally requires personal
guarantees of the principals as well as security interest in real estate.
Multi-family mortgage loans are generally originated in amounts of up to 75% of
the appraised value of the property. The loan-to-one-borrower limitation, $4.1
million as of June 30, 1997, is the maximum the Bank will lend on a multi-family
real estate loan. This limit will increase as a result of the proceeds received
by the Bank from the Offerings.
Loans secured by multi-family residential real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage
loans and carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by
multi-family residential real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired.
Construction Loans. As of June 30, 1997, construction loans totaled
$25.1 million or 14.7% of the Bank's total loans outstanding. Construction loans
are made to certain builders for construction of single family homes for resale,
as well as to individuals in connection with long-term, permanent loans to be
made upon completion of the construction. This portfolio predominantly consists
of speculative loans i.e. loans to builders who are speculating that they will
be able to locate a purchaser for the underlying property prior to or shortly
after the time construction has been completed.
The Bank principally finances the construction of single-family homes.
Construction loans are made to contractors who have sufficient financial
strength and a proven track record, for the purpose of resale, as well as on a
"pre-sold" basis. Construction loans made for the purpose of resale generally
provide for interest only payments at fixed rates and have terms of six months
to one year. Construction
50
<PAGE>
loans on "pre-sold" homes may convert into a permanent ARM loan upon completion
of construction. Construction loans to a borrower who will occupy a home, or to
a builder who has pre-sold the home, will be considered for loan to value ratios
of up to 85%. Construction loans for speculative purposes, models, and
commercial properties may be considered for loan to value ratios of up to 80%.
Loan proceeds are disbursed in increments as construction progresses and as
inspections warrant. The Bank employs inspectors rather than paying title
companies for construction disbursement purposes.
Construction lending by its nature entails significant additional risks
as compared with one-to four-family mortgage lending, attributable primarily to
the fact that funds are advanced upon the security of the project under
construction prior to its completion. As a result, construction lending often
involves the disbursement of substantial funds with repayment dependent on the
success of the ultimate project and the ability of the borrower or guarantor to
repay the loan. Because of these factors, the analysis of the prospective
construction loan projects require an expertise that is different in significant
respects from that which is required for residential mortgage lending. The Bank
has attempted to address these risks through its underwriting procedures.
Commercial Real Estate. As of June 30, 1997, the Bank had commercial
real estate loans totaling $8.3 million or 4.9% of the Bank's total loan
portfolio. Commercial real estate loans are generally originated in amounts up
to 75% of the appraised value of the mortgaged property. The Bank's commercial
real estate loans are generally permanent, adjustable rate loans secured by
improved property such as office buildings, retail stores, small shopping
centers, medical offices, churches and other non-residential buildings. All
originated commercial real estate loans are within the Bank's market area.
To originate commercial real estate loans, the Bank generally requires
a security interest in the real estate, personal guarantees of the principals, a
security interest in personal property, and a standby assignment of rents and
leases. The Bank has established its loan-to-one borrower limitation, which was
$4.1 million as of June 30, 1997, as its maximum commercial real estate loan
amount. This limit will increase as a result of the proceeds received by the
Bank from the Offerings. Commercial loans above 75% loan to value ratio require
Board of Director approval on a case-by-case basis. Because of the small number
of commercial real estate loans made, and the relationship of each borrower to
the Bank, each such loan has differing terms and conditions applicable to the
particular borrower.
Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate are often dependent on
successful operation or management of the properties, repayment of such loans
may be subject, to a greater extent, to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks by limiting the
number of such loans, lending only to established customers and borrowers
otherwise known to the Bank, and generally restricting such loans to its primary
market area.
At June 30, 1997, the Bank also included approximately $3.4 million in
loans to develop land into residential lots and loans on completed lots in the
commercial real estate loan portfolio. The Bank utilizes its knowledge of the
local market conditions and appraisals to evaluate the development cost, and
estimate projected lot prices and absorption rates to assess loans on
residential subdivisions. The Bank typically loans up to 70% of the appraised
value over terms up to two years. Development loans generally involve a greater
degree of risk than residential mortgage loans because (1) the funds are
advanced upon the security of the land which has a materially lower value prior
to completion of the infrastructure required of a subdivision, (2) the cash flow
available for debt repayment is a function of the sale of the individual lots,
and (3) the interest required to service the debt is a function of the time
required to complete the development and sell the lots.
51
<PAGE>
Consumer and Other Lending. The Bank also offers other loans, primarily
loans secured by share accounts, commercial business assets, consumer loans, and
automobile loans. As of June 30, 1997, $5.6 million or 3.3%, of the Bank's loan
portfolio consisted of such loans. The Bank will continue to expand its consumer
lending as opportunities present themselves.
Loan Approval Authority and Underwriting. All loans secured by real
estate must have the approval of the members of the loan committee which
consists of six senior officers. The loan committee meets periodically to review
and approve loans made within the scope of its authority. Real estate loans in
excess of $500,000 require prior approval by the Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is requested, income,
assets, and certain other information are verified and, if necessary, additional
financial information is requested. An appraisal of the real estate intended to
secure the proposed loan is generally required, which currently is performed by
certified appraisers designated and approved by the Board of Directors. It is
the Bank's policy to obtain appropriate insurance protection on all real estate
first mortgage loans. Borrowers generally must also obtain hazard insurance
prior to closing. Borrowers generally are required to advance funds for certain
items such as real estate taxes, flood insurance and private mortgage insurance,
when applicable.
Delinquencies and Problem Assets.
Delinquent Loans. As of June 30, 1997, the Bank had 9 loans with a
total principal balance of $828,000, 90 days or more past due and 16 loans with
total principal balances of $1.2 million between 30 and 89 days past due. The
Bank generally does not accrue interest on loans past due more than 90 days
unless they are well secured and the Bank expects that the account will be
collected within 30 days.
52
<PAGE>
The following table sets forth the Bank's loans that are 90 days or
more delinquent.
Delinquency Summary
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family.................................. $279 $ -- $ -- $ -- $ --
Multi-family......................................... 286 -- -- -- --
Construction......................................... 150 273 -- -- --
Commercial real estate............................... -- -- 1,882 2,013 2,313
--- --- ----- ----- -----
Total mortgage loans................................... 715 273 1,882 2,013 2,313
--- --- ----- ----- -----
Non-mortgage loans
Commercial........................................... -- 120 -- -- --
Consumer and other................................... -- -- -- 6 11
--- ------- ------- ------- -----
Total non-mortgage loans............................... -- 120 -- 6 11
--- ------ --- ------- -----
Total non-accrual loans................................ 715 393 1,882 2,019 2,324
--- ------ ----- ----- -----
Accruing loans which are past maturity and
contractually past due 90 days or more:
Mortgage loans:
One- to four-family.................................. -- 246 -- -- --
Multi-family......................................... -- -- -- -- --
Construction......................................... 113 1,047 -- -- --
Commercial real estate............................... -- 91 -- -- --
--- ----- ----- ----- ------
Total mortgage loans................................... 113 1,381 -- -- --
--- ----- ----- ----- ------
Non-mortgage loans:
Commercial........................................... -- -- -- -- --
Consumer and other................................... -- -- -- -- --
--- ----- ----- ----- ------
Total non-mortgage loans............................... -- -- -- -- --
--- ----- ----- ----- ------
Total accruing loans.................................. 113 1,384 -- -- --
--- ----- ----- ----- ------
Total non-accrual and accrual loans.................... $828 $1,777 $1,882 $2,019 $2,324
=== ===== ===== ===== =====
Total non-accrual and accrual loans as a
percentage of net loans.............................. .52% 1.32% 1.57% 1.92% 2.42%
=== ==== ==== ==== ====
Total non-accrual and accrual loans as a
percentage of total assets........................... .42% .96% 1.10% 1.27% 1.46%
=== === ==== ==== ====
</TABLE>
53
<PAGE>
Non-Performing Assets. Loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, the collection
of additional interest is doubtful. Mortgage loans are placed on non-accrual
status generally when either principal or interest is more than 90 days past
due. Interest accrued and unpaid at the time a loan is placed on nonaccrual
status is charged against interest income.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is deemed a foreclosed asset held for sale until such
time as it is sold. When a foreclosed asset held for sale is acquired it is
recorded at its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations.
As of July 1, 1995, the Bank implemented Statement of Financial
Accounting Standards No. 114 (SFAS 114). While implementation had no material
effect on net income, in accordance with the new pronouncement, loans totaling
$851,818, net of the valuation allowance, which were previously classified as
in-substance foreclosures, and reported as part of foreclosed assets
held-for-sale have been reclassified to loans along with $199,033 of related
allowances for collectibility.
Prior to the implementation of SFAS 114, the Bank considered collateral
for a loan to be in-substance foreclosed if: (1) the borrower had little or no
equity in the collateral; (ii) proceeds for repayment of the loan could be
expected to come only from the operation or sale of the collateral; and (iii)
the borrower had either formally or effectively abandoned control of the
collateral to the Bank, or retained control of the collateral but was unlikely
to be able to rebuild equity in the collateral or otherwise repay the loan in
the foreseeable future. Cash flow attributable to in-substance foreclosures was
used to reduce the carrying value of the collateral.
54
<PAGE>
The following table shows the principal amount of non-performing assets
and the resulting impact on interest income for the periods then ended.
Non-Performing Assets
<TABLE>
<CAPTION>
As of June 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- --------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family........................ $ 279 $ -- $ -- $ -- $ --
Multi-family............................... 286 -- -- -- --
Construction............................... 190 273 -- -- --
Commercial real estate..................... 502 -- 1,882 2,013 2,313
----- --- ----- ----- -----
Total mortgage loans......................... 1,257 273 1,882 2,013 2,313
----- --- ----- ----- -----
Non-mortgage loans:
Commercial................................. -- 120 -- -- --
Consumer and other......................... -- -- -- 6 11
----- --- ----- ------ ------
Total non-mortgage loans..................... -- 120 - 6 11
----- --- ----- ------ ------
Total non-performing loans(1)................ 1,257 393 1,882 2,019 2,324
Foreclosed assets held for sale.............. 210 2 4 6 7
Non-performing loans classified as
in-substance foreclosures.................. -- -- 698 846 974
------- ----- ------ ----- ------
Total non-performing assets ................. $1,467 $395 $2,584 $2,871 $3,305
===== === ===== ===== =====
Total non-performing loans as a percentage
of net loans............................... .79% .29% 1.57% 1.92% 2.55%
Total non-performing assets as a percentage
of total assets............................ .74% .21% 1.51% 2.02% 2.09%
Impact on interest income for the period:
Interest income that would have been
recorded on non-accruing loans............. $ 31 $ 15 $ -- $ -- $ 1
</TABLE>
- --------------------
(1) Includes loans not delinquent more than 90 days but considered impaired.
55
<PAGE>
Problem Assets. Federal regulations require that the Bank 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" must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. "Doubtful assets" have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a special mention category,
described as assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish general allowance for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount. A portion of general loss allowances
established to cover ^ 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.
As of June 30, 1997, the Bank had total classified assets of $2.2
million of which $2.2 million were considered substandard and $0 were classified
as loss. Special mention assets totaled $930,000 as of June 30, 1997.
One borrower had three non-accrual loans with the Bank that were
classified as substandard or special mention at June 30, 1997. These loans,
aggregating approximately $373,000, are cross collateralized by a partially
completed single family residence and three duplexes. The Bank has provided
reserves against the estimated potential loss for these loans.
One bankrupt borrower had three non-accrual loans with the Bank that
were classified as substandard at June 30, 1997. These loans, aggregating
approximately $306,000, are secured by first deeds on multi-family properties
and a second deed on a single family residence. The Bank believes that the
borrower may abandon these properties and that the Bank will ultimately take
possession of these properties. The Bank has established a reserve equal to 20%
of the outstanding balance.
Nine non-accrual loans originated by the Bank to a builder were
classified as substandard at June 30, 1997. Of these loans, aggregating
approximately $580,000, three are secured by first deeds on nonowner occupied
residences, four are secured by first deeds on partially completed single family
residences, one is a commercial loan and one is a consumer loan. The Bank has
established a reserve equal to 20% of the outstanding balance.
One borrower had 16 loans past due less than 30 days that were
classified as special mention at June 30, 1997. These loans, aggregating
approximately $534,000, were secured by first deeds on three single family
residences and 13 duplex units. This borrower also holds loans from the Bank on
nine condominium units secured by first and second deeds of trust, aggregating
approximately $314,000 at June 30, 1997 and current at that date. This same
borrower also owes the Bank approximately $503,000 to the Bank through a first
deed of trust on a multi-family dwelling. This loan was also current at June 30,
1997. The Bank has provided reserves against all of the loans by this borrower
due to past payment performance.
56
<PAGE>
Classification of Assets
The following table shows the aggregate amounts of the Bank's
classified assets as of June 30, 1997.
<TABLE>
<CAPTION>
As of June 30, 1997
---------------------------------------------------------------------------------------------------
Substandard Doubtful Loss Special Mention
------------------------ ------------------- --------------------- -----------------------
Number Balance Number Balance Number Balance Number Balance
------ ------- ------ ------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
1-4 family..................... 10 $ 384 -- $ -- -- $ -- 15 $747
Multi-family................... 4 1,077 -- -- -- -- 1 183
Commercial real estate......... 1 19 -- -- -- -- -- --
Construction and land.......... 7 473 -- -- -- -- -- --
Other loans.................... 1 8 -- -- -- -- -- --
-- ----- --- --- --- --- --- ---
Total loans................. 23 $1,961 -- $ -- -- $ -- 16 $930
== ===== === === === === == ===
Foreclosed assets held-for-sale:
1-4 family..................... 2 $ 210 -- $ -- -- $ -- -- $ --
Commercial real estate......... -- -- -- -- -- -- -- --
Land and other loans........... -- -- -- -- -- -- -- --
-- ----- --- --- --- --- -- ---
Total foreclosed assets..... 2 210 -- -- -- -- -- --
-- ----- --- --- --- --- --- ---
Total....................... 25 $2,171 -- $ -- -- $ -- 16 $930
== ===== === === === === == ===
</TABLE>
57
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and valuation
of foreclosed assets held for sale. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
As of June 30, 1997, the Bank's total allowance for loan losses was
$2.2 million which amounted to 1.3% of total loans. This allowance reflects not
only management's determination to maintain an allowance for loan losses
consistent with regulatory expectations for non-performing assets, but also
reflects the Bank's policy of evaluating the risks inherent in its loan
portfolio, and the regional economy.
In March 1996 the Bank had $1.2 million of loan recovery on a
commercial loan which was previously partially charged off. The loan recovery
represents amounts recovered in excess of the carrying balance of the loan as
reflected by the original terms of the loan, including accrued interest and
previously charged-off principal. Consequently, the Bank determined that the
allowance for loan losses was sufficient prior to the recovery, and credited the
provision for loan losses. During fiscal year 1997, the Bank again experienced a
net recovery and based on a review discussed above, elected to make no further
addition to the allowance. Management anticipates the need to begin adding to
loss reserves through charges to provision for loan losses within the next year
if growth in the loan portfolio continues as anticipated.
58
<PAGE>
The following tables set forth certain information concerning
the Bank's allowance for possible loan losses at the dates indicated.
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Beginning balance .................................... $ 2,108 $ 1,718 $ 1,703 $ 1,687 $ 1,792
------- ------- ------- ------- -------
Gross loan charge offs (non-residential, commercial
and residential 1-4 family) ......................... (63) (4) (5) (2) (13)
Recoveries (residential 1-4 family and non-residential) 132 1,407 4 4 6
------- ------- ------- ------- -------
Net loan recoveries (charge-offs) ..................... 69 1,403 (1) 2 (7)
Provision (credit) for loan losses (charged to expense) -- (1,212) 16 14 (98)
Allowances reclassified to loans which were previously
classified as in-substance foreclosures ............. -- 199 -- -- --
------- ------- ------- ------- -------
Ending balance ........................................ $ 2,177 $ 2,108 $ 1,718 $ 1,703 $ 1,687
======= ======= ======= ======= =======
Net recoveries (charge-offs) as a percentage of
average loans, net .................................. 0.05% 1.10% --% --% 0.01%
Allowance for loan losses as a percentage of
average loans, net .................................. 1.49 1.66 1.52 1.62 1.82
Allowance for loan losses as a percentage of total
non-performing loans ................................ 173.19 536.39 91.29 84.35 72.59
</TABLE>
59
<PAGE>
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ----------------------------- -------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each 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(1)............ $2,099 96.73% $2,071 98.73% $1,700 99.30%
Consumer and other loans..... 78 3.27 37 1.27 18 0.70
----- ------ ----- ------ ------ ------
Total................... $2,177 100.00% $2,108 100.00% $1,718 100.00%
===== ====== ===== ====== ====== ======
</TABLE>
- ----------------
(1) Includes an allowance for loan losses for construction loans of $450,000
and $195,000 at June 30, 1997 and 1996, respectively.
Mortgage-Backed Securities
The Bank has significant investments in mortgage-backed securities and
has at times utilized such investments to complement its mortgage lending
activities. As of June 30, 1997, the Bank held mortgage-backed securities
totaling $15.8 million or 7.9%, of total assets. The estimated fair value of
such securities totaled $16.1 million as of June 30, 1997. All of the Bank's
mortgage-backed securities are insured and are guaranteed by the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Bank
("GNMA"), or the Federal National Mortgage Association ("FNMA").
The following table sets forth the Bank's mortgage-backed portfolio by
the amount of such securities backed by fixed-rate and adjustable-rate
mortgages.
Composition of Mortgage-Backed Securities by Fixed and Adjustable Rates
<TABLE>
<CAPTION>
At June 30, 1997
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Held-to-maturity:
GNMA...................... $ 3,748 $ 2,194 $ 5,942
FNMA...................... 609 1,074 1,683
FHLMC..................... 3,014 5,175 8,189
$ 7,371 $ 8,443 $ 15,814
===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Held-to-maturity:
GNMA...................... $ 7,317 $ -- $ 7,317
FNMA...................... 925 1,606 2,531
FHLMC..................... 3,585 6,634 10,219
----- ----- ------
Total..................... $ 11,827 $ 8,240 $ 20,067
====== ===== ======
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 1995
--------------------------------------------------------------
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Held to maturity:
GNMA...................... $ 5,830 $ -- $ 5,830
FNMA...................... 939 403 1,342
FHLMC..................... 2,635 4,048 6,683
----- ----- -----
Total..................... $ 9,404 $ 4,451 $ 13,855
===== ===== ======
</TABLE>
As of June 30, 1997, all mortgage-backed securities were classified as
held-to-maturity by the Bank. The following table sets forth the composition of
the Bank's mortgage-backed securities portfolio, indicating the amortized cost,
percent of portfolio and estimated fair value.
Composition of Mortgage-Backed Securities by Cost and Fair Value
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------
Percent Estimated
Amortized of Fair
Cost Portfolio Value
---- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Held to maturity:
GNMA.................... $5,942 37.58% $ 6,312
FNMA.................... 1,683 10.64 1,719
FHLMC.................. 8,189 51.78 8,060
----- ----- -----
Total................... $15,814 100.00% $ 16,091
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
-----------------------------------------------------
Percent Estimated
Amortized of Fair
Cost Portfolio Value
---- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Held-to-maturity:
GNMA.................... $ 7,317 36.47% $ 7,672
FNMA.................... 2,531 12.61 2,480
FHLMC................... 10,219 50.92 10,189
------ ----- ------
Total................... $ 20,067 100.00% $ 20,341
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1995
----------------------------------------------------
Percent Estimated
Amortized of Fair
Cost Portfolio Value
---- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Held-to-maturity:
GNMA.................... $ 5,830 42.08% $ 6,235
FNMA.................... 1,342 9.69 1,343
FHLMC................... 6,683 48.23 6,698
----- ----- -----
Total................... $ 13,855 100.00% $ 14,276
====== ====== ======
</TABLE>
61
<PAGE>
The following table sets forth the maturities of the Bank's
mortgage-backed securities and the weighted yields of those securities at June
30, 1997.
Maturities and Weighted Average Yields of Mortgage-Backed Securities
<TABLE>
<CAPTION>
Contractual Maturities Due at Year Ended June 30, 1997
--------------------------------------------------------------------------------------------------------------
One After One Year After Five Years to After
Year or Less to Five Years Ten Years Ten Years Total Amount
---------------------- --------------------- ----------------------- -------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------- ----------- ------------ ------- ----------- ----------- --------- ---------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
GNMA.......... $ -- --% $ -- --% $ -- --% $ 5,942 8.70% $ 5,942 8.70%
FNMA.......... -- -- -- -- -- -- 1,683 6.50 1,683 6.50
FHLMC......... -- -- 1,900 6.00 6 8.10 6,283 7.60 8,189 7.23
--- --- ----- ---- -- ---- ----- ---- ----- ----
Total $ -- --% $1,900 6.00% $ 6 8.10% $13,908 7.94% $15,814 7.70%
=== === ===== ==== == ==== ====== ==== ====== ====
</TABLE>
62
<PAGE>
The following table sets forth the Bank's mortgage-backed
securities purchases, sales and principal repayments.
Mortgage-Backed Securities Activity
<TABLE>
<CAPTION>
Year Ended June 30,
- -----------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance..................................... $20,067 $13,855 $14,138
Purchases............................................. -- 10,834 2,174
Sales................................................. -- -- --
Principal payments.................................... (4,300) (4,628) (2,485)
Amortization and accretion, net....................... 47 6 28
------- ------- -------
Ending balance...................................... $15,814 $20,067 $13,855
====== ====== ======
</TABLE>
Investment Activities
The investment policy of the Bank, which is established by the Board of
Directors and reviewed by the Investment Committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk, and to complement the
Bank's lending activities. The policy currently provides for held-to-maturity
and available-for-sale portfolios. The Bank has adopted an investment policy
which strictly prohibits speculation in investment securities. The Bank does not
currently engage in trading investment securities and does not anticipate doing
so in the future. As of June 30, 1997, the Bank had investment securities with
an estimated fair value of $11.7 million and a carrying value of $11.9 million.
Of those securities $3.4 million, or 28.1%, of the Bank's investment securities
portfolio were available-for-sale.
The Bank has the authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements, and loans on
federal funds.
The following table sets forth the composition of the Bank's investment
securities portfolio.
Composition of Investment Securities
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Treasury and government agency securities.............. $8,586 $15,656 $20,343
Obligations of state and political subdivisions............. -- -- 1,625
Corporate notes and bonds................................... -- -- 500
Other securities(1)......................................... 3,360 2,052 1,650
------ ------ ------
Total investment securities............................... 11,946 17,708 24,118
Interest-bearing deposits.................................... 3,400 2,373 4,186
FHLB stock................................................... 1,734 1,734 1,700
------ ------ ------
Total investments......................................... $17,080 $21,815 $30,004
====== ====== ======
</TABLE>
- ------------------
(1) Consists of FHLMC stock.
63
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
securities portfolio at June 30, 1997.
Investment Portfolio Maturities and Average Weighted Yields
<TABLE>
<CAPTION>
As of June 30, 1997
----------------------------------------------------------------------------------------------------------------------
One Year or Less After One to Five Years After Five to Ten Years After Ten Years Total Investment Securities
------------------- ------------------------ ------------------------- ------------------ ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Fair
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Treasury
and
government
agencies.... $ -- --% $7,003 6.02% $ -- --% $1,583 6.58% $8,586 6.13% $8,373
----- ----- ----- ---- ----- ---- ----- ---- ----- ---- -----
Total....... $ -- --% $7,003 6.02% $ -- --% $1,583 6.58% $8,586 6.13% $8,373
===== ===== ===== ==== ===== ==== ===== ==== ===== ==== =====
</TABLE>
64
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, borrowings,
amortization and prepayments on loans and mortgage-backed securities.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits principally consist of
fixed-term certificates, passbook savings, money market, individual retirement
accounts ("IRAs") and NOW (checking) accounts. The flow of deposits is
influenced significantly by general economic conditions, the restructuring of
the thrift industry, changes in money market and prevailing interest rates and
competition. The Bank's deposits are typically obtained from the areas in which
its offices are located. The Bank relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits.
The Bank seeks to maintain a high level of stable core deposits by
providing convenient and high quality service through its offices.
The following table sets forth the distribution of the Bank's deposit
accounts as of June 30, 1997.
Deposit Account Types
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Category Term Interest Rate(1) Balance Amount June 30, 1997 Total Deposits
- -------- ---- ---------------- -------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
NOW accounts............. None 2.05% $100 $9,386 6.21%
Savings accounts......... None 2.80 25 8,621 5.70
Money market accounts.... None 2.98 1,000 8,288 5.47
Non interest-bearing
demand accounts........ None 100 2,334 1.54
------ ------
Total............... 28,629 18.92
------ ------
Certificates of Deposit:
Fixed Term, Fixed Rate 1-11 Months 4.96 500 16,846 11.14
Fixed Term, Fixed Rate 12-23 Months 5.29 500 47,682 31.53
Fixed Term, Fixed Rate 24-35 Months 5.63 500 28,485 18.83
Fixed Term, Fixed Rate 36-47 Months 5.77 500 12,013 7.94
Fixed Term, Fixed Rate 48-59 Months 5.87 500 1,718 1.14
Fixed Term, Fixed Rate 60-71 Months 5.92 500 10,615 7.02
Fixed Term, Fixed Rate 72-95 Months 5.92 500 5,258 3.48
------- ------
Total............... 122,617 81.08
------- ------
Total deposits........... $151,246 100.0%
======= =====
</TABLE>
- ---------------
(1) Current interest rate offerings as of June 30, 1997.
65
<PAGE>
The following table presents the deposit activity of the Bank.
Deposit Activity
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Beginning balance................................. $157,008 $139,595 $141,017
------- ------- -------
Deposits.......................................... 126,919 118,097 83,991
Withdrawals...................................... (137,273) (105,689) (89,184)
-------- -------- -------
Net deposits (withdrawals)........................ (10,354) 12,408 (5,193)
Interest credited................................. 4,592 5,005 3,771
------- ------- -------
Net increase (decrease) in deposits............... (5,762) 17,413 (1,422)
------- ------- -------
Ending balance.................................... $151,246 $157,008 $139,595
======= ======= =======
</TABLE>
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
Certificates of Deposit Accounts by Rate
<TABLE>
<CAPTION>
As of June 30,
------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
0.00 - 3.99%......................................... $ 6 $ 50 $ 1,043
4.00 - 5.99%......................................... 108,383 106,243 68,576
6.00 - 7.99%......................................... 14,228 27,030 49,583
8.00 - 9.99%......................................... -- -- 22
---------- --------- ---------
Total........................................... $ 122,617 $133,323 $119,224
======== ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1997.
Certificate of Deposit Maturity Schedule
<TABLE>
<CAPTION>
Balance Due in
----------------------------------------------------------------------------------------------------
Less than One to Two to Three Years
Interest Rate One Year Two Years Three Years or More Total
- ------------- ------------------- ------------------- ------------------- ------------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00 - 3.99%............... $ 6 $ -- $ -- $ -- $ 6
4.00 - 5.99%............... 76,118 25,948 3,742 2,575 108,383
6.00 - 7.99%............... 5,356 1,177 2,601 5,094 14,228
------ ------ ----- ----- ------
Total................. $81,480 $27,125 $6,343 $7,669 $122,617
====== ====== ===== ===== =======
</TABLE>
66
<PAGE>
The following table indicates the approximate amount of the Bank's
certificate accounts of $100,000 or more by time remaining until maturity as of
June 30, 1997.
Maturities of Certificates of Deposit of $100,000 or More
Certificates
of Deposits
-----------
(In thousands)
Maturity Period
- ---------------
Three months or less...................................... $2,592
Three through six months.................................. 1,101
Six through twelve months................................. 2,197
Over twelve months....................................... 2,106
-----
Total................................................ $7,996
=====
67
<PAGE>
The following table presents the change in dollar amount of deposit
accounts by savings type for the years ended June 30, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
At June 30, 1997 At June 30, 1996 At June 30, 1995
----------------------------------- ----------------------------------- --------------------------------
Minimum Balance in Percentage Increase or Balance in Percentage Increase or Balance in Percentage Increase or
Term Thousands of Deposits Decrease Thousands of Deposits Decrease Thousands of Deposits Decrease
------ ---------- ----------- --------- ---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and
transaction
accounts:
NOW accounts... None $ 9,386 6.21% $2,761 $6,625 4.22% $1,091 $ 5,534 3.96% $(687)
Savings
accounts..... None 8,621 5.70 (1,641) 10,262 6.54 (501) 10,763 7.71 (4,468)
Money market
accounts..... None 8,288 5.47 3,024 5,264 3.35 1,956 3,308 2.37 (1,026)
Non-interest-
bearing
demand
accounts..... None 2,334 1.54 800 1,534 0.98 768 766 0.55 500
------ ----- ------ ------ ----- ------- ------ ----- -------
Total...... 28,629 ^ 18.92 4,944 23,685 15.09 3,314 20,371 14.59 (5,681)
------ ------- ----- ------ ----- ------- ------ ----- -------
Certificate
of Deposit
accounts:
Fixed-rate,
fixed term...1-11 months 16,846 11.14 (16,454) 33,300 21.21 11,970 21,330 15.28 (2,764)
Fixed-rate,
fixed term...12-23 months 47,682 31.53 2,983 44,699 28.47 1,363 43,336 31,05 7,345
Fixed-rate,
fixed term...24-35 months 28,485 18.83 3,801 24,684 15.72 1,269 23,415 16.77 (1,208)
Fixed-rate,
fixed term...36-47 months 12,013 7.94 (461) 12,474 7.94 (1,053) 13,527 9.69 (3,040)
Fixed-rate,
fixed term...48-59 months 1,718 1.14 (100) 1,818 1.16 (613) 2,431 1.74 (244)
Fixed-rate,
fixed term...60-71 months 10,615 7.02 (590) 11,205 7.14 499 10,706 7.67 1,969
Fixed-rate,
fixed term...72-95 months 5,258 3.48 115 5,143 3.27 664 4,479 3.21 2,224
Fixed-rate,
fixed term... 96+ months -- -- -- -- -- -- -- -- (23)
-------- ------- -------- ------- ------- -------- --------- -------- ------
Total...... 122,617 ^ 81.08 (10,706) 133,323 84.91 14,099 119,224 85.41 4,259
------- ------- ------- ------- ------- ------ ------- ------ ------
Total
deposits. $151,246 100.00% $ (5,762) $157,008 100.00% $17,413 $139,595 100.00% $(1,422)
======= ====== ======= ======= ====== ====== ======= ====== ======
</TABLE>
68
<PAGE>
Borrowings
Deposits are the primary source of funds for the Bank's lending
activities and other general business purposes. However, during periods when
supply of lendable funds cannot meet the demand for such loans, the FHLB System
makes available, subject to compliance eligibility standards, a portion of the
funds necessary through loans (advances) to its members.
As of June 30, 1997 and 1996, there were $18.2 million and $0
outstanding advances from the FHLB, respectively. The weighted average interest
rate on such advances at June 30, 1997 was 6.12%. The average balance of
outstanding advances during 1997 and 1996, was $13.8 million and $690,000,
respectively, and the approximate average interest rate was 6.09% and 5.65%,
respectively. During 1997 and 1996 the maximum outstanding at any month end was
$21.2 million and $3.0 million, respectively.
Subsidiary Activity
The Bank has one service corporation, Guaranty Financial Services of
Springfield, Inc. The Bank had an investment of $643,000 in its service
corporation as of June 30, 1997. The service corporation sells mutual funds,
fixed and variable annuities, unit investment trusts, individual stocks and
bonds and life insurance. Such sales are completed through an agreement with
"INVEST" for providing brokerage services. In addition, the service corporation
acts as a real estate broker for properties owned by the Bank.
Properties
The Bank's office facilities currently consist of the main office in
Springfield, Greene County, Missouri and three full-service branch offices in
Springfield. The Bank constructed a new main office building in 1995, which
provides the Bank with a modern office for customer services and projects a
favorable image for the Bank in the local marketplace. The Bank has also
recently completed additional investment in certain of the branch offices to
upgrade and improve the facilities.
The Bank intends to open a new branch office location in the southern
section of Springfield during the second quarter of fiscal year 1998. This
branch, located on the site of land purchased for a permanent branch office
facility, will be a modular building leased for a two year period, thus
requiring only moderate investment in fixed assets and equipment. The Bank
estimates that the investment in the site improvements to facilitate the modular
office will be approximately $50,000. Monthly lease payments for the modular
office are $2,100 for a two year period. Following the end of the two year
lease, the Bank intends to examine whether to extend the lease of the modular
office, or commence construction of a permanent branch office facility.
In addition to the above, the Bank will continue to evaluate additional
branching opportunities that may complement operations or support penetration of
new markets.
69
<PAGE>
Carrying Value of Land and Buildings
<TABLE>
<CAPTION>
As of June 30, 1997
-----------------------------------------------------------------------------------------
(In Thousands)
Office Locations Year Acquired Status Net Carrying Value
- ---------------- ---------------------------- ----------------------------- --------------------------
<S> <C> <C> <C>
330 East Walnut N/A Leased N/A
1510 East Sunshine 1978 Owned $ 402
2109 North Glenstone 1986 Owned 509
1341 West Battlefield 1992 Owned 4,650
------
Total Net Carrying Value of Land and Buildings $5,561
</TABLE>
Employees
As of June 30, 1997, the Bank had 56 full-time employees and 11 part
time employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank, the Mutual Holding Company
or the Company ^ that would have had a material effect on the operations or
income of the Bank or the Company.
Competition
The Bank experiences substantial competition both in attracting and
retaining deposit accounts and in the making of mortgage and other loans.
Direct competition for savings accounts comes from other savings
institutions, credit unions, regional bank and thrift holding companies and
commercial banks located in its primary market area. Significant competition for
the Bank's other deposit products and services comes from money market mutual
funds, brokerage firms and insurance companies. The primary factors in competing
for loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. Competition for origination of real
estate loans normally comes from other savings institutions, commercial banks,
mortgage bankers, mortgage brokers and insurance companies.
The Bank's primary competition comprises the financial institutions
near each of the Bank's branch offices. In Springfield, where the Bank's main
office and three branch offices are located, primary competition consists of
five thrift institutions and 17 commercial banks and 12 credit unions.
The Bank believes it is able to compete effectively in its primary
market area by offering competitive interest rates and loan fees, and a variety
of deposit products, and by emphasizing personal customer service.
70
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
the Company and the Bank. The description is not complete and is qualified in
its entirety by references to applicable laws and regulation.
Holding Company Regulation
General. The Company will be required to register and file reports with
the OTS and will be subject to regulation and examination by the OTS. In
addition, the OTS will have enforcement authority over the Company and any
non-savings institution subsidiaries. This will permit the OTS to restrict or
prohibit activities that it determines to be a serious risk to the Bank. This
regulation is intended primarily for the protection of the Bank's depositors and
not for the benefit of stockholders of the Company.
QTL Test. Since the Company will own only one savings institution, it
will be able to diversify its operations into activities not related to banking,
but only so long as the Bank satisfies the qualified thrift lender (the "QTL")
test. If the Company controls more than one savings institution, it would lose
the ability to diversify its operations into non-banking related activities,
unless such other savings institutions each also qualify as a QTL or were
acquired in a supervisory acquisition. See "- Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. The Bank is also subject to certain
reserve requirements promulgated by the Board of Governors of the Federal
Reserve System ("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's board of directors on any
deficiencies that the OTS finds in the Bank's operations. The Bank's
relationship with its depositors and borrowers is also regulated to a great
extent by federal and state law, especially in such matters as the ownership of
savings accounts and the form and content of its mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. 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 SAIF 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
71
<PAGE>
loan loss reserves for regulatory purposes. Any change in regulations, whether
by the OTS, the FDIC or any other government agency, could have a material
adverse impact on the Bank's operations.
Insurance of Deposit Accounts. The deposit accounts of the Bank are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). 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, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator. The FDIC may also prohibit an insured
depository institution from engaging in any activity the FDIC determines poses a
serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly commercial banks, were required to pay substantially lower, or
virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $932,000 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members were reduced to approximately
.064% of deposits on an annual basis; this rate may continue through the end of
1999. During this same period, BIF members are expected to be annually assessed
approximately .013% of deposits. Thereafter, assessments for BIF and SAIF
members should be the same and the SAIF and BIF may be merged. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank substantially declined.
Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, the Bank might have to convert to a different financial
institution charter and be regulated under federal law as a bank, including
being subject to the more restrictive activity limitations imposed on national
banks. The Bank cannot predict the impact of its conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. The Bank's capital ratios are set forth under "Historical and Pro Forma
Capital Compliance."
72
<PAGE>
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS may require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends by the Bank to the
Company. In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect would be to reduce its regulatory capital below the
amount required for the liquidation account to be established at the time of the
Conversion. See "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers -- Liquidation Account."
73
<PAGE>
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of June
30, 1997, the Bank qualified as a Tier 1 institution.
In the event the Bank's capital falls below its fully phased-in
requirement or the OTS notifies the Bank that it is in need of more than normal
supervision, the Bank would become a Tier 2 or Tier 3 institution and as a
result, the Bank's ability to make capital distributions could be restricted.
Tier 2 institutions, which are institutions that before and after the proposed
distribution meet their current minimum capital requirements, may only make
capital distributions of up to 75% of net income over the most recent four
quarter period. Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.
A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a savings institution cannot distribute regulatory
capital that is needed for its liquidation account. See "The Conversion and
Reorganization - Liquidation Rights."
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test. If the Bank maintains an appropriate level
of qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualified as a QTL, the Bank will continue to enjoy full borrowing
privileges from the FHLB of Des Moines. The required percentage of QTIs is 65%
of portfolio assets (defined as all assets minus intangible assets, property
used by the institution in conducting its business and liquid assets equal to
20% of total assets). Certain assets are subject to a percentage limitation of
20% of portfolio assets. In addition, savings institutions may include shares of
stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is
determined on a monthly basis in nine out of every 12 months. As of June 30,
1997, the Bank was in compliance with its QTL requirement with approximately
99.9% of its assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings
74
<PAGE>
institution. The Bank's affiliates include the Company and any company which
would be under common control with the Bank. In addition, a savings institution
may not extend credit to any affiliate engaged in activities not permissible for
a bank holding company or acquire the securities of any affiliate that is not a
subsidiary. The OTS has the discretion to treat subsidiaries of savings
institutions as affiliates on a case-by-case basis.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At June 30, 1997, the Bank's required liquid
asset ratio was 5.0% and the actual ratio was 8.2%. Monetary penalties may be
imposed upon associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1997, the Bank had $1,733,700 in FHLB
stock, at cost, which was in compliance with this requirement. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1997, dividends paid by the
FHLB of Des Moines to the Bank totaled $122,281.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At June 30,
1997, the Bank's reserve met the minimum level required by the Federal Reserve
System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. The Bank had no borrowings from the Federal Reserve
System at June 30, 1997.
75
<PAGE>
FEDERAL AND STATE TAXATION
The Company and the Bank will report their income on a June 30th fiscal
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including, particularly, the Bank's reserve for bad debts discussed below. After
the Conversion and Reorganization, it is expected that the Company and its
subsidiaries, including the Bank, will file a consolidated federal income tax
return. Consolidated returns have the effect of eliminating intercompany
distributions, including dividends, from the computation of consolidated taxable
income for the taxable year in which such distributions occur. However, the
Company may elect not to file consolidated returns.
Savings associations are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner as
other corporations. However, prior to August 1996, savings associations such as
the Bank, which met certain definitional tests and other conditions prescribed
by the Code could benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans were separated into
"qualifying real property loans," which generally are loans secured by interests
in certain real property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans must be based
on actual loss experience. The amount of bad debt reserve deduction with respect
to qualifying real property loans could be based upon actual loss experience
("experience method") or a percentage of taxable income determined without
regard to such deduction ("percentage of taxable income method").
The Bank has generally elected to use the method which has resulted in
the greatest deductions for federal income tax purposes. Under the experience
method, the bad debt deduction for an addition to the reserve for qualifying
real estate property loans is an amount determined under a formula based
generally on the bad debts actually sustained by a savings association over a
period of years. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans is computed as a
percentage, which Congress has reduced from as much as 60% in prior years to 8%
of taxable income, with certain adjustments, effective for taxable years
beginning after calendar year 1986. The allowable deduction under the percentage
of taxable income method ("percentage bad debt deduction") for taxable years
beginning before calendar year 1987 was scaled downward in the event that less
than 82% of the total dollar amount of the assets of an institution were within
certain designated categories. When the percentage method bad debt deduction was
lowered to 8%, the 82% qualifying assets requirement was lowered to 60%. For all
taxable years, there is no deduction in the event that less than 60% of the
total dollar amount of the assets of an institution falls within such
categories. Moreover, in such case, the Bank could be required to recapture,
generally over a period of up to four years, its existing bad debt reserve. As
of June 30, 1996, more than the required amount of the Bank's total assets fell
within such category.
The bad debt deduction under the percentage of taxable income method
was subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans could not exceed the amount necessary
to increase the balance of such reserve at the close of the taxable year to 6%
of such loans outstanding at the end of the taxable year. Further, the addition
to the reserve for losses on qualifying real property loans could not exceed the
amount which, when added to that year's addition to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12% of total deposits
or withdrawable accounts of depositors at year-end exceeds the sum of surplus,
undivided
76
<PAGE>
profits and reserves at the beginning of the year. Finally, the percentage bad
debt deduction under the percentage of taxable income method was reduced by the
deduction for losses on nonqualifying loans.
To the extent (i) a savings association's reserve for losses on
qualifying real property loans under the percentage of income method exceeded
the amount that would have been allowed under the experience method, and (ii) a
savings association makes distributions to stockholders (including distributions
in redemption, dissolution or liquidation) that are considered to result in
withdrawals from the excess bad debt reserve, then the amounts considered
withdrawn would be included in the savings association's taxable income. The
amount that would be deemed withdrawn from such reserves upon such distribution
and which would be subject to taxation at the savings association's level at the
normal corporate tax rate would have been an amount that, when reduced by taxes
on such amount, would equal the amount actually distributed. Dividends paid out
of a savings association's current or accumulated earnings and profits as
calculated for federal income tax purposes, however, would not be considered to
result in withdrawals from its bad debt reserves to the extent of such earnings
and profits. Dividends in excess of a savings association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation of a savings association would
be considered to come from its loss reserve. Earnings appropriated to the Bank's
bad debt reserve and claimed as a tax deduction are not available for the
payment of cash dividends or for distribution to stockholders (including
distributions made on dissolution or liquidation), unless the Bank includes the
amount in taxable income, along with the amount deemed necessary to pay the
resulting federal income tax.
The Bank's bad debt deduction for the years ended June 30, 1996 and
1995 was based on the percentage of taxable income method. Prior to fiscal 1988,
the Bank had used a percentage of taxable income method in determining its bad
debt deduction for tax purposes. As a result of deductions under this method,
net equity as of June 30, 1997 includes accumulated earnings of $5,075,000 on
which federal income taxes have not been provided. If in the future this portion
of net equity is used for any purposes other than to absorb losses, income taxes
may be provided at the applicable tax rate.
In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts, such as the Bank, no longer have a choice between
the percentage of taxable income method and the experience method in determining
additions to bad debt reserves. Thrifts with $500 million of assets or less may
still use the experience method, which is generally available to small banks
currently. Larger thrifts must use the specific charge off method regarding bad
debts. Any reserve amounts accumulated after 1987, which are presently included
as a component of the net deferred tax liability, will be taxed over a six year
period beginning in 1996; however, bad debt reserves set aside through 1987 are
generally not taxed. An institution may delay recapturing into income its
post-1987 bad debt reserves for an additional two years if it meets a
residential-lending test. The amount of bad debt reserves and related deferred
tax liability that must be recaptured was $913,500 and $338,000 as of June 30,
1997, respectively. This law is not expected to have a material impact on the
Bank.
In addition to their regular federal income tax liability, corporations
are also subject to an alternative minimum tax. The corporate alternative
minimum tax rate is 20%. The tax is applied on "alternative minimum taxable
income" ("AMTI") which includes: (1) 100% of the excess of a savings
association's bad debt deduction over the amount allowable under the experience
method; (2) 75% of the excess of the "adjusted current earnings" of the Bank
over the AMTI; and (3) interest on certain tax-exempt bonds.
77
<PAGE>
The Revenue Reconciliation Act of 1993 added a new Section 475 to the
Code. Section 475 is a new mark-to-market tax law, that is different from the
accounting mark-to-market SFAS No. 115. The term "securities" in the Code
includes not just traditional debt and equity securities, but mortgages as well.
For tax purposes, institutions were required to identify which securities
qualified for an exemption by October 31, 1993. A financial institution is
subject to a mark-to-market rule if its activities bring it within the
definition of a dealer in securities under Section 475(c)(1) of the Code.
The Bank's federal income tax returns have not been audited during the
last five years.
Thrift institutions located in Missouri, such as the Bank, are subject
to a special financial institutions tax, based on net income without regard to
net operating loss carryforwards, at the rate of 7% of net income. This tax is
in lieu of certain other state taxes on thrift institutions, on their property,
capital or income, except taxes on tangible personal property owned by the Bank
and held for lease or rental to others and on real estate, contributions paid
pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales taxes and use taxes. In addition, the Bank is entitled to credit
against this tax all taxes paid to the State of Missouri or any political
subdivision, except taxes on tangible personal property owned by the Bank and
held for lease or rental to others and on real estate, contributions paid
pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales and use taxes and taxes imposed by the Missouri Financial
Institutions Tax Law. Thrift institutions are not subject to the regular
corporate income tax.
MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors of the Company consists of those persons who
currently serve as Directors of the Bank. The Board of Directors is divided into
three classes, each of which contains approximately one-third of the Board. The
directors shall be elected by the stockholders of the Company for staggered
three-year terms, or until their successors are elected and qualified. One class
of directors, consisting of Messrs. Barham and Haseltine have terms of office
expiring at the first annual meeting following the Conversion and
Reorganization. A second class, consisting of Messrs. Barnes and Rogers have
terms of office expiring at the annual meeting to be held one year thereafter. A
third class, consisting of Messrs. Hall and Lipscomb have terms of office
expiring at the annual meeting to be held two years thereafter. Following the
Conversion and Reorganization, it is anticipated that the size of the Board of
Directors will be increased by the addition of up to two new members.
The following individuals hold the executive offices in the Company set
forth below opposite their names.
<TABLE>
<CAPTION>
Name Age (1) Positions Held With the Company
- ---- ------- -------------------------------
<S> <C> <C>
James E. Haseltine 50 President, Chief Executive Officer and Director
William B. Williams 50 Executive Vice President, Chief Operating Officer
Bruce Winston 49 Vice President, Chief Financial Officer
</TABLE>
- ------------------
(1) At June 30, 1997.
78
<PAGE>
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. Additional
information concerning the business experience and compensation of the directors
and executive officers of the Company is set forth under "Management of the
Bank".
Proposed Future Stock Benefit Plans
1998 Stock Option Plan. The Board of Directors of the Company intends
to adopt the 1998 Stock Option Plan (the "1998 Option Plan") within one year of
the Conversion and Reorganization, subject to approval by the Company's
stockholders at a stockholders meeting to be held no sooner than six months
after the Conversion and Reorganization. The 1998 Option Plan would be in
compliance with the OTS regulations currently in effect. See "- Restrictions on
Benefit Plans." In accordance with OTS regulations, a number of shares equal to
10% of the aggregate shares of Conversion Stock to be sold in the Offerings
(i.e., 330,000 shares based upon the sale of 3,300,000 shares at the midpoint of
the Offering Range) would be reserved for issuance by the Company upon exercise
of stock options to be granted to officers, directors and employees of the
Company and the Bank from time to time under the 1998 Option Plan. The purpose
of the 1998 Option Plan would be to provide additional performance and retention
incentives to certain officers, directors and employees by facilitating their
purchase of a stock interest in the Company. The 1998 Option Plan, which would
become effective upon stockholder approval of such plan, would provide for a
term of 10 years, after which no awards could be made, unless earlier terminated
by the Board of Directors of the Company pursuant to the 1998 Option Plan. The
options would vest over a five year period (i.e., 20% per year), beginning one
year after the date of grant of the option. Options would be granted based upon
several factors, including seniority, job duties and responsibilities, job
performance, the Bank's performance and a comparison of awards given by other
institutions converting from mutual to stock form.
It is anticipated that the 1998 Option Plan would provide that, in the
event of a change in control of the Company or the Bank, if accelerated vesting
is not inconsistent with applicable OTS regulations at the time of such change
in control, options not immediately exercisable on such date of a change in
control would become immediately exercisable, and the optionee would, at the
discretion of the option committee, be entitled to receive cash in an amount
equal to the excess of the fair market value of the stock subject to the option
over the option price in exchange for the surrender of the option. Applicable
OTS regulations prohibit accelerated vesting except in the event of death or
disability, but if OTS regulations are subsequently revised to provide for
accelerated vesting upon a change in control, the 1998 Option Plan will provide
for accelerated vesting upon a change in control. "Control" generally refers to
the acquisition by any person or group of the ownership or power to vote more
than 25% of the Company's stock, the control of the election of a majority of
directors or the exercise of a controlling influence over the management or
policies of the Company.
The Company would receive no monetary consideration for the granting of
stock options under the 1998 Option Plan, however, it would receive the option
price for each share issued to optionees upon the exercise of such options. The
exercise of options and payment for the shares received would contribute to the
equity of the Company.
If the 1998 Option Plan is implemented more than one year after the
Conversion and Reorganization, the 1998 Option Plan will comply with such OTS
regulations and policies that are applicable at such time.
79
<PAGE>
1998 Restricted Stock Plan. The Board of Directors of the Bank intends
to adopt the 1998 RSP within one year of the Conversion and Reorganization, the
objective of which is to enable the Bank to retain personnel and directors of
experience and ability in key positions of responsibility. The Company expects
to hold a stockholders' meeting no sooner than six months after the Conversion
and Reorganization in order for stockholders to vote to approve the 1998 RSP.
The 1998 RSP will be implemented in accordance with applicable OTS regulations
currently in effect. See "- Restrictions on Benefit Plans." Awards would be
granted based upon a number of factors, including seniority, job duties and
responsibilities, job performance, the Bank's performance and a comparison of
awards given by other institutions converting from mutual to stock form. The
1998 RSP would be managed by a committee of non-employee directors (the "RSP
Trustees"). The 1998 RSP Trustees would have the responsibility to invest all
funds contributed by the Bank to the trust created for the 1998 RSP (the "RSP
Trust").
The Bank will contribute sufficient funds to the 1998 RSP so that the
1998 RSP Trust can purchase, in the aggregate, a number of shares equal to up to
4% of the amount of Conversion Stock that is sold in the Offerings. The shares
purchased by the 1998 RSP would be authorized but unissued shares or would be
purchased in the open market. In the event the market price of the Common Stock
is greater than $10.00 per share, the Bank's contribution of funds will be
increased. Likewise, in the event the market price is lower than $10.00 per
share, the Bank's contribution will be decreased. In recognition of their prior
and expected services to the Bank and the Company, as the case may be, the
officers, other employees and directors responsible for implementation of the
policies adopted by the Board of Directors and the profitable operation of the
Bank will, without cost to them, be awarded stock under the 1998 RSP. Based upon
the sale of 3,300,000 shares of Conversion Stock in the Offerings at the
midpoint of the Offering Range, the 1998 RSP Trust is expected to purchase up to
132,000 shares of Conversion Stock.
In accordance with applicable OTS regulations, the shares granted under
the 1998 RSP will be in the form of restricted stock payable over a five year
vesting period (i.e., 20% per year) beginning one year after the date of grant
of the award. Compensation expense in the amount of the fair market value of the
Common Stock at that time granted will be recognized pro rata over the years
during which the shares are payable. It is anticipated that the 1998 RSP would
provide that, in the event of a change in control of the Company or the Bank, if
accelerated vesting is not inconsistent with applicable OTS regulations at the
time of such change in control, restricted stock not vested on the date of a
change in control would become immediately vested. Applicable OTS regulations
currently prohibit accelerated vesting in the event of a change in control or
imminent change in control, but if OTS regulations are subsequently revised to
provide for accelerated vesting upon a change in control, the 1998 RSP will
provide for such accelerated vesting. "Control" generally refers to the
acquisition by any person or group of the ownership or power to vote more than
25% of the Company's stock, the control of the election of a majority of
directors or the exercise of a controlling influence over the management or
policies of the Company.
If the 1998 RSP is implemented more than one year after the Conversion
and Reorganization, the 1998 RSP will comply with such OTS regulations and
policies that are applicable at such time.
Restrictions on Stock Benefit Plans. OTS regulations provide that in
the event the Bank implements or adopts stock option or management and/or
employee stock benefit plans within one year from the date of Conversion and
Reorganization, such plans must comply with the following restrictions: (1) the
plans must be fully disclosed in the Prospectus, (2) for stock option plans, the
total number of shares for which options may be granted may not exceed 10% of
the shares sold in the Offerings, (3) for
80
<PAGE>
restricted stock plans, the shares may not exceed 3% of the shares sold in the
Offerings (4% for institutions with 10% or greater tangible capital), (4) the
aggregate amount of stock purchased by the ESOP in the Offerings may not exceed
10% (8% for well-capitalized institutions utilizing a 4% restricted stock plan),
(5) no individual employee may receive more than 25% of the available awards
under any plan, (6) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan, (7) all plans
must be approved by a majority of the total votes eligible to be cast at any
duly called meeting of the Company's stockholders held no earlier than six
months following the Conversion and Reorganization, (8) for stock option plans,
the exercise price must be at least equal to the market price of the stock at
the time of grant, (9) for restricted stock plans, no stock issued in a
conversion may be used to fund the plan, (10) neither stock option awards nor
restricted stock awards may vest earlier than 20% as of one year after the date
of stockholder approval and 20% per year thereafter, and vesting may be
accelerated only in the case of disability or death (or with OTS approval in the
event of a change in control), (11) the proxy material must clearly state that
the OTS in no way endorses or approves of the plans, and (12) prior to
implementing the plans, all plans must be submitted to the Regional Director of
the OTS within five days after stockholder approval with a certification that
the plans approved by the stockholders are the same plans that were filed with
and disclosed in the proxy materials relating to the meeting at which
stockholder approval was received. Plans adopted and implemented more than one
year after the Conversion and Reorganization would not necessarily be subject to
these limitations.
MANAGEMENT OF THE BANK
Directors and Executive Officers
The Board of Directors of the Bank is composed of six members each of
whom serves for a term of three years. The Bank's stock charter and bylaws
require that directors be divided into three classes, as nearly equal in number
as possible, each class to serve for a three-year period, with approximately
one-third of the directors elected each year. Executive officers are elected
annually by the Board of Directors and serve at the Board's discretion.
Following the Conversion and Reorganization, it is anticipated that the size of
the Board of Directors will be increased by the addition of up to two new
members.
81
<PAGE>
The following table sets forth information with respect to the
directors and executive officers of the Bank, all of whom will continue to serve
in the same capacities after the Conversion and Reorganization.
<TABLE>
<CAPTION>
Position with Director Current
Name Age(1) Bank Since Term Expires
- ---- ------ ---- ----- ------------
<S> <C> <C> <C> <C>
Jack L. Barham 64 Chairman 1983 1998
James E. Haseltine 50 President, CEO, Director 1990 1998
Wayne V. Barnes 65 Director 1976 1999
George L. Hall 89 Director 1987 2000
Ivy L. Rogers 78 Director 1990 1999
Gary Lipscomb 67 Director 1991 2000
Executive Officers Who Are Not Directors
- ----------------------------------------
William B. Williams 50 Executive Vice President, COO
Bruce Winston 49 Vice President, CFO
Carla Green 37 Vice President
Jerry Graham 60 Vice President
Larry Cruzan 64 Vice President
Kevin M. Bell 46 Vice President
Dana A. Elwell 44 Vice President
E. Lorene Thomas 63 Secretary
</TABLE>
- --------------------
(1) As of June 30, 1997.
Biographical Information
The principal occupation during the past five years of each executive
officer and director of Guaranty Federal is set forth below. All such persons
have held their present positions for five years unless otherwise stated.
Jack L. Barham worked at the Bank for 24 years and retired in 1995. He
served in various positions of responsibility and was a realtor and appraiser.
In 1983 he was elected to the Board of Directors and in 1990 was elected Vice
President and Chairman of the Board. He served in the US Navy, is a deacon at
Ridgecrest Baptist Church and has been a member of various civic organizations.
James E. Haseltine joined the Bank in 1983, and has served as Director,
President and Chief Executive Officer since 1990. After graduating Drury College
in 1968, he entered military service with the US Army and served in the Republic
of Vietnam. He has served as a founding member and Chairman of the Affordable
Housing Action Board of Springfield, Inc., an organization serving low to
moderate income families. He is a licensed real estate broker.
82
<PAGE>
He is a past president of the Rotary Club of Springfield, serves as
director of the Springfield Business and Development Corporation and the
Springfield Finance and Development Corporation (not for profit community
organizations), and is a member of First and Calvary Presbyterian Church.
Wayne V. Barnes is President of Sunnyland Stages Inc. and Sunnyland
Tours, Inc., Springfield, Missouri. Mr. Barnes attended the University of
Missouri and Drury College, and served in the US Navy. He is active in many
civic organizations.
George L. Hall is a retired owner and manager of the Ed. V. Williams
Clothing Company in Springfield. He is active in many civic and religious
organizations.
Ivy L. Rogers retired from the US Department of Justice Bureau of
Prisons. He held position as chief Construction Representative working out of
Washington, DC and other parts of the country. Now self-employed as a consultant
for construction projects he recently completed a contract with Greene County,
Missouri to supervise construction of a new judicial building. Mr. Rogers served
in the US Navy Construction Battalion during World War II.
Gary Lipscomb, CPA, practiced as a Certified Public Accountant for over
25 years in Springfield, Missouri retiring from his firm, Lipscomb, Kirkpatrick
and Company, CPA's in August of 1988 to devote full time to the operation of
Lipscomb Ford-Chrysler, Inc. in Branson, Missouri. He sold his Branson operation
in December of 1993 and since that time has owned and operated, with his wife
Betty, Lipscomb Mitsubishi in Springfield, Missouri. Mr. Lipscomb has been and
is active in many social, fraternal, and religious activities. Mr. Lipscomb owns
various real estate investments in Springfield and Branson, including a
partnership interest in the Galleria in Springfield, Missouri.
William B. Williams joined the Bank in 1995 as Executive Vice President
and Chief Operating Officer. Prior to joining the Bank, Mr. Williams worked as a
consultant to Midland Loan Services, L.P., a commercial mortgage banker in
Kansas City, Missouri. From 1987 to 1994, Mr. Williams worked for North American
Savings Bank in Grandview, Missouri, most recently as Executive Vice President
and Chief Financial Officer. Mr. Williams received a BSBA degree from the
University of Arkansas in 1969 and after serving as an officer in the US Navy,
he received a MBA degree from Tulane University in 1974. He is a CPA.
E. Lorene Thomas joined the Bank in 1983. She is presently Corporate
Secretary. Mrs. Thomas was employed by Public Finance in Joplin, Missouri for
six years, prior to being employed by Joplin Federal Savings & Loan, Joplin,
Missouri. She also worked for American Savings and Loan, and First Federal
Savings and Loan in Springfield, Illinois. She has worked 28 years in the
savings and loan business, having experience in every department. Mrs. Thomas
has taken accounting courses and many Institute of Financial Education courses.
She has been an active member in the United Methodist Church.
Bruce Winston is Vice President and Chief Financial Officer of the
Bank. He joined the Bank in 1992. Prior to joining the Bank, he served in
various other capacities with two other financial institutions over a period of
20 years. He is a graduate of Southwest Missouri State University, and is a
member of First Presbyterian Church, where he has served as an Elder and
Treasurer.
Carla J. Green has been with the Bank since 1983. She is the Vice
President in charge of branch operations. Mrs. Green has attended both Drury
College and Southwest Missouri State University. Mrs. Green is a member of
Harmony Baptist Church and various business and civic clubs, including
Springfield Southeast Rotary. Mrs. Green came to the Bank with an extensive
background in financial institutions.
83
<PAGE>
Jerry F. Graham joined the Bank in 1978. He is the Vice President
responsible for construction lending. Prior to joining the Bank, he served as a
branch manager at another financial institution for a 14 year period. He served
eight years in the Navy Reserve. Mr. Graham attended Drury College.
Mr. Graham is a director of the Springfield Area Credit Association and
is a classroom instructor for the Institute of Financial Education. He is active
in various civic and religious organizations and is a past chairman of the
Finance Committee and Past President of the Springfield Area Council of
Churches. He has been a member of St. John's United Church of Christ of or over
50 years, serving as Sunday School Teacher, choir member, Secretary, Vice
President and President of the Church Council.
Larry Cruzan joined the Bank in 1989 and currently serves as Vice
President and Loan Officer. He has been active in Real Estate lending with
banks, savings associations and mortgage banks for over 39 years, with the past
34 years in Springfield. Mr. Cruzan holds a BS Degree in Business Administration
from Pittsburgh State University, served as an officer in the US Army, is a
licensed Real Estate Broker and Insurance Agent, a past president of Springfield
Host Lions club, and Springfield Chapter of Pittsburgh State Alumni Association,
and as an Elder at First and Calvary Presbyterian Church. He currently serves as
Vice President of the Board of Directors of The Springfield Association for the
Blind.
Kevin Bell joined the Bank in 1996. He is the Vice President
responsible for consumer lending. Mr. Bell spent five years previously with
Union Planters Bank in Springfield, and five years with United Savings & Loan.
He began his banking career with Union National Bank in 1972. He attended
Hanover College and Drury College, and attends St. Elizabeth Ann Seaton Catholic
Church. He has been active in various civic organizations including the
Springfield Chamber of Commerce and Kiwanis Club.
Dana Elwell joined the Bank in July 1996. He is the Vice President
responsible for permanent mortgage lending. Previously, he was in charge of real
estate lending at First City National Bank for one year. Previous to that, Mr.
Elwell worked in the real estate department at Boatmen's National Bank for over
10 years. He is a graduate of Central Missouri State University with a BS degree
in finance. He is a founding member and past president of the Affordable Housing
Action Board of Springfield, Inc. ("AHAB"), an organization serving low to
moderate income families. He is currently on the Executive Committee of AHAB.
Dana is also chairman of the Housing Committee of Vision 20/20, an organization
developed by the city of Springfield and Greene County to work on the
city/county comprehensive plan. He also serves as Vice President of the Nixa
Community Foundation, which grants money to not-for-profit organizations for
worthy projects in the Nixa area.
Meetings and Committees of the Board of Directors
The business of the Bank is conducted at regular and special meetings
of the full Board of Directors and its standing committees. The standing
committees consist of the Executive, Audit, Investment, Nominating, Option and
RRP Committees.
During fiscal 1997 the Board of Directors met at 12 regular meetings
called in accordance with the bylaws. No special meetings were held during
fiscal 1997. No Director attended less than 75% of the regular meetings and the
meetings held by those committees of the Board of Directors on which he/she
served.
The audit committee consists of Messrs. Lipscomb, Barnes, Hall, Rogers,
and Barham. This standing committee regularly meets on a quarterly basis with
the internal auditor to review audit programs and the results of audits of
specific areas, as well as other regulatory compliance issues. In addition, the
84
<PAGE>
audit committee meets with the independent certified public accountants to
review the results of the annual audit and other related matters. The audit
committee met three times during the fiscal year ended June 30, 1997.
The nominating committee, a non-standing committee, meets once a year
and is composed of those Directors whose terms are not expiring that year.
Compensation Committee Interlocks and Insider Participation
For the fiscal year ended June 30, 1997, the compensation committee
consisted of the board of directors of the Bank. This standing committee reviews
performance, industry salary surveys and the recommendations of management
concerning compensation. Mr. James E. Haseltine is the President and Chief
Executive Officer of the Bank, the Mutual Holding Company and the Company. Mr.
Haseltine does not participate in compensation committee matters involving his
compensation. The Bank holds a loan originated in March 1987 that is secured by
a mortgage on the residence of Mr. Haseltine. Mr. Haseltine paid reduced
origination and application fees for the loan, a Bank policy applicable at that
time to all employees and directors. During the 1997 fiscal year, the largest
balance on this loan was $67,041 and the interest rate was 8.0%. Mr. Jack L.
Barham is the Chairman of the Board of Directors of the Bank, the Mutual Holding
Company and the Company and had been, for many years until his retirement in
1995 an officer of the Bank.
Directors' Compensation
The members of the Board of Directors each received a yearly fee of
$9,000, payable monthly. Directors do not receive fees for attendance at
committee meetings. During the year ended June 30, 1996, Directors Barham,
Barnes, Hall, Rogers and Lipscomb each received 1,945 stock awards under the
RRP. Mr. Haseltine's compensation is reported in the following section.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the Chief Executive Officer of the
Bank. No other executive officers of the Bank had salaries and bonuses earned
during the year ended June 30, 1997, which exceeded $100,000 for services
rendered in all capacities to the Bank.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------------------------------------------------------------------------------
| Awards | Payouts
|------------------------|--------------------
Fiscal | |
Year | Restricted Securities|
Name and Ended Other Annual | Stock Underlying| All Other
Principal Position June 30, Salary Bonus Compensation(1) |Award(s)(2) Options(3)| Compensation(4)
- -------------------------- -------- ------ ----- --------------- |----------- ----------| ---------------
| |
<S> <C> <C> <C> <C> <C> <C> <C>
James E. Haseltine 1997 $96,250 $6,510 $11,329 | 0 0 | $11,380
President & CEO 1996 87,228 7,681 11,159 | $34,859 9,561 | 12,963
1995 73,300 7,205 12,074 | 0 0 | 10,817
</TABLE>
- -------------------------
(1) Includes Directors' fees of $9,000 for the year ended June 30, 1997,
and $8,000 for the year ended June 30, 1996, and $7,000 for the year
ended June 30, 1995, in addition to an automobile allowance.
85
<PAGE>
(2) Pursuant to the RRP, the Bank granted Mr. Haseltine 3,169 restricted
shares of Common Stock. As of the date awarded, the shares were valued
at $11.00. Such shares vest at a rate of 20% per year with the first
installment vested on October 18, 1996. Dividends are paid on
restricted stock after awards vest. Based on the closing price of
$16.75 on June 30, 1997, the 2,535 restricted shares held by Mr.
Haseltine had a value of $42,461.
(3) Pursuant to the Stock Option Plan, the Bank granted Mr. Haseltine
options to purchase shares of Common Stock. Such options vest at a rate
of 20% per year with the first installment having vested on December
15, 1996.
(4) Represents the Bank's accruals pursuant to the pension plan.
Recognition and Retention Plan. The Bank established the 1994
Recognition and Retention Plan (the "RRP") as a method of providing directors,
officers and other employees of the Bank with a proprietary interest in the Bank
in a manner designed to encourage such persons to remain with the Bank. The Bank
contributed funds to the RRP Trust, and the Trust purchased 38,895 shares of
Bank Common Stock.
A committee of all the directors administers the RRP and may make
awards to officers and employees, however, awards to outside directors are fixed
under the RRP. Under the RRP, awards are granted to directors and officers in
the form of shares of Bank Common Stock to be held in trust under the RRP.
Awards are nontransferable and nonassignable. Awards vest on a five-year
schedule at a rate of 20% per year beginning one year after the effective date
of the award. Awards will be 100% vested upon termination of employment due to
death or disability. In the event that an employee terminates employment or a
director ceases to serve with the Bank for any reason other than death or
disability, the employee's or director's nonvested awards will be forfeited.
When shares become vested in accordance with the RRP, the participants will
recognize income equal to the fair market value of the Common Stock at that
time. The amount of income recognized by the participants will be a deductible
expense for the tax purposes of the Bank. Prior to vesting, recipients of awards
may direct the voting of the shares allocated to them. Unallocated shares will
be voted by the RRP trustees. Earned shares are distributed to recipients as
soon as practicable following the day on which they are earned.
Pension Plan. The Bank participates in a multiemployer defined benefit
plan ("Pension Plan"). Employees who have one year of service and who have
reached age 21 are eligible to participate in the Pension Plan. They are 100%
vested after five years of service. Employees are entitled to a normal
retirement benefit at age 65 equal to 2% times years of benefit service times
the average annual salary (as defined) for the five consecutive years of highest
salary during benefit service, with annual 1% adjustments for retirees who
attain age 66 and older. The Pension Plan also provides for early retirement
benefits (commencing as early as age 45), disability retirement benefits and
death benefits. Contributions are actuarially determined. The Bank makes all
contributions to the Pension Plan. Benefits received pursuant to the Pension
Plan are not subject to any deduction for social security or other offset
amounts.
Due to changes enacted under the Tax Reform Act of 1986, qualified
pension plans require benefit accruals for any active employee working beyond
age 65 with respect to service completed on or after July 1, 1988. Internal
Revenue Service interpretations require retroactive credit for the period
between age 65 and July 1, 1988. As a result, the Bank has accrued an unfunded
liability of $87,005, $139,843 and $192,681 as of June 30, 1997, 1996 and 1995,
respectively, to provide for prior service credit to its eligible employees.
Pension expense was $128,785, $156,013, and $173,889, for the years ended June
30, 1997, 1996 and 1995, respectively. The Bank expects that the pension plan
will be terminated as of December 31, 1997.
The following table illustrates annual pension benefits at age 65 under
the Pension Plan at various levels of compensation and years of service,
assuming 100% vesting of benefits. All retirement benefits illustrated in the
table below are without regard to any Social Security benefits to which a
participant might be entitled. Mr. Haseltine has 13 years of service under the
plan.
86
<PAGE>
<TABLE>
<CAPTION>
Year of Service
-----------------------------------------------------------------------------------------------------
5 Year
Average
Salary 5 10 15 20 25 30 35
- --------------- ------------- ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$20,000 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000
40,000 4,000 8,000 12,000 16,000 20,000 24,000 28,000
60,000 6,000 12,000 18,000 24,000 30,000 36,000 42,000
80,000 8,000 16,000 24,000 32,000 40,000 48,000 56,000
100,000 10,000 20,000 30,000 40,000 50,000 60,000 70,000
125,000 12,500 25,000 37,500 50,000 62,500 75,000 87,500
</TABLE>
Stock Option Plan. The Bank's Board of Directors adopted the 1994 stock
option plan ("1994 Option Plan"). Pursuant to the Option Plan, 97,237 shares,
10% of the Bank Common Stock issued to the public in the formation of the Mutual
Holding Company, are reserved for future issuance by the Bank upon exercise of
stock options to be granted to directors and employees of the Bank from time to
time under the 1994 Option Plan. The purpose of the 1994 Option Plan is to
provide additional incentive to certain directors, officers and employees by
facilitating their purchase of a stock interest in the Bank. Options have been
granted at the Bank Common Stock's fair market price on the date of the grant.
All options are exercisable in five equal annual installments commencing one
year after the effective date of the Option Grant, provided that all options
will be 100% exercisable in the event the optionee terminates his or her
employment due to death or disability. The Option Plan provides for a term of
ten years, after which no awards may be made, unless earlier terminated by the
Board of Directors pursuant to the Option Plan. The Option Plan is administered
by a committee of at least three non-employee directors of the Bank, who are
appointed by the Bank's Board of Directors (the "Option Committee").
An optionee will not be deemed to have received taxable income upon
grant or exercise of any incentive stock option, provided that such shares are
not disposed of by the optionee for at least one year after the date of exercise
and two years after the date of grant. No compensation deduction may be taken by
the Bank as a result of the grant or exercise of incentive stock options.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year, and FY-End Option/SAR Values
---------------------------------------------------------------------------------
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
at FY-End (#) at FY-End ($)(1)
Shares Acquired
Name on Exercise (#) Value Realized($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------- -------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James E. Haseltine -- -- 1,912/7,649 9,809/39,239
</TABLE>
- ------------------
(1) Market value of the underlying securities based upon a June 30, 1997
closing stock price of $16.75, minus the exercise price of $11.62 per
share.
87
<PAGE>
Employment Agreements
The Bank intends to enter into employment agreements with James E.
Haseltine, President and Chief Executive Officer and other executive officers of
the Bank. Mr. Haseltine's salary under the employment agreement will be based on
his then current salary. Mr. Haseltine's employment agreement will be for a term
of three years. The agreements will be terminable by the Bank for "just cause"
as defined in the agreements. If the Bank terminates the employee without just
cause, the employee will be entitled to a continuation of the employee's salary
from the date of termination through the remaining term of the agreement. Mr.
Haseltine's employment agreement will contain a provision stating that in the
event of the termination of employment in connection with any future change in
control of the Bank, as defined in the agreement, Mr. Haseltine will be paid in
a lump sum an amount equal to 2.99 times Mr. Haseltine's five year average
annual taxable compensation. In addition, the Bank intends to enter into
employment agreements with eight other officers, which will provide a severance
payment upon termination without just cause in the event of a change in control,
as defined in the agreements. The agreements may be renewed annually by the
Board of Directors upon a determination of satisfactory performance within the
Board's sole discretion.
Employee Stock Ownership Plan^
The Bank has established an employee stock ownership plan (the "ESOP")
for the exclusive benefit of its participating employees, to be implemented upon
the completion of the conversion. Participating employees are employees who have
completed one year of service with the Bank or its subsidiary and have attained
the age of 21. An application for a letter of determination as to the
tax-qualified status of the ESOP will be submitted to the IRS. Although no
assurances can be given, it is expected that the ESOP will receive a favorable
letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Bank in cash or
common stock. Benefits may be paid either in shares of the common stock or in
cash. In accordance with the Plan, the ESOP may borrow funds with which to
acquire up to 8% of the Conversion Stock to be issued in the Offerings
(excluding exchanged shares). The ESOP intends to borrow funds from the Company.
The loan is expected to be for a term of ten years at an annual interest rate
equal to the prime rate as published in The Wall Street Journal. Presently it is
anticipated that the ESOP will purchase up to 8% of the Conversion Stock to be
issued in the Offerings (i.e., $2,640,000, based on the midpoint of the Offering
Range). The loan will be secured by the shares purchased and earnings of ESOP
assets. Shares purchased with such loan proceeds will be held in a suspense
account for allocation among participants as the loan is repaid. The Company
anticipates contributing approximately $264,000 annually (based on a $2,640,000
purchase) to the ESOP to meet principal obligations under the ESOP loan, as
proposed. It is anticipated that all such contributions will be tax-deductible.
This loan is expected to be fully repaid in approximately 10 years.
Shares sold above the maximum of the Offering Range (i.e., more than
3,795,000 shares) may be sold to the ESOP before satisfying remaining unfilled
orders of Eligible Account Holders to fill the ESOP's subscription, the ESOP may
purchase some or all of the shares covered by its subscription after the
conversion in the market or may be issued previously authorized but unissued
shares.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant benefits become 100% vested in plan
allocations after completion of five years of service. Employment prior to the
adoption of the ESOP shall be credited for the purposes
88
<PAGE>
of vesting. Vesting will be accelerated upon retirement, death, disability,
change in control of the Company, or termination of the ESOP. Forfeitures will
be reallocated to participants on the same basis as other contributions in the
plan year. Benefits may be payable in the form of a lump sum upon retirement,
death, disability or separation from service. Contributions by the Bank to the
ESOP are discretionary and may cause a reduction in other forms of compensation.
Therefore, benefits payable under the ESOP cannot be estimated.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Transactions with Certain Related Persons
Loans made to a director or executive officer in excess of the greater
of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors. The Bank provides loans to its officers, directors, and
employees to purchase or refinance personal residences, as well as consumer
loans. Loans made to officers, directors and executive officers are made in the
ordinary course of business on the same terms and conditions as would be made to
any other customer in the ordinary course of business. Prior to August 1989, all
employees, officers and directors were eligible for accommodations as to
origination and application fees. This practice was eliminated in 1989, as to
directors and executive officers.
Set forth below is certain information as of June 30, 1997, as to loans
in excess of $60,000 made by the Bank to each of its directors and executive
officers and affiliates of directors and executive officers.
<TABLE>
<CAPTION>
Original Largest
Name of Officer Date Loan Balance at Balance Since Interest Loan
or Director Originated Amount June 30, 1997 July 1, 1996 Rate Type
- ---------------------- ------------------ --------------- ----------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
James E. Haseltine March, 1987 $90,000 $64,935 $67,041 8.000% Real Estate
Jerry F. Graham May, 1993 71,600 66,450 67,487 7.500 Real Estate
Kevin M. Bell August, 1992 84,000 78,974 79,945 8.375 Real Estate
</TABLE>
The Bank intends that all transactions between the Bank and its
executive officers, directors, holders of 10% or more of the shares of any class
of its Common Stock and affiliates thereof, will contain terms no less favorable
to the Bank than could have been obtained by it in arm's-length negotiations
with unaffiliated persons and will be approved by a majority of independent
outside directors of the Bank not having any interest in the transaction.
89
<PAGE>
Beneficial Ownership of Bank Common Stock
The following table includes, as of June 30, 1997, certain information
as to Bank Common Stock beneficially owned by (i) the only persons or entities,
including any "group" as that term is used in Section 13(d)(3) of the Exchange
Act, who or which was known to the Bank to be the beneficial owner of more than
5% of the issued and outstanding Bank Common Stock, (ii) the directors of the
Bank and (iii) all directors and executive officers of the Bank as a group. For
the anticipated ownership of the Common Stock by directors and executive
officers of the Company and the Bank upon consummation of the Conversion and
Reorganization, see "- Proposed Subscriptions by Directors and Executive
Officers." As can be seen in the table below, the aggregate of ownership of the
Bank by the Mutual Holding Company and its directors and officers as a group is
approximately 72% (2,249,941 shares).
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name of Beneficial Owner or Beneficial Ownership as of Bank Common
Number of Persons in Group June 30, 1997 (1)(2) Stock
-------------------------- -------------------- -----
<S> <C> <C>
Guaranty Federal Bancshares, M.H.C. 2,152,635 (3) 68.9%
Jack L. Barham 6,935 (5) 0.2
James E. Haseltine 22,843 (4)(5) 0.7
Wayne V. Barnes 21,945 (5) 0.7
George L. Hall 3,445 (5) 0.1
Ivy L. Rogers 3,945 (5) 0.1
Gary Lipscomb 14,445 (5) 0.5
All directors and executive officers as a group
(14 persons) 97,306 (6) 3.1%
</TABLE>
90
<PAGE>
- ---------------
(1) For purposes of this table, pursuant to rules promulgated under the
Exchange Act, an individual is considered to beneficially own shares of
Bank Common Stock if he or she directly or indirectly has or shares (1)
voting power, which includes the power to vote or to direct the voting of
the shares; or (2) investment power, which includes the power to dispose or
direct the disposition of the shares. Unless otherwise indicated, a
director has sole voting power and sole investment power with respect to
the indicated shares. Shares which are subject to stock options which are
exercisable within 60 days of June 30, 1997, are deemed to be outstanding
for the purpose of computing the percentages of common stock beneficially
owned by the respective individuals and group.
(2) Includes shares of Bank Common Stock which have been awarded to the
individual under the 1994 RRP which are subject to forfeiture.
(3) Guaranty Federal Bancshares, M.H.C. is the mutual holding company of
Guaranty Federal. The shares of Bank Common Stock held by the MHC are to be
canceled in connection with the Conversion and Reorganization.
(4) Includes 1,912 shares that Mr. Haseltine has the right to acquire within 60
days through the exercise of options.
(5) Includes all shares granted to the individual under the RRP regardless of
whether such shares have vested for that individual as a grant recipient is
entitled to vote shares granted to that recipient. Excludes shares of
Common Stock held by the RRP that have not been granted to the individual
who serves as a trustee of the RRP. Such individual disclaims beneficial
ownership with respect to such shares held in a fiduciary capacity. The
trustees vote all shares granted but not voted in the same proportion as
unvested shares that have been awarded and voted by grant recipients.
(6) Includes in the case of all directors and executive officers of Guaranty
Federal as a group, options to purchase 8,814 shares that are exercisable
within 60 days. Also includes, in the case of all directors and executive
officers of Guaranty Federal as a group, shares held in the 1994 RRP which
may be voted by the officer or director pending distribution to that
officer or director.
Proposed Subscriptions by Directors and Executive Officers
The following table sets forth, for each of the Bank's directors and
executive officers and for all of the directors and executive officers as a
group, (1) the number of Exchange Shares to be held upon consummation of the
Conversion and Reorganization, based upon their beneficial ownership of Bank
Common Stock as of June 30, 1997; (assuming an Exchange Ratio of 1.4443); (2)
the proposed purchases of Conversion Stock; and (3) the total amount of Common
Stock to be held upon consummation of the Conversion and Reorganization, in each
case assuming that 3,300,000 shares of Conversion Stock are sold, which is the
midpoint of the Offering Range.
91
<PAGE>
<TABLE>
<CAPTION>
Proposed Purchases of Total Common
Conversion Stock Stock to be Held
---------------- ----------------
Number of
Exchange
Shares to be Number of Number of Percentage
Name Held (1) Amount Shares Shares(2) of Total
- -------------------------------------- ------------ ------ ------ ---------------- ---------
<S> <C> <C> <C> <C> <C>
Jack L. Barham........................ 7,769 $150,000 15,000 22,769 0.5%
James E. Haseltine (2)................ 26,569 50,000 5,000 31,569 0.7
Wayne V. Barnes....................... 29,447 10,000 1,000 30,447 0.6
George L. Hall........................ 2,728 10,000 1,000 3,728 -- (3)
Ivy L. Rogers......................... 3,450 30,000 3,000 6,450 0.1
Gary Lipscomb......................... 18,615 75,000 7,500 26,115 0.6
William B. Williams................... 315 100,000 10,000 10,315 0.2
Bruce Winston........................ 7,734 130,000 13,000 20,734 0.4
Carla J. Green........................ 1,516 -- -- 1,516 -- (3)
Jerry F. Graham....................... 1,296 5,000 500 1,796 -- (3)
Larry Cruzan.......................... 1,181 5,000 500 1,681 -- (3)
Kevin M. Bell......................... -- 10,000 1,000 1,000 -- (3)
Dana A. Elwell....................... -- 20,000 2,000 2,000 -- (3)
E. Lorene Thomas...................... 841 5,000 500 1,341 -- (3)
--------- -------- ------- -------- ----
All Directors and Executive
Officers as a Group (14
Persons) 101,461 $600,000 60,000 161,461 3.4%
======= ======= ====== ======= =====
</TABLE>
- ----------------------
(1) Assumes that no outstanding options have been exercised prior to the
Exchange. The Company is not aware of any director or executive officer
who intends to exercise outstanding options prior to the Exchange. For
purposes of the calculation, the Exchange Ratio used does not reflect
the exercise of any options. If options were to be exercised prior to
the Exchange, the actual exchange ratio would be slightly lower and the
number of exchange shares would be slightly higher.
(2) Depending on the actual Exchange Ratio, an individual will be unable to
purchase any shares in the Offerings if those purchases would result in
ownership that exceeds the purchase limitations. See "The Conversion
and Reorganization - Limitations on Common Stock Purchases and
Ownership." Individuals unable to purchase shares in the Offerings may
purchase shares in the open market upon completion of the Conversion
and Reorganization.
(3) Less than 0.1%.
92
<PAGE>
THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Mutual Holding Company, the Bank and the
Company have approved the Plan of Conversion, as has the OTS, subject to
approval by the members of the Mutual Holding Company and the stockholders of
the Bank entitled to vote on the matter and the satisfaction of certain other
conditions. Such OTS approval, however, does not constitute a recommendation or
endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company and the Bank
adopted the Plan as of May 20, 1997. The Plan has been approved by the OTS,
subject to, among other things, approval of the Plan by at least a majority of
the total number of votes eligible to be cast by the Members of the Mutual
Holding Company and approval of the Plan by at least a majority of the votes
cast by the Public Stockholders of the Bank. The Members' Meeting and the
Stockholders' Meeting have been called for this purpose on __________ ___, 1997.
The following is a brief summary of pertinent aspects of the Plan and
the Conversion and Reorganization. The summary is qualified in its entirety by
reference to the provisions of the Plan, which is available for inspection at
each branch office of the Bank and at certain offices of the OTS. The Plan also
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part, copies of which may be obtained from the SEC. See "Additional
Information."
Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, the Company will be structured
in the form used by holding companies of commercial banks, many business
entities and a growing number of savings institutions. An important distinction
between the mutual holding company form of organization and the fully public
form is that, by regulation, a mutual holding company must always own over 50%
of the common stock of its savings institution subsidiary. Only a minority of
the subsidiary's outstanding stock can be sold to investors. If Guaranty Federal
had undertaken a full conversion to public ownership in 1995, a much greater
amount of Bank Common Stock would have been offered, resulting in more stock
offering proceeds than management believes could have been effectively deployed
at the time.
Through the Conversion and Reorganization, the Company and the Bank
will complete the transition to full public ownership. The stock holding company
form of organization will provide the Company with the ability to diversify the
Company's and the Bank's business activities through acquisition of or mergers
with both stock savings institutions and commercial banks, as well as other
companies. Although there are no current arrangements, understanding or
agreements regarding any such opportunities, the Company will be in a position
after the Conversion and Reorganization, subject to regulatory limitations and
the Company's financial position, to take advantage of any such opportunities
that may arise.
The Conversion and Reorganization will be important to the future
growth and performance of the organization by providing a larger capital base to
support the operations of the Bank and the Company and by enhancing their future
access to capital markets, ability to diversify into other financial services
related activities, and ability to provide services to the public. The
Conversion and Reorganization will result in increased funds being available for
lending purposes, greater resources for expansion of services,
93
<PAGE>
and better opportunities for attracting and retaining qualified personnel.
Although the Bank currently has the ability to raise additional capital through
the sale of additional shares of Bank Common Stock, that ability is limited by
the mutual holding company structure which, among other things, requires that
the Mutual Holding Company hold a majority of the outstanding shares of Bank
Common Stock.
The Conversion and Reorganization also will result in an increase in
the number of outstanding shares of Common Stock following the Conversion and
Reorganization, as compared to the number of outstanding shares of Public Bank
Shares prior to the Conversion and Reorganization, which will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "Market for Common Stock."
An additional benefit of the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Bank for federal income
tax purposes. When the Bank in its mutual form transferred substantially all of
its assets and liabilities to the Bank in connection with the MHC
Reorganization, its accumulated earnings and profits tax attribute was not able
to be transferred to the Bank. Accordingly, this tax attribute was retained by
the Bank in its mutual form when it converted its charter to that of a mutual
holding company, even though the underlying retained earnings were transferred
to the Bank. The Conversion and Reorganization has been structured to re-unite
the accumulated earnings and profits tax attribute retained by the Mutual
Holding Company in the MHC Reorganization with the retained earnings of the Bank
by merging the Mutual Holding Company with and into the Bank in a tax-free
reorganization. This transaction will increase the Bank's ability to pay
dividends to the Company in the future. At the same time, the issues regarding a
mutual holding company's ability to waive dividends and the effect of any waiver
that may occur will be removed as a result of the elimination of the mutual
holding company structure. See "Dividend Policy."
In light of the foregoing, the Boards of Directors of the Bank and the
Mutual Holding Company believe that the Conversion and Reorganization is in the
best interests of such companies and their respective stockholders and members.
Description of the Conversion and Reorganization
On May 20, 1997, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan and in September 1997 the Bank incorporated the
Company under Delaware law as a first-tier wholly owned subsidiary of the Bank.
Pursuant to the Plan, (i) the Mutual Holding Company will convert to an interim
Federal stock savings bank and simultaneously will merge with and into the Bank,
pursuant to which the Mutual Holding Company will cease to exist and the shares
of Bank Common Stock held by the Mutual Holding Company will be canceled, and
(ii) a second interim savings institution ("Interim") formed by the Company
solely for such purpose will then merge with and into the Bank. As a result of
the merger of Interim with and into the Bank, the Bank will become a wholly
owned subsidiary of the Company and the Public Bank Shares will be converted
into the Exchange Shares pursuant to the Exchange Ratio^. The Exchange Ratio
ensures that after the Conversion and Reorganization, ^ Public Stockholders will
own the same aggregate percentage of Common Stock as they currently own of the
Bank common stock, subject to an adjustment to reflect the market value of
assets held by the Mutual Holding Company^ ( before giving effect to ^ the
payment of cash in lieu of issuing fractional Exchange Shares and ^ any shares
of Common Stock purchased by the Bank's ^ stockholders in the Offerings or ^
issued to the ESOP thereafter).
In addition to its investment in Guaranty Federal, the Mutual Holding
Company holds two classes of assets solely for the benefit of the mutual
members: (i) an investment in land of $1.2 million to be utilized for a future
branch ($600,000 of which is financed by a mortgage) and, (ii) cash and
investments
94
<PAGE>
of approximately $0.7 million accumulated from semi-annual dividends paid by
Guaranty Federal (the Mutual Holding Company has not waived dividends).
As part of the Offerings, these Mutual Holding Company assets held
solely for the benefit of members are consolidated with the Bank's balance sheet
to determine a pro forma pre-conversion balance sheet for valuation purposes.
Regulatory policy requires that the resulting minority ownership percentage be
adjusted downward to account for dividends waived by the Mutual Holding Company
and for assets held by the Mutual Holding Company solely for the benefit of the
mutual members. The objective of this policy is to ensure that the existing
public Bank stockholders do not benefit from the past waiver of dividends (if
any) or the Mutual Holding Company assets held solely for the benefit of the
members of the Mutual Holding Company. Because the Mutual Holding Company has
never waived any dividends, no adjustment is necessary for this factor. The
Mutual Holding Company does hold the aforementioned two assets solely for the
benefit of the mutual members, however, and the minority ownership percentage
has been adjusted downward accordingly pursuant to the formula.
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by (1) the OTS,
(2) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting, and (3) holders
of at least two-thirds of the shares of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor in
the Bank has both a deposit account in the institution and a pro rata ownership
interest in the net worth of the Mutual Holding Company based upon the balance
in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to
realize the value of their ownership interest in the Mutual Holding Company,
which has realizable value only in the unlikely event that the Mutual Holding
Company is liquidated. In such event, the depositors of record at that time, as
owners, would share pro rata in any residual surplus and reserves of the Mutual
Holding Company after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Company. The Common Stock of the Company is separate and apart
from deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore, the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the Bank.
Continuity. While the Conversion and Reorganization is being
accomplished, the normal business of the Bank of accepting deposits and making
loans will continue without interruption. The Bank will
95
<PAGE>
continue to be subject to regulation by the OTS and the FDIC. After the
Conversion and Reorganization, the Bank will continue to provide services for
depositors and borrowers under current policies by its present management and
staff.
The directors and officers of the Bank at the time of the Conversion
and Reorganization will continue to serve as directors and officers of the Bank
after the Conversion and Reorganization. The directors and executive officers of
the Company consist of individuals currently serving as directors and executive
officers of the Mutual Holding Company and the Bank, and they generally will
retain their positions in the Company after the Conversion and Reorganization.
Effect on Public Bank Shares. Upon consummation of the Conversion and
Reorganization, the Public Bank Shares shall be converted into Common Stock
based upon the Exchange Ratio without any further action on the part of the
holder thereof. Upon surrender of the Public Bank Shares, Common Stock will be
issued in exchange for such shares. See "- Delivery and Exchange of
Certificates."
Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Bank, a federally chartered savings bank, will become
stockholders of the Company, a Delaware-chartered corporation. For a description
of certain changes in the rights of stockholders as a result of the Conversion
and Reorganization, see "Comparison of Stockholders' Rights."
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
at the time of the Conversion and Reorganization will automatically continue as
a depositor after the Conversion and Reorganization, and each such deposit
account will remain the same with respect to deposit balance, interest rate and
other terms, except to the extent that funds in the account are withdrawn to
purchase Conversion Stock to be issued in the Offerings. Each such account will
continue to be insured by the FDIC to the same extent as before the Conversion
and Reorganization. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effects on Loans. No loan outstanding from the Bank will be affected by
the Conversion and Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Mutual Holding Company as to all matters requiring membership action. Upon
completion of the Conversion and Reorganization, depositors and borrowers will
cease to be members and will no longer be entitled to vote at meetings of the
Mutual Holding Company. Upon completion of the Conversion and Reorganization,
all voting rights in the Bank will be vested in the Company as the sole
stockholder of the Bank. Exclusive voting rights with respect to the Company
will be vested in the holders of Common Stock. Depositors of and borrowers from
the Bank will not have voting rights in the Company after the Conversion and
Reorganization, except to the extent that they become stockholders of the
Company.
Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal and Missouri income taxation which indicate that the adoption
and implementation of the Plan of Conversion set forth herein will not be
taxable for federal or Missouri income tax purposes to the Primary Parties or
the Bank's Eligible Account Holders, Supplemental Eligible Account Holders or
Other Members, except as discussed below. See "- Tax Aspects" below and "Risk
Factors."
96
<PAGE>
Effect on Liquidation Rights. If the Mutual Holding Company were to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, members of the Mutual
Holding Company would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at the Bank immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after the
Conversion and Reorganization, all claims of creditors (including those of
depositors, to the extent of the deposit balances) also would be paid first,
followed by distribution of the "liquidation account" to certain depositors (see
"- Liquidation Rights" below), with any assets remaining thereafter distributed
to the Company as the holder of the Bank's capital stock. Pursuant to the rules
and regulations of the OTS, a merger, consolidation, sale of bulk assets or
similar combination or transaction with another insured savings institution
would not be considered a liquidation for this purpose and, in such a
transaction, the liquidation account would be required to be assumed by the
surviving institution.
Effect on Existing Compensation Plans. Under the Plan, the 1994 Option
Plan and the 1994 RRP will become benefit plans of the Company and shares of
Common Stock will be issued (or reserved for issuance) pursuant to such benefit
plans instead of shares of Bank Common Stock. As of June 30, 1997, 80.8% of the
options available for grant under the 1994 Option Plan had been granted but
options for 78,556 shares had not yet been exercised. As of June 30, 1997, 88.6%
of the shares of Bank Common Stock purchased by the 1994 RRP had been allocated.
See "Management of the Bank - Certain Benefits - 1994 Stock Option Plan" and "-
1994 Recognition and Retention Plan."
The Offerings
Subscription Offering. In accordance with the Plan of Conversion,
rights to subscribe for the purchase of Conversion Stock have been granted under
the Plan of Conversion to the following persons in the following order of
descending priority: (1) Eligible Account Holders; (2) the ESOP; (3)
Supplemental Eligible Account Holders; and (4) Other Members. All subscriptions
received will be subject to the availability of Conversion Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum and minimum purchase limitations set
forth in the Plan of Conversion and as described below under "- Limitations on
Common Stock Purchases and Ownership."
Eligible Account Holders (First Priority). Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) the maximum purchase limitation established for the Community
Offering and/or Syndicated Community Offering, (ii) one-tenth of 1% of the total
offering of shares of Conversion Stock in the Subscription Offering, or (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of which the numerator is the amount of the
Qualifying Deposits of the Eligible Account Holder and the denominator is the
total amount of all Qualifying Deposits of all Eligible Account Holders, subject
to the overall purchase limitations and the overall ownership limitation. See "-
Limitations on Common Stock Purchases and Ownership."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make such
person's total allocation equal to the lesser of the number of shares subscribed
for or 100 shares. Thereafter, unallocated shares will be allocated to
subscribing Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective eligible deposits bear to the
total amount of eligible deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled, provided that no fractional shares shall be
issued. The subscription rights of Eligible
97
<PAGE>
Account Holders who are also directors or officers of the Mutual Holding Company
or the Bank and their associates will be subordinated to the subscription rights
of other Eligible Account Holders to the extent attributable to increased
deposits in the year preceding December 31, 1995.
ESOP (Second Priority). The ESOP will receive, without payment
therefore, second priority, nontransferable subscription rights to purchase, in
the aggregate, up to 8% of the Conversion Stock within the Offering Range,
including any increase in the number of shares of Conversion Stock after the
date hereof as a result of an increase of up to 15% in the maximum of the
Offering Range. The ESOP currently intends to purchase 8% of the shares of
Conversion Stock, or 264,000 shares based on the midpoint of the Offering Range.
Subscriptions by the ESOP will not be aggregated with shares of Conversion Stock
purchased directly by or which are otherwise attributable to any other
participants in the Offerings, including subscriptions of any of the Bank's
directors, officers, employees or associates thereof. See "Management of the
Bank - Certain Benefits - Employee Stock Ownership Plan."
The right of the ESOP to subscribe for Conversion Stock is subordinate
to the rights of Eligible Account Holders. However, solely in the event the
Offerings result in the sale of Conversion Stock in an amount greater than the
maximum of the Offering Range (up to 15% greater), the ESOP has a priority,
higher than that of Eligible Account Holders, to satisfy its subscription from
the amount of Conversion Stock issued that exceeds the maximum of the Offering
Range.
In the event that there are insufficient shares for the ESOP to
purchase 8% of the Conversion Stock within the Offering Range, the Company may
issue additional shares of Conversion Stock directly to the ESOP at the Purchase
Price to satisfy the ESOP's order to purchase such amount of Conversion Stock in
the Offerings and/or the ESOP may purchase shares of Conversion Stock in the
open market. Purchases of additional shares of Common Stock from the Company
would dilute the interests of other stockholders. See "- Limitations on ^ Common
Stock Purchases and Ownership" and "Risk Factors Possible Dilutive Effect of
Issuance of Additional Shares."
Supplemental Eligible Account Holders (Third Priority). Each
Supplemental Eligible Account Holder will receive, without payment therefor,
third priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of (i) the maximum purchase limitation
established for the Community Offering and/or Syndicated Community Offering,
(ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the
Subscription Offering, or (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Conversion
Stock offered in the Subscription Offering by a fraction, of which the numerator
is the amount of the Qualifying Deposits of the Supplemental Eligible Account
Holder and the denominator is the total amount of all Qualifying Deposits of all
Supplemental Eligible Account Holders, subject to the overall purchase
limitation, the overall ownership limitations, and the availability of shares of
Conversion Stock for purchase after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders and the ESOP. See "- Limitations on
^ Common Stock Purchases and Ownership."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Thereafter, unallocated shares may be allocated to
subscribing preferred Supplemental Eligible Account Holders whose subscriptions
remain unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all such subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued.
98
<PAGE>
Other Members (Fourth Priority). To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority, nontransferable
subscription rights to subscribe for Conversion Stock in the Subscription
Offering up to the greater of (i) the maximum purchase limitation established
for the Community Offering and/or Syndicated Community Offering) or (ii)
one-tenth of 1% of the total offering of shares of Conversion Stock in the
Subscription Offering, in each case subject to the overall purchase limitation,
the overall ownership limitation, and the availability of shares of Conversion
Stock for purchase after taking into account the shares of Conversion Stock
purchased by Eligible Account Holders, the ESOP, and Supplemental Eligible
Account Holders. See "- Limitations on Common Stock Purchases and Ownership."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders, is in excess of the total number of
shares of Conversion Stock offered in the Subscription Offering, shares first
may be allocated so as to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total equal to the lesser of the number
of shares subscribed for or 100 shares. Thereafter, any remaining shares may be
allocated among subscribing Other Members on a pro rata basis in the proportion
that each such Other Member's subscription bears to the total subscriptions of
all subscribing Other Members, provided that no fractional shares shall be
issued.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 p.m.., Missouri Time, on ______________ _____,
1997, unless extended for up to 45 days or such additional periods by the
Primary Parties with the approval of the OTS. Such extensions may not be
extended by _____________ _____, 199_. Subscription rights that have not been
exercised prior to the Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of ^ Conversion Stock ^(2,805,000 shares) have been subscribed
for or otherwise sold. If all shares have not been subscribed for or sold within
45 days after the Expiration Date, unless such period is extended with the
consent of the OTS, all funds delivered to the Bank pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be canceled. If an extension beyond the 45-day
period following the Expiration Date is granted, the Primary Parties will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
Public Stockholders Offering. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, each
Public Stockholder as of the Stockholder Voting Record Date, __________ ___,
199_____, may submit orders for Conversion Stock in the Offerings up to the
maximum purchase limitation established for the Community Offering and/or
Syndicated Community Offering, subject to the overall purchase and ownership
limitations and the availability of shares of Conversion Stock for purchase
after taking into account the shares of Conversion Stock purchased by Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders. See "-
Limitations on ^ Common Stock Purchases and Ownership."
In the event the Public Stockholders as of the Stockholder Voting
Record Date submit orders for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, Other Members and directors, officers and employees of the
Mutual Holding Company and the Bank, is in excess of the total number of shares
of Conversion Stock offered in the Offerings, available shares will be allocated
among Public Stockholders as of the
99
<PAGE>
Stockholder Voting Record Date whose orders are accepted on a pro rata basis in
the same proportion as each Public Stockholder's order bears to the total orders
of all Public Stockholders, provided that no fractional shares shall be issued.
The opportunity to submit orders for shares of Conversion Stock in the
Public Stockholders Offering category is subject to the right of the Primary
Parties, in their sole discretion, to accept or reject any such orders in whole
or in part for any reason either at the time of receipt of an order or as soon
as practicable following the completion of the Public Stockholders Offering. ^
Public Stockholders do not have subscription rights with respect to the
Conversion and Reorganization and may not be able to purchase any shares if
their ownership exceeds applicable limits.
Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions Eligible Account Holders, the
ESOP, Supplemental Eligible Account Holders, and Other Members and orders of
Public Stockholders, the Primary Parties have determined to offer shares
pursuant to the Plan to certain members of the general public, with preference
given to the natural persons residing in the Local Community (such natural
persons referred to as "Preferred Subscribers"). Such persons^ may purchase
$250,000 of ^ Conversion Stock, subject to the overall purchase and ownership
limitations. See "- Limitations on Common Stock Purchases and Ownership." This
amount may be increased at the sole discretion of the Primary Parties. The
opportunity to submit orders for shares of Conversion Stock in the Community
Offering category is subject to the right of the Primary Parties, in their sole
discretion, to accept or reject any such orders in whole or in part for any
reason either at the time of receipt of an order or as soon as practicable
following the completion of the Community Offering.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers, available shares of stock will be allocated first to each
Preferred Subscriber whose order is accepted by the Primary Parties, in an
amount equal to the lesser of 100 shares or the number of shares ordered by each
such Preferred Subscriber, if possible. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose orders remain unsatisfied in the
same proportion that the unfilled order of each bears to the total unfilled
orders of all Preferred Subscribers whose order remains unsatisfied. If the
orders of Preferred Subscribers are filled, and there are shares remaining,
shares will be allocated to other members of the general public who submit
orders in the Community Offering applying the same allocation described above
for Preferred Subscribers.
Syndicated Community Offering. The Plan provides that, if feasible, all
shares of Conversion Stock not purchased in the Subscription, Public
Stockholders and Community Offerings may be offered for sale to the general
public in a Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed or through an underwritten public offering. No
person will be permitted to subscribe in the Syndicated Community Offering for
more than $250,000 of ^ Conversion Stock, subject to the overall purchase and
ownership limitations discussed below in "Limitations on Common Stock Purchases
and Ownership." The Primary Parties have the right to reject orders in whole or
part in their sole discretion in the Syndicated Community Offering. Neither the
Selling Agent nor any registered broker-dealer shall have any obligation to take
or purchase any shares of ^ Conversion Stock in the Syndicated Offering;
however, the Selling Agent has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering. In the event a Syndicated Community
Offering is utilized, broker-dealers will enter into selected dealers'
agreements with the Selling Agent and will be entitled to commissions that will
have previously been negotiated in an amount of up to approximately 4.5% of the
aggregate Purchase Price of the ^ Conversion Stock.
100
<PAGE>
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering,
the selected dealers' agreement provides that a purchaser may pay for his shares
with funds held by or deposit with a selected dealer. If an order form is
executed and forwarded to the selected dealer or if the selected dealer is
authorized to execute the order form on behalf of a purchaser, the selected
dealer is required to forward the order form and funds on behalf of a purchaser
to the Bank for deposit in a segregate account on or before noon of the business
day following receipt of the order form or execution of the order form by the
selected dealer. Alternatively, selected dealers may solicit indications of
interest from their customers to place orders for shares. Such selected dealers
shall subsequently contact their customers who indicated an interest and seek
their confirmation as to their intent to purchase. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
funds to the Bank for deposit in a segregate account. If such alternative
procedure is employed, purchasers' funds are not required to be in their
accounts with selected dealers until the debit date.
The Syndicated Community Offering will terminate no more that 45 days
following the Expiration Date, unless extended by the Primary Parties with the
approval of the OTS. See "- Stock Pricing and Number of Shares to be Issued"
below for a discussion of rights of subscribers, if any, in the event an
extension is granted.
Limitations on Common Stock Purchases and Ownership
The Plan includes the following limitations on the number of shares of
^ Conversion Stock that may be purchased in the Offerings and the maximum
ownership limitation upon consummation of the Conversion and Reorganization:
(1) No less than 25 shares of Conversion Stock may be
purchased, to the extent such shares are available;
(2) The number of shares of Conversion Stock which may be
purchased by any person (or persons through a single account) in any
category in the Subscription Offering shall not exceed such number of
shares of Conversion Stock that, when combined with Exchange Shares
received, shall equal $250,000 ^ of Common Stock, except for the ESOP,
which in the aggregate may subscribe for up to 8% of the Conversion
Stock^;
(3) The number of shares of Conversion Stock which may be
purchased by any person^ in the Public Stockholders, the Community or
Syndicated Community Offerings combined shall not exceed such number of
shares of Conversion Stock that, when combined with Exchange Shares
received, shall equal $250,000 ^ of Common Stock.
(4) Except for Tax-Qualified Employee Stock Benefit Plans, the
maximum amount of Conversion Stock that may be purchased in all
categories in the Conversion and Reorganization by any person (or
persons through a single account) together with any associate or group
of persons acting in concert shall not exceed such number of shares
that when combined with Exchange Shares shall equal ^ $320,850 of
Common Stock.
(5) No more than 31.7% of the total number of shares sold in
the Offerings may be purchased by directors and officers of the Mutual
Holding Company and the Bank and their associates in the aggregate,
excluding purchases by the ESOP.
101
<PAGE>
Calculations of aggregate ownership for purposes of applying the
purchase and ownership limits will not include shares that may be obtained
pursuant to the exercise of options or shares that have been granted pursuant to
a stock benefit plan of the Bank.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the Mutual Holding Company or the Stockholders of the Bank, the limitations in
(2) and (3) above may be decreased, or increased up to a maximum of 5% of the
total shares of Conversion Stock to be issued in the Offerings at the sole
discretion of the Primary Parties. If such amounts are increased, subscribers
for the maximum amount will be, and certain other large subscribers in the sole
discretion of the Primary Parties may be, given the opportunity to increase
their subscriptions up to the then applicable limit.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion and Reorganization due to an increase in the
maximum of the Offering Range of up to 15% (the "Adjusted Maximum"), the new
total number of shares will be allocated in the following order of priority in
accordance with the Plan: (i) to fill the ESOP's order of up to a total of 8% of
the Adjusted Maximum number of shares; (ii) in the event that there is an
oversubscription by Eligible Account Holders, to fill their unfulfilled
subscriptions; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account holders, to fill their unfulfilled subscriptions;
(iv) in the event that there is an oversubscription by Other Members, to fill
unfulfilled subscriptions; (v) in the event that there is an oversubscription by
Public Stockholders, to fill their unfulfilled subscriptions; (vi) in the event
of oversubscription by Preferred Subscribers in the Community Offering, to fill
their unfulfilled subscriptions; and (vii) to fill unfulfilled subscriptions in
the Community Offering other than Preferred Subscribers.
The term "associate", when used to indicate a relationship with any
person, is defined to mean (i) a corporation or organization (other than the
Mutual Holding Company, the Bank, a majority-owned subsidiary of the Bank or the
Company) of which such person is a director, officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any tax-qualified employee stock benefit plan of the Company or the Bank
in which such person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of
such person, or any relative of such spouse, who has the same home as such
person or who is a director or officer of the Company or the Bank or any of the
subsidiaries of the foregoing.
The term "resident" as used herein means any person who, on the date
designated for that category of subscriber in the Plan, maintained a bona fide
residence within the Local Community and has manifested an intent to remain
within the Local Community for a period of time. The designated dates for
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are December 31, 1995, September 30, 1997 and __________ ___, 1997,
respectively. To the extent the person is a corporation or other business
entity, the principal place of business or headquarters shall be within the
Local Community. To the extent the person is a personal benefit plan, the
circumstances of the beneficiary shall apply with respect to this definition. In
the case of all other benefit plans, the circumstances of the trustee shall be
examined for purposes of this definition. The Bank may utilize deposit or loan
records or such other evidence provided to it to make a determination as to
whether a person is a bona fide resident of the Local Community. Subscribers in
the Community Offering who are natural persons also will have a purchase
preference if they are residents of the Local Community. In all cases, however,
such determination shall be in the sole discretion of the Bank and shall be
determined on a case-by-case basis without regard to prior determinations.
102
<PAGE>
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock must be based on the appraised pro forma market value of the
Mutual Holding Company and the Bank on a consolidated basis, as determined on
the basis of an independent valuation. The Primary Parties have retained RP
Financial to make such a valuation. For its services in making such an appraisal
and any expenses incurred in connection therewith, RP Financial will receive
$27,500 plus out of pocket expenses of up to $7,500. RP Financial will also
receive a fee of $7,500 for its assistance in the preparation of the business
plan. The Primary Parties have agreed to indemnify RP Financial and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where RP Financial liability results from its
negligence or bad faith.
The Independent Valuation has been prepared by RP Financial in reliance
upon the information contained in this Prospectus, including the financial
statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the
Primary Parties and the economic and demographic conditions in the Bank's
existing market area: certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other similarly situated publicly traded
companies located in Missouri and other regions of the United States; the
aggregate size of the offering of the Common Stock; the impact of the Conversion
and Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for the Bank
Common Stock and securities of comparable companies and general conditions in
the market for such securities.
On the basis of the foregoing, RP Financial has advised the Primary
Parties in its opinion the estimated pro forma market value of the Bank and the
Mutual Holding Company on a combined basis was $47,043,645 as of September 5,
1997. In accordance with OTS regulations, the minimum and maximum of the
valuation were set at 15% below and above the valuation, respectively, resulting
in a range of $39,987,098 to $54,100,192 (the "Total Valuation Range"). Because
the holders of the Public Bank Shares are to hold the same aggregate percentage
ownership interest in the Company as they held in the Bank just prior to
consummation of the Conversion and Reorganization, adjusted downward pursuant to
OTS policy requiring the Exchange Ratio to reflect the market value of assets
held by the Mutual Holding Company (before giving effect to the payment of cash
in lieu of issuing fractional Exchange Shares and any shares of Conversion Stock
purchased the Bank's stockholders in the Offerings or issued to the ESOP
thereafter), the Appraisal was multiplied by 70.15%, which is the Mutual Holding
Company's percentage interest in the Bank, as adjusted upward pursuant to OTS
policy requiring the Exchange Ratio to reflect the market value of assets held
by the Mutual Holding Company. The resulting amount ($33,000,000) is the
midpoint of the dollar amount of the Conversion Stock to be offered in the
Offerings. In accordance with OTS regulations, the minimum and maximum of the
offering were set at 15% below and above the midpoint, respectively, resulting
in a range of $28,050,000 to $37,950,000 (the "Offering Range). The Boards of
Directors of the Primary Parties determined that the Conversion Stock would be
sold at $10.00 per share, resulting in a range of 2,805,000 to 3,795,000 shares
of Conversion Stock being offered. Upon consummation of the Conversion and
Reorganization, the Conversion Stock and the Exchange Shares will represent
approximately 70.15% and 29.85% , respectively, of the Company's total
outstanding shares of Common Stock. Based upon the above factors, the Public
Stockholders will experience a dilution of approximately 4.1% in their ownership
interest in the Company as compared to their current ownership interest in the
Bank. There can be no assurances as to the impact such dilution will have on the
trading price of the Bank Conversion Stock prior to the Conversion and
Reorganization or the Common Stock following completion of the Conversion and
Reorganization.
103
<PAGE>
The Boards of Directors of the Primary Parties reviewed RP Financial's
appraisal report, including the methodology and the assumptions used by RP
Financial and determined that the Offering Range was reasonable and adequate.
However, the Boards of Directors of the Primary Parties are relying upon the
expertise, experience and independence of RP Financial and are not qualified to
determine the appropriateness of the assumptions or the methodology.
The MHC Regulations provide that in a conversion of the Mutual Holding
Company to stock form, the Public Stockholders will be entitled to exchange
their Public Bank Shares for Exchange Shares, provided the Bank and the Mutual
Holding Company demonstrate to the satisfaction of the OTS that the basis for
the exchange is fair and reasonable. The Boards of Directors of the Bank and the
Company have determined that each Public Bank Share will on the Effective Date
be converted into and become the right to receive a number of Exchange Shares
determined pursuant to the Exchange Ratio that ensures that after the Conversion
and Reorganization, Public Stockholders will own the same aggregate percentage
of Common Stock as they currently own of the Bank Common Stock, subject to an
adjustment to reflect the market value of assets held by the Mutual Holding
Company (before giving effect to the payment of cash in lieu of issuing
fractional Exchange Shares and any shares of Common Stock purchased the Bank's
stockholders in the Offerings or issued to the ESOP thereafter). Based upon such
formula and the Offering Range, the Exchange Ratio ranged from a minimum of
1.2276 to a maximum of 1.6609 Exchange Shares for each Public Bank Share, with a
midpoint of 1.4443. Based upon these Exchange Ratios, the Company expects to
issue between 1,193,709 and 1,615,019 Exchange Shares to Public Stockholders.
The Offering Range and the Exchange Ratio may be amended with the approval of
the OTS, if required, or if necessitated by subsequent developments in the
financial condition of any of the Primary Parties or market conditions
generally. In the event the Appraisal is updated to below $39,987,098 (the
minimum of the Total Valuation Range) or above $62,215,221 (the maximum, as
adjusted, of the Total Valuation Range), such Appraisal will be filed with the
SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for Common
Stock in excess of $37,950,000 (the maximum of the Offering Range) and up to
$43,642,500 (the maximum of the Offering Range, as adjusted by 15%), the Company
may be required by the OTS to accept all such orders. No assurance, however, can
be made that the Company will receive orders for Common Stock in excess of the
maximum of the Offering Range or that, if such orders are received, that all
such orders will be accepted because the Company's final valuation and number of
shares to be issued are subject to the receipt of an updated Appraisal from RP
Financial which reflects such an increase in the valuation and the approval of
such increase by the OTS. There is no obligation or understanding on the part of
management to take and/or pay for any shares of Common Stock in order to
complete the Offerings.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the financial statements and other
information provided by the Bank and the Mutual Holding Company, nor did RP
Financial value independently the assets or liabilities of the Bank. The
valuation considers the Bank and the Mutual Holding Company as going concerns
and should not be considered as indication of the liquidation value of the Bank
and the Mutual Holding Company. Moreover, because such valuation is necessarily
based upon the estimates and projections of a number of matters, all of which
are subject to change from time to time, no assurance can be given that persons
purchasing Conversion Stock or receiving Exchange Shares in the Conversion and
Reorganization will thereafter be able to sell such shares at prices at or above
the purchase price per share in the Offerings.
104
<PAGE>
No sale of shares of Conversion Stock or issuance of Exchange Shares
may be consummated unless, prior to such consummation, RP Financial confirms
that nothing of a material nature has occurred which, taking into account all
relevant factors, would cause it to conclude that the aggregate Purchase Price
is materially incompatible with the estimate of the pro forma market value the
Mutual Holding Company and the Bank on combined basis. If such is not the case,
a new Offering Range may be set, a new Exchange Ratio may be determined based
upon the new Offering Range, a new Subscription, Public Stockholders, Community
and/or Syndicated Community Offering may be held or such other action may be
taken as the Primary Parties shall determine and the OTS may permit or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of Common
Stock to be sold in the Offerings may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number of
shares times the $10.00 purchase price is not below the minimum or more than 15%
above the maximum of the Offering Range (exclusive of a number of shares equal
to up to an additional 8% of the Conversion Stock that may be issued to the ESOP
out of authorized but unissued shares of Conversion Stock to the extent such
shares are not purchased in the Offerings due to an oversubscription). In the
event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the Offering Range or
more than 15% above the maximum of such range (exclusive of additional shares
that may be issued to the ESOP), purchasers will be resolicited (i.e., permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded with interest at
the Bank's passbook rate of interest, or be permitted to modify or rescind their
subscriptions).
An increase in the number of shares of Common Stock, either as a result
of an increase in the Total Valuation Range or Offering Range or due to the
purchase by the ESOP of authorized but unissued shares (see "The Offerings -
Subscription Offering - ESOP (Second Priority)"), would decrease a subscriber's
ownership interest and the Company's pro forma net income and stockholders'
equity on a per share basis while increasing pro forma net income and
stockholders' equity on an aggregate basis. A decrease in the number of shares
of Common Stock would increase both a subscriber's ownership interest and the
Company's pro forma net income and stockholders' equity on a per share basis
while decreasing pro forma net income and stockholders' equity on an aggregate
basis. See "Risk Factors Possible Dilutive Effect of Issuance of Additional
Shares" and "Pro Forma Data."
The Appraisal has been filed as an exhibit to this Registration
Statement and Application for Conversion of which this Prospectus is a part and
is available for inspection in the manner set forth under "Additional
Information."
The Exchange
The Boards of Directors of the Bank and the Company have determined
that each Public Bank Share will, upon consummation of the Conversion and
Reorganization, be automatically converted into and become the right to receive
a number of shares of Common Stock determined pursuant to a the Exchange Ratio
that ensures that after the Conversion and Reorganization and before giving
effect to Public Stockholders' purchases in the Offerings and receipt of cash in
lieu of fractional shares or issuances to the ESOP, Public Stockholders will own
an aggregate percentage of the Company's Common Stock that reflects an
adjustment to the Public Stockholders' current ownership of the Bank Common
Stock. The adjustment reflects the market value of assets held by the Mutual
Holding Company.
The adjustment in the Exchange Ratio described above would decrease the
Public Stockholder's ownership interest to 29.85% from 31.12% based on the
following calculation:
105
<PAGE>
(Pro Forma Market Value of Bank) - (Market Value of MHC Assets)
---------------------------------------------------------------
Pro Forma Market Value of Bank
To determine the Exchange Ratio, the adjusted Public Stockholder's
ownership interest was multiplied by the number of shares to be issued in the
Conversion and Reorganization, and the result was divided by the number of
Public Bank Shares outstanding (972,365 shares, as adjusted as of June 30,
1997). Immediately prior to consummation of the Conversion and Reorganization,
the Bank will recalculate the dilution to be experienced by Public Stockholders
pursuant to the above formula, which will take into effect changes in
stockholders' equity and percentage ownership through such date.
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Offering Range, the following: (i) the
total number of shares of Common Stock and Exchange Shares to be issued in the
Conversion and Reorganization, (ii) the percentage of the total Common Stock
represented by the Common Stock and the Exchange Shares, and (iii) the Exchange
Ratio. The table assumes that there is no cash paid in lieu of issuing
fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock to Exchange Shares to
be Issued(1) be Issued(1) Total Shares of
------------ ------------ Common Stock Exchange
Amount Percent Amount Percent to be Outstanding(1) Ratio(1)
------ ------- ------ ------- -------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum................ 2,805,000 70.15% 1,193,709 29.85% 3,998,709 1.2276
Midpoint................ 3,300,000 70.15 1,404,364 29.85 4,704,364 1.4443
Maximum................. 3,795,000 70.15 1,615,019 29.85 5,410,019 1.6609
15% above maximum....... 4,364,250 70.15 1,857,272 29.85 6,221,522 1.9101
</TABLE>
- -----------------
(1) Assumes that exercisable options to purchase 14,383 shares of Bank
Common Stock at June 30, 1997 are not exercised prior to consummation
of the Conversion and Reorganization. Assuming that all of such options
are exercised prior to such consummation, the percentages represented
by the Conversion Stock and the Exchange Shares would amount to 69.84%
and 30.16%, respectively, and the Exchange Ratio would amount to
1.2222, 1.4379, 1.6536, and 1.9016, at the minimum, midpoint, maximum
and 15% above the maximum of the Offering Range, respectively.
The final Exchange Ratio will be determined based upon the number of
shares issued in the Offerings and the number of shares of Bank Common Stock
held by Public Stockholders just prior to consummation of the Conversion and
Reorganization (adjusted downward to take into account the market value of
assets held by the Mutual Holding Company) and it will not be based upon the
market value of the Public Bank Shares. At the minimum, midpoint and maximum of
the Offering Range, one Public Bank Share will be exchanged for 1.2276, 1.4443
and 1.6609 shares of Common Stock, respectively (which have a calculated
equivalent estimated value of $12.28, $14.44 and $16.61 based on the Purchase
Price of Conversion Stock in the Offerings and the aforementioned Exchange
Ratios). However, there can be no assurance as to the actual market value of a
share of Common Stock after the Conversion and Reorganization or that such
shares can be sold at or above the $10.00 per share Purchase Price. Any increase
or decrease in the number of shares of Common Stock will result in a
corresponding change in the number of Exchange Shares, so that upon consummation
of the Conversion and Reorganization the Conversion Stock and the Exchange
Shares will represent approximately 70.15% and 29.85%, respectively, of the
Company's total outstanding shares of Common Stock.
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for the Conversion Stock pursuant to the Plan reside. However, no
person will be offered or allowed to purchase any Conversion Stock under the
Plan
106
<PAGE>
if such person resides in a foreign country or in a state of the United States
with respect to which any of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares under the Plan reside in such state
or foreign country; and either (ii) the granting of subscription rights or
offering or selling shares of Conversion Stock to such persons would require the
Bank, the Company or its employees to register, under the securities laws of
such state or foreign country, as a broker or dealer or to register or otherwise
qualify its securities for sale in such state or foreign country; or (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any such person.
Marketing Arrangements
The Primary Parties have engaged FBR as a financial advisor and
marketing agent in connection with the Offerings, and FBR has agreed to use its
best efforts to solicit subscriptions and purchase orders for shares of
Conversion Stock in the Offerings. FBR is a member of National Association of
Securities Dealers, Inc. (the "NASD") and a broker-dealer which is registered
with the SEC. FBR will provide various services including, but not limited to,
(1) training and educating the Bank's employees who will be performing certain
ministerial functions in the Offerings regarding the mechanics and regulatory
requirements of the stock sales process; (2) coordinating the Company's sales
efforts, (3) soliciting orders for Conversion Stock and (4) assisting in the
solicitation of proxies of Members and Stockholders for use at the Members'
Meeting and the Stockholders' Meeting, respectively. Based upon negotiations
between the Primary Parties and FBR, FBR will receive a fee of $150,000. FBR
also will be reimbursed for its reasonable out-of-pocket expenses (including
legal fees and expenses) up to $50,000. The Primary Parties have agreed to
indemnify FBR for reasonable costs and expenses (including legal fees) incurred
in connection with certain claims or litigation arising out of or based upon
untrue statements or omissions contained in the offering material for the
Conversion Stock, including certain liabilities under the Securities Act.
Directors and executive officers of the Primary Parties may participate
in the solicitation of offers to purchase Conversion Stock. Other employees of
the Bank may participate in the Offerings in ministerial capacities or providing
clerical work in effecting a sales transaction. Such other employees have been
instructed not to solicit offers to purchase Conversion Stock or provide advice
regarding the purchase of Conversion Stock. Questions of prospective purchasers
will be directed to executive officers or registered representatives. The
Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Conversion
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Conversion
Stock. No officer, director or employee of the Primary Parties will be
compensated in connection with such person's solicitations or other
participation in the Offerings or the Exchange by the payment of commissions or
other remuneration based either directly or indirectly on transactions in the
Conversion Stock and Exchange Shares, respectively.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares.
Federal regulations also prohibit any
107
<PAGE>
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of Conversion Stock prior
to the completion of the Conversion.
The Primary Parties will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Bank would receive his
pro rata share of any assets of the Mutual Holding Company remaining after
payment of claims of all creditors. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Conversion and Reorganization, each depositor, in the
event of a complete liquidation of the Bank, would have a claim as a creditor of
the same general priority as the claims of all other general creditors of the
Bank. However, except as described below, this claim would be solely in the
amount of the balance in the deposit account plus accrued interest. A depositor
would not have an interest in the value or assets of the Bank or the Company
above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the amount of any dividends waived by the Mutual Holding
Company (of which there were none) plus the greater of (1) 100% of the Bank's
retained earnings of $17.85 million at December 31, 1994, the date of the latest
balance sheet contained in the final offering circular utilized in the Bank's
initial public offering in the MHC Reorganization, or (2) 70.15% of the Bank's
total stockholders' equity as reflected in its latest balance sheet contained in
the final Prospectus utilized in the Offerings. As of the date of this
Prospectus, the initial balance of the liquidation account would be $_____
million. Each Eligible Account Holder and Supplemental Eligible Account Holder,
if such person were to continue to maintain such person's deposit account at the
Bank, would be entitled, upon a complete liquidation of the Bank after the
Conversion and Reorganization, to an interest in the liquidation account prior
to any payment to the Company as the sole stockholder of the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Bank at the close of
business on December 31, 1995 or September 30, 1997, as the case may be. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account for each of such person's deposit
accounts based on the proportion that the balance of each such deposit account
on the December 31, 1995 eligibility record date (or the September 30, 1997
supplemental eligibility record date, as the case may be) bore to the balance of
all deposit accounts in the Bank on such date.
If, however, on any June 30 annual closing date of the Bank, commencing
June 30, 1996 for Eligible Account Holders and June 30, 1998 for Supplemental
Eligible Account Holders, the amount in any deposit account is less than the
amount in such deposit account on December 31, 1995 or September 30, 1997, as
the case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any
108
<PAGE>
assets remaining after the above liquidation rights of Eligible Account Holders
and Supplemental Eligible Account Holders are satisfied would be distributed to
the Company as the sole stockholder of the Bank.
Tax Aspects
Consummation of the Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling from the IRS or an opinion of
counsel with respect to federal tax effects of the transaction, and either a
ruling or an opinion with respect to Missouri tax laws, to the effect that
consummation of the transactions contemplated hereby will not result in a
taxable reorganization under the provisions of the applicable codes or otherwise
result in any material adverse tax consequences to the Mutual Holding Company,
the Bank, the Company or to account holders receiving subscription rights,
except to the extent, if any, that subscription rights are deemed to have fair
market value on the date such rights are issued. This condition may not be
waived by the Primary Parties.
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C., has issued an
opinion to the Company and the Bank to the effect that for federal income tax
purposes: (1) the conversion of the Mutual Holding Company from mutual to stock
form and the simultaneous merger of the Mutual Holding Company with and into the
Bank, with the Bank being the surviving institution, will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code, (2) no
gain or loss will be recognized by the Mutual Holding Company upon the transfer
of assets to the Bank, pursuant to the Conversion and Reorganization, (3) no
gain or loss will be recognized by the Bank upon the receipt of the assets of
the converted Mutual Holding Company in such merger, (4) the merger of Interim
with and into the Bank, with the Bank being the surviving institution, will
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code, (5) no gain or loss will be recognized by Interim upon the transfer of its
assets to the Bank pursuant to its merger with the Bank, (6) no gain or loss
will be recognized by the Bank upon the receipt of the assets of Interim in such
merger, (7) no gain or loss will be recognized by the Company upon the receipt
of Bank Common Stock solely in exchange for Common Stock, (8) no gain or loss
will be recognized by the Public Stockholders upon the receipt of Common Stock
solely in exchange for their Public Bank Shares, (9) the basis of the Common
Stock to be received by the Public Stockholders will be the same as the basis of
the Public Bank Shares surrendered in exchange therefor, before giving effect to
any payment of cash in lieu of fractional shares, (10) the holding period of the
Common Stock to be received by the Public Stockholders will include the holding
period of the Public Bank Shares, provided that the Public Bank Shares were held
as a capital asset on the date of the exchange, and (11) the Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members will recognize
gain upon the issuance to them of nontransferable subscription rights to
purchase Common Stock, but only to the extent of the value, if any, of the
subscription rights.
Furthermore, Carnahan, Evans, Cantwell & Brown, P.C. has issued an
opinion to the Company and the Bank to the effect that the income tax
consequences of the Conversion and Reorganization are substantially the same
under Missouri law as they are under the Code.
In the opinion of RP Financial, which opinion is not binding on the
IRS, the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the Common
Stock at a price equal to its estimated fair market value, which will be the
same price as the Purchase Price for the unsubscribed shares of Common Stock. If
the subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, receipt of such rights likely would be taxable only to
those eligible subscribers who exercise the subscription rights (either as a
capital gain or ordinary income) in an amount equal to such value, and the
Primary Parties could recognize gain on such
109
<PAGE>
distribution. Eligible subscribers are encouraged to consult with their own tax
advisor as to the tax consequences in the event that such subscription rights
are deemed to have an ascertainable value.
Unlike private rulings, an opinion is not binding on the IRS and the
IRS could disagree with the conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding. If the IRS determines that the tax
effects of the transaction are to be treated differently from that presented in
the tax opinion, the Mutual Holding Company and the Bank may be subject to
adverse tax consequences as a result of the Conversion and Reorganization.
Delivery and Exchange of Certificates
Common Stock. Certificates representing Common Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Common Stock as soon as
practicable following consummation of the Conversion and Reorganization. Any
certificates returned as undeliverable will be held by the Company until claimed
by persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for Common Stock are available and delivered
to subscribers, subscribers may not be able to sell such shares.
Exchange Shares. After consummation of the Conversion and
Reorganization, each holder of a certificate or certificates theretofore
evidencing issued and outstanding shares of Bank Common Stock (other than the
Mutual Holding Company), upon surrender of the same to an agent, duly appointed
by the Company, which is anticipated to be the transfer agent for the Common
Stock (the "Exchange Agent"), shall be entitled to receive in exchange therefore
a certificate or certificates representing the number of full shares of Common
Stock for which the shares of Bank Common Stock theretofore represented by the
certificate or certificates so surrendered shall have been converted based on
the Exchange Ratio. The Exchange Agent shall promptly mail to each such holder
of record of an outstanding certificate which immediately prior to the
consummation of the Conversion and Reorganization evidenced shares of Bank
Common Stock, and which is to be exchanged for Common Stock based on the
Exchange Ratio as provided in the Plan, a form of letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
such certificate shall pass, only upon delivery of such certificate to the
Exchange Agent) advising such holder of the terms of the exchange effected by
the Conversion and Reorganization and of the procedure for surrendering to the
Exchange Agent such certificate in exchange for a certificate or certificates
evidencing Common Stock. The Bank's stockholders should not forward Bank Common
Stock certificates to the Bank or the Exchange Agent until they have received
the transmittal letter.
No holder of a certificate theretofore representing shares of Bank
Common Stock shall be entitled to receive any dividends in respect of the Common
Stock into which such shares shall have been converted by virtue of the
Conversion and Reorganization until the certificate representing such shares of
Bank Common Stock is surrendered in exchange for certificates representing
shares of Common Stock. In the event that dividends are declared and paid by the
Company in respect of Common Stock after the consummation of the Conversion and
Reorganization but prior to surrender of certificates representing shares of
Bank Common Stock, dividends payable in respect of shares of Common Stock not
then issued shall accrue (without interest). Any such dividends shall be paid
(without interest) upon surrender of the certificates representing such shares
of Bank Common Stock. The Company shall be entitled, after the consummation of
the Conversion and Reorganization, to treat certificates representing shares of
Bank Common Stock as evidencing ownership of the number of full shares of Common
Stock into which the
110
<PAGE>
shares of Bank Common Stock represented by such certificates shall have been
converted, notwithstanding the failure on the part of the holder thereof to
surrender such certificates.
The Company shall not be obligated to deliver a certificate or
certificates representing shares of Common Stock to which a holder of Bank
Common Stock would otherwise be entitled as a result of the Conversion and
Reorganization until such holder surrenders the certificate or certifies
representing the shares of Bank Common Stock for exchange as provided above, or,
in default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond as may be required in each case by the Company. If any certificate
evidencing shares of Common Stock is to be issued in a name other than that in
which the certificate evidencing Bank Common Stock surrendered in exchange
therefore is registered, it shall be a condition of the issuance thereof that
the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange pay to the
Exchange Agent any transfer or other tax required by reason of the issuance of a
certificate for shares of Common Stock in any name other than that of the
registered holder of the certificate surrendered or otherwise establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
Required Approvals
Various approvals of the OTS are required in order to consummate the
Conversion and Reorganization. The OTS has approved the Plan of Conversion,
subject to approval by the Mutual Holding Company's Members and the Bank's
Stockholders. In addition, consummation of the Conversion and Reorganization is
subject to OTS approval of the Company's application to acquire all of the
to-be-outstanding Bank Common Stock and the applications with respect to the
merger of the Mutual Holding Company (following its conversion to an interim
Federal stock savings bank) into the Bank and the merger of Interim into the
Bank, with the Bank being the surviving entity in both mergers. Applications for
these approvals have been filed and are currently pending. There can be no
assurances that the requisite OTS approvals will be received in a timely manner,
in which event the consummation of the Conversion and Reorganization may be
delayed beyond the expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion also must be
approved by (1) at least a majority of the total number of votes eligible to be
cast by Members of the Mutual Holding Company at the Members' Meeting, and (2)
holders of at least two-thirds of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Primary Parties will be final; however, such interpretations shall have no
binding effect on the OTS. The Plan provides that, if deemed necessary or
desirable by the Board of Directors, the Plan may be substantively amended by
the Board of Directors as a result of comments from the OTS or otherwise, prior
to the solicitation of proxies from the members of the Mutual Holding Company
and at any time thereafter with the concurrence of the OTS, except that in the
event that the regulations under which the Plan was adopted are liberalized
subsequent to the approval of the Plan by the OTS and the members of the Mutual
Holding Company at the special meeting of members, the Board of Directors may
amend the Plan to conform to the regulations without further approval of the OTS
or the members, to the extent permitted by law. An amendment to the Plan that
would result in a material adverse change in the terms of the Conversion and
Reorganization would require a resolicitation. In the event of a resolicitation,
subscriptions for which a confirmation or
111
<PAGE>
modification was not received would be rescinded. Any amendment to the Plan
regarding preferences to the Local Community will not be deemed to be a material
change.
Certain Restrictions on Purchase or Transfer of Shares After the Conversion and
Reorganization
All shares of Conversion Stock purchased in connection with the
Conversion and Reorganization by a director or an executive officer of the
Primary Parties will be subject to a restriction that the shares may not be sold
for a period of one year following the Conversion and Reorganization, except in
the event of the death of such director or executive officer or pursuant to a
merger or similar transaction approved by the OTS. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and appropriate stop-transfer instructions will be issued to the
Company's transfer agent. Any shares of Common Stock issued within this one-year
period as a stock dividend, stock split or otherwise with respect to such
restricted stock will be subject to the same restrictions. The directors and
executive officers of the Company will also be subject to the insider trading
rules promulgated pursuant to the Exchange Act.
Purchases of Common Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Company's outstanding Common Stock or to the purchase of Common
Stock pursuant to any tax-qualified employee stock benefit plan, such as the
ESOP, or by any non-tax-qualified employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion and Reorganization. During the second and third
years following consummation of the Conversion and Reorganization, the Company
may not repurchase any shares of its Common Stock other than pursuant to (i) an
offer to all stockholders on a pro rata basis that is approved by the OTS; (ii)
the repurchase of qualifying shares of a director, if any; (iii) purchases in
the open market by a tax-qualified or non-tax-qualified employee stock benefit
plan in an amount reasonable and appropriate to fund the plan; or (iv) purchases
that are part of an open-market program not involving more than 5% of its
outstanding capital stock during a 12- month period, if the repurchases do not
cause the Bank to become undercapitalized and the Bank provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
However, the Regional Director has authority to permit repurchases during the
first year following consummation of the Conversion and Reorganization and to
permit repurchases in excess of 5% during the second and third years upon the
establishment of exceptional circumstances, as determined by the Regional
Director.
COMPARISON OF STOCKHOLDERS' RIGHTS
General. As a result of the Conversion and Reorganization, holders of
the Bank Common Stock will become, subject to the Exchange Ratio, stockholders
of the Company, a Delaware corporation. There are certain differences in
stockholder rights arising from distinctions between the Bank's current federal
stock charter ("Charter") and bylaws ("Bank Bylaws") and the Certificate of
Incorporation ("Certificate") and bylaws of the Company ("Company Bylaws") and
from distinctions between laws with respect to federally chartered savings
associations and Delaware law.
112
<PAGE>
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the more
significant differences and certain important similarities. The discussion
herein is qualified in its entirety by reference to the Charter and Bank Bylaws,
the Certificate and Company Bylaws, the Code of Federal Regulations, and the
Delaware General Corporation Law ("DGCL").
Authorized Capital Stock. The Company's authorized capital stock
consists of 10,000,000 shares of common stock, $0.10 par value per share, and
2,000,000 shares of preferred stock, $0.01 par value per share ("Preferred
Stock"), whereas the Bank's authorized capital stock consists of ^ 8,000,000
shares of common stock, par value $1.00 per share and 2,000,000 shares of
preferred stock. The shares of Common Stock and Preferred Stock were authorized
in an amount greater than that to be issued in the Conversion and Reorganization
to provide the Company's Board of Directors with as much flexibility as possible
to effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plan for
the issuance of additional shares, other than the issuance of additional shares
pursuant to stock benefit plans. See "Management of the Company - Proposed
Future Stock Benefit Plans" and "Management of the Bank - Certain Benefits."
Restrictions on Capital Stock Ownership. Pursuant to applicable laws
and regulations, the Mutual Holding Company is required to own not less than a
majority of the outstanding Bank Common Stock. There will be no such restriction
applicable to the Company following consummation of the Conversion and
Reorganization.
Voting Rights. Stockholders of the Bank currently may not cumulate
votes in elections of directors. The Certificate also prohibits cumulative
voting rights. Elimination of cumulative voting helps to ensure the continuity
and stability of both the Company's and the Bank's Boards of Directors, and the
policies adopted by each, by possibly delaying, deterring or discouraging proxy
contests.
The Charter does not contain any specification of or limitation on the
circumstances under which separate class voting rights may be provided to a
particular class or series of Bank Preferred Stock.
The Certificate provides that there will be, in addition to the
affirmative vote required for certain business combinations, a class vote of the
holders of any class or series of stock as otherwise required by law, the
Certificate, a resolution of the board of directors providing for the issuance
of a class or series of stock, or any agreement between the Company and a
national securities exchange or national securities quotation system. Further,
the DGCL requires a class vote in addition to the vote of all shareholders for
an amendment to the Certificate if the amendment would increase or decrease the
aggregate number of authorized shares, effect an exchange, reclassification or
cancellation of all or part of the shares of a class, create a new class of
shares or influence distributions to shareholders by increasing the rights,
preferences or number of shares of an existing class. Delaware law also requires
separate voting by voting groups for plans involving mergers and share
exchanges, if such plans contain a provision that, if contained in an amendment
to the Certificate, would require the action of one or more voting groups as
described above.
113
<PAGE>
For additional information relating to voting rights, see "-
Limitations on Acquisitions of Voting Stock and Voting Rights" below.
Payments of Dividends. The ability of the Bank to pay dividends on its
capital stock is restricted by OTS regulations and by tax considerations related
to savings and loan associations such as the Bank. See "Regulation - Regulation
of the Bank - Dividend and Other Capital Distribution Limitations" and "Federal
and State Taxation." Although the Company is not subject to these restrictions
as a Delaware corporation, such restrictions will indirectly affect the Company
because dividends from the Bank will be a primary source of funds of the Company
for the payment of dividends to stockholders of the Company.
The DGCL generally provides that, subject to any restrictions in the
certificate of incorporation, a corporation may make distributions to its
stockholders, provided that no distribution may be made if, after giving it
effect, the corporation would not be able to pay its debts as they become due in
the ordinary course of business.
Board of Directors. The Bank Bylaws require the Board of Directors of
the Bank to be divided into three classes as nearly equal in number as possible
and that the members of each class shall be elected for a term of three years
and until their successors are elected and qualified, with one class being
elected annually. The Certificate also requires that the Board of Directors of
the Company be divided into three classes. The members of each class shall be
elected for a term of three years and until their successors are elected and
qualified.
Under the Bank Bylaws, any vacancies in the Board of Directors of the
Bank may be filled by the affirmative vote of a majority of the remaining
directors even if less than a quorum of the Board of Directors remains. The
Certificate requires that any vacancies on the Board of Directors of the Company
be filled by a vote of two-thirds of the directors then in office, whether or
not a quorum. Persons elected by the directors of the Bank to fill vacancies may
only serve until the next annual meeting of stockholders whereas persons elected
to vacancies on the Company's Board of Directors may serve until the annual
meeting of stockholders at which the term of the class, to which the absent
director had been elected, expires.
Under the Bank Bylaws, any director may be removed for cause by the
holders of a majority of the outstanding voting shares, provided that if less
than the entire Board is to be removed, none of the directors may be removed if
the votes cast against the removal would be sufficient to elect a director if
then cumulatively voted at an election of the class of directors of which such
director is a member. The Certificate provides that any director of the Company
may be removed only for cause at a duly constituted meeting of stockholders
called expressly for that purpose upon the vote of the holders of at least 80%
of the total votes eligible to be cast by stockholders.
Limitations on Liability. The Certificate provides that directors of
the Company shall have no liability to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that this
provision will not eliminate liability of a director (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not made in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) acts specified in the DGCL pertaining to
unlawful distributions, or (iv) for any transaction from which a director
derived an improper personal benefit.
The provision limiting the personal liability of the Company's
directors for monetary damages for breach of fiduciary duty does not eliminate
or alter the duty of the Company's directors; it merely
114
<PAGE>
limits personal liability for monetary damages to the extent permitted by the
DGCL. Moreover, it applies only to claims against a director arising out of the
director's role as a director, it currently does not apply to claims arising out
of a director's role as an officer (if such director is also an officer) or
arising out of any other capacity in which a director serves because the DGCL
does not authorize such a limitation of liability.
The SEC takes the position that similar provisions limiting the
liability of directors under state laws would not protect those corporations'
directors from liability for violations of the federal securities laws. Federal
banking regulators also may take the same position with respect to violations of
federal banking laws and regulations.
Currently, federal law does not permit federally chartered savings
banks such as Guaranty Federal to limit the personal liability of directors in
the manner provided by the DGCL and the laws of many other states.
Indemnification of Directors, Officer, Employees, Fiduciaries and
Agents. The Charter and Bank Bylaws do not contain any provision relating to
indemnification of directors and officers of the Bank. Under present OTS
regulations, however, the Bank must indemnify its directors, officers and
employees for any costs incurred in connection with any litigation involving any
such person's activities as a director, officer or employee if such person
obtains a final judgement on the merits in his or her favor. In addition,
indemnification is permitted in the case of a settlement, a final judgement
against such person or final judgement other than on the merits, if a majority
of the disinterested directors determine that such person was acting in good
faith within the scope of his or her employment as he or she could reasonably
have perceived it under the circumstances and for a purpose he or she could
reasonably have believed under the circumstances was in the best interest of the
Bank or its stockholders. The Bank also is permitted to pay ongoing expenses
incurred by a director, officer or employee if a majority of the disinterested
directors concludes that such person may ultimately be entitled to
indemnification. Before making any indemnification payment, the Bank is required
to notify the OTS of its intention and such payment cannot be made if the OTS
objects thereto.
The Certificate provides that the Company must indemnify any Company
director, officer, or employee and any person who serves or served at the
Company's request at another corporation or other enterprise who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed suit, including actions by or in the right of the Company, whether
civil, criminal, administrative, or investigative, if that person is successful
on the merits or otherwise; or that the person acted in good faith in the
transaction which is the subject of the suit or action, and in a manner the
person reasonably believed to be in, or not opposed to, the best interest of the
Company. Indemnification results in the payment to the person of expenses
(including attorneys' fees) actually and reasonably incurred by that person in
connection with the defense or settlement of the action or suit. If these
provisions were to be declared invalid, the Company would seek to indemnify each
director, officer, employee, and agent of the Company as to costs, charges, and
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement with respect to any action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, including an action by or in the
right of the Company to the fullest extent permitted by applicable law.
If Delaware law is amended to permit further indemnification of the
directors, officers, employees and agents of the Corporation, then the Company
will indemnify such persons to the fullest extent permitted by Delaware law, as
so amended.
115
<PAGE>
Special Meeting of Stockholders. The Charter provides that special
meetings of the stockholders of the Bank may be called only upon the direction
of the Board of Directors. The Certificate contains a provision pursuant to
which special meetings of stockholders of the Company may be called only by the
board of the directors of the Company, or by a committee of the Board of
Directors whose powers include the power and authority to call special meetings.
Shareholders are prohibited from calling special meetings except as required by
Delaware law.
Stockholder Nominations and Proposals. The Bank Bylaws generally
provide that stockholders may submit nominations for election at an annual
meeting of stockholders and any new business to be taken up at such a meeting by
filing such in writing with the Bank at least five days before the date of any
such meeting.
The Certificate provides that all nominations for election to the Board
of Directors of the Company and proposals for any new business, other than those
made by the Board or a committee thereof, can only be made by a stockholder who
has complied with detailed requirements concerning timing and information that
must be provided as enumerated in the Certificate.
The procedures regarding stockholder proposals and nominations are
intended to provide the Board of Directors of the Company with the information
deemed necessary to evaluate a stockholder proposal or nomination and other
relevant information, such as existing stockholder support, as well as the time
necessary to consider and evaluate such information in advance of the applicable
meeting. The proposed procedures, however, will give incumbent directors advance
notice of a business proposal or nomination. This may make it easier for the
incumbent directors to defeat a stockholder proposal or nomination, even when
certain stockholders view such proposal or nomination as in the best interests
of the Company or its stockholders.
Stockholder Action Without a Meeting. The Bank Bylaws provide that any
action to be taken or which may be taken at any annual or special meeting of
stockholders may be taken if a consent in writing, setting forth the actions so
taken, is given by the holders of all outstanding shares entitled to vote. The
Certificate prohibits the taking of action without a meeting.
Stockholder's Right to Examine Books and Records. A federal regulation
which is applicable to the Bank provides that stockholders may inspect and copy
specified books and records of a federally chartered savings association after
proper written notice for a proper purpose. The DGCL provides that any
stockholder may inspect books and records for any reasonable and proper purpose
upon written demand stating the purpose of the inspection. Each Delaware
corporation must provide shareholders access to certain books and records upon
five days written notice.
Limitations on Acquisitions of Voting Stock and Voting Rights. The
Certificate provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. In addition, for a period of five years from
April 1995, no person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Company. A beneficial holder submitting a proxy or proxies totalling more than
10% of the then outstanding shares of Common Stock will be able to vote in the
following manner: the number of votes which may be cast by such a beneficial
owner shall be a number equal to the total number of votes that a single record
owner of all Common Stock owned by such person would be entitled to cast,
multiplied by a fraction, the numerator of which is the number of shares of such
class or series which are both beneficially owned and owned of record by such
beneficial owner and the denominator of which
116
<PAGE>
is the total number of shares of Common Stock beneficially owned by such
beneficial owner. The impact of these provisions on the submission of a proxy on
behalf of a beneficial holder of more than 10% of the Common Stock is to (1)
require divestiture of the amount of stock held in excess of 10% (if within five
years of the Conversion and Reorganization more than 10% of the Common Stock is
beneficially owned by a person) and (2) at any time, limit the vote on Common
Stock held by the beneficial owner to 10% or possibly reduce the amount that may
be voted below the 10% level. Unless the grantor of a revocable proxy is an
affiliate or an associate of such a 10% holder or there is an arrangement,
agreement or understanding with such a 10% holder, these provisions would not
restrict the ability of such a 10% holder of revocable proxies to exercise
revocable proxies for which the 10% holder is neither a beneficial nor record
owner. A person is a beneficial owner of a security if such person has the power
to vote or direct the voting of all or part of the voting rights of the
security, or has the power to dispose of or direct the disposition of the
security. The Certificate further provides that this provision limiting voting
rights may only be amended upon the vote of 80% of the outstanding shares of
voting stock.
The foregoing restrictions do not apply to any tax-qualified defined
benefit plan or defined contribution plan of the Company or its subsidiaries or
to the acquisition of more than 10% of any class of equity security of the
Company if such acquisition has been approved by a majority of the Continuing
Directors, as defined in the Certificate.
The Charter also contains a provision which imposes a restriction with
respect to any offer to acquire or acquisition of more than 10% of the Bank
Common Stock for five years from the effective date of the Charter. In the event
shares are acquired in violation of this section, the shares in excess of 10%
will not be counted as shares entitled to vote. There is no provision in the
Charter which would reduce a beneficial owner's voting position to less than
10%, and the protection in the Charter is limited to five years from April 1995.
Mergers, Consolidations and Sales of Assets. A federal regulation
requires the approval of the Board of Directors of the Bank and the holders of
two-thirds of the outstanding stock of the Bank entitled to vote thereon for
mergers, consolidations and sales of all or substantially all of the Bank's
assets. Such regulation permits the Bank to merge with another corporation
without obtaining the approval of its stockholders if: (i) it does not involve
an interim savings association; (ii) the Charter is not changed; (iii) each
share of the Bank Common Stock outstanding immediately prior to the effective
date of the transaction is to be an identical outstanding share or a treasury
share of the Bank after such effective date; and (iv) either: (A) no shares of
voting stock of the Bank and no securities convertible into such stock are to be
issued or delivered under the plan of combination or (B) the authorized unissued
shares or the treasury shares of voting stock of the Bank to be issued or
delivered under the plan of combination, plus those initially issuable upon
conversion of any securities to be issued or delivered under such plan, do not
exceed 15% of the total shares of voting stock of the Bank outstanding
immediately prior to the effective date of the transaction.
The DGCL requires that the Board of Directors of the Company must adopt
a plan of merger or share exchange or approve any sale, lease, exchange or other
disposition of all or substantially all of the Company's property. The Board may
also condition the effectiveness of the plan or disposition of assets on any
basis, including requiring a supermajority vote. Separate voting by voting
groups is required under the DGCL for certain plans. See "Comparison of
Stockholder's Rights - Voting Rights."
In addition to the provisions of Delaware law, the Certificate requires
the approval of the holders of at least 80% of the Company's outstanding shares
of voting stock, and a majority of such shares not including shares deemed
beneficially owned by a "Principal Shareholder" to approve certain "Business
Combinations." The term "Principal Shareholder" is defined to include any person
and the affiliates and
117
<PAGE>
associates of the person (other than the Company or its subsidiary) who
beneficially owns, directly or indirectly, 10% or more of the outstanding shares
of voting stock of the Company. The Certificate requires the approval of the
stockholders in accordance with the increased voting requirements in connection
with any such transactions except in cases where the proposed transaction had
been approved in advance by at least two-thirds of the Company's "Continuing
Directors" (generally, those members of the Company's Board of Directors who are
not affiliated with the Principal Shareholder and were directors before the
Principal Shareholder became a Principal Shareholder). These provisions of the
Certificate apply to a "Business Combination" which generally is defined to
include (i) any merger or consolidation of the Company with or into a Principal
Shareholder; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of all or a substantial part of the assets of the Company or of a
subsidiary to a Principal Shareholder (the term "substantial part" is defined to
include more than 25% of the Company's total assets); (iii) any merger or
consolidation of a Principal Shareholder with or into the Company or a
subsidiary; (iv) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of all or any substantial part of the assets of a Principal
Shareholder to the Company or a subsidiary; (v) the issuance of any securities
of the Company or a subsidiary to a Principal Shareholder; (vii) any
reclassification of the Common Stock, or any recapitalization involving the
Common Stock; and (viii) an agreement, contract or other arrangement providing
for any of the foregoing transactions.
Neither the Charter and Bank Bylaws nor federal laws and regulations
contain a provision which restricts business combinations between the Bank and
Principal Shareholders in the manner set forth in the Certificate.
Dissenters' Rights of Appraisal. A federal regulation which is
applicable to the Bank generally provides that a stockholder of a federally
chartered savings association which engages in a merger, consolidation or sale
of all or substantially all of its assets shall have the right to demand from
such association payment of the fair or appraised value of his or her stock in
the association, subject to specified procedural requirements. This regulation
also provides, however, that the stockholders of a federally chartered savings
association with stock which is listed on a national securities exchange or
quoted on The Nasdaq Stock Market are not entitled to dissenters' rights in
connection with a merger involving such savings association if the stockholder
is required to accept only "qualified consideration" for his or her stock, which
is defined to include cash, shares of stock of any association or corporation
which at the effective date of the merger will be listed on a national
securities exchange or quoted on The Nasdaq Stock Market or any combination of
such shares of stock and cash.
After the Conversion and Reorganization, the right of appraisal of
dissenting stockholders of the Company will be governed by the DGCL. Pursuant
thereto, a stockholder of a Delaware corporation generally has the right to
dissent from any merger or consolidation involving the corporation or sale of
all or substantially all of the corporation's assets, subject to specified
procedural requirements. However, no such appraisal rights are available for the
shares of any class or series of a corporation's capital stock if as of the
record date fixed to determine the stockholders entitled to receive notice to
and to vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, such shares were either listed on a national securities
exchange or traded on the Nasdaq National Market or a similar market.
Amendment of Governing Instruments. No amendment of the Charter may be
made unless it is first proposed by the Board of Directors of the Bank, then
preliminarily approved by the OTS, and thereafter approved by the holders of a
majority of the total votes eligible to be cast at a legal meeting. Article XX
of the Certificate generally provides that the Certificate may be amended as
permitted by Delaware law, except that any amendment to certain sections must be
approved by the affirmative vote of the holders of not less than 80% of the
voting power of the Company entitled to vote thereon.
118
<PAGE>
The Bank Bylaws may be amended by a majority vote of the full Board of
Directors of the Bank or by a majority vote of the votes cast by the
stockholders of the Bank at any legal meeting. The Company Bylaws may only be
amended by a vote of a majority of the Board of Directors or by the vote of not
less than 80% of the outstanding shares of capital stock entitled to vote
generally in the election of directors cast at a meeting of the stockholders
called for that purpose.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
Although the Boards of Directors of the Bank and the Company are not
aware of any effort that might be made to obtain control of the Company after
the Conversion and Reorganization, the Boards of Directors, as discussed below,
believe it is appropriate to include certain provisions in the Certificate to
protect the interests of the Company and its stockholders from takeovers that
the Board of Directors of the Company might conclude are not in the best
interests of the Bank, the Company, or the Company's stockholders.
Provisions of the Certificate of Incorporation and the Bylaws of the Company
The following discussion is a summary of certain material provisions of
the Certificate and Company Bylaws and certain other agreements and regulatory
provisions, which may be deemed to have an "anti-takeover" effect. The following
description of certain of these provisions is necessarily general and, with
respect to provisions contained in the Certificate and Company Bylaws and the
Bank's proposed stock charter and bylaws, reference should be made in each case
to the document in question, each of which is part of the Bank's application to
the OTS or the Company's Registration Statement filed with the SEC. See
"Additional Information."
Limitations on Voting Rights. The Certificate provides that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote in respect of the shares held in excess of the Limit. In
addition, for a period of five years from April 1995, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of an equity security of the Company. The Certificate further
provides that the Limit may be amended upon the vote of 80% of the outstanding
shares of voting stock. See also "- Comparison of Stockholder Rights -
Limitations on Acquisitions of Voting Stock and Voting Rights."
Election of Directors. Certain provisions of the Certificate and
Company Bylaws will impede changes in majority control of the Board of
Directors. The Certificate provides that the Board of Directors of the Company
will be divided into three classes, with directors in each class elected for
three-year staggered terms except for the initial directors. Thus, it would take
two annual elections to replace a majority of the Company's Board. The
Certificate and Company Bylaws also provide that any vacancy occurring in the
Board of Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Furthermore, the Company Bylaws impose
certain notice and information requirements in connection with the nomination by
stockholders of candidates for election to the Board of Directors or the
proposal by stockholders of business to be acted upon at an annual meeting of
stockholders. See "Comparison of Stockholders' Rights - Board of Directors."
The Certificate provides that a director may only be removed for cause
by the affirmative vote of not less than 80% of the outstanding shares eligible
to vote.
119
<PAGE>
Restriction on Call of Special Meetings. The Certificate provides that
a special meeting of stockholders may be called only pursuant to a resolution
adopted by a majority of the Board of Directors, or a Committee of the Board or
other person so empowered by the Company Bylaws. The Certificate also provide
that any action required or permitted to be taken by the stockholders of the
Company may be taken at an annual or special meeting. Stockholder action by
written consent in lieu of a meeting is prohibited.
Absence of Cumulative Voting. The Certificate provides that there shall
be no cumulative voting rights in the election of directors.
Authorized Shares. The Certificate authorizes the issuance of
10,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. The
shares of Common Stock and Preferred Stock were authorized in an amount greater
than that to be issued in the Conversion and Reorganization to provide the
Company's Board of Directors with flexibility to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of additional shares upon exercise of stock
options.
Procedures for Certain Business Combinations. The Certificate prohibits
the Company from engaging in or entering into certain Business Combinations with
any Principal Shareholder or any affiliates of the Principal Shareholder unless
the proposed transaction has been approved in advance by the Company's
Continuing Directors. See "Comparison of Stockholders' Rights - Mergers,
Consolidations and Sales of Assets."
Amendment to Certificate and Company Bylaws. Amendments to the
Certificate must be approved by a majority vote of the Company's Board of
Directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the Common Stock; number, classification, election and removal of
directors; amendment of the Bylaws; call of special stockholder meetings;
director liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing) in the Certificate.
The Company Bylaws may be amended by a majority vote of the Board of
Directors or the affirmative vote of the holders of a majority of the shares of
the voting stock of the Company, provided, however, that at least 80% of the
total votes eligible to be voted at a duly constituted meeting of stockholders
is required to amend or repeal provisions relating to election and removal of
directors, director liability, certain business combinations and amendments to
provisions relating to the foregoing in the Company Bylaws.
Purpose and Takeover Defensive Effects of the Certificate and Company
Bylaws. An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above
120
<PAGE>
the current market prices, such offers are sometimes made for less than all of
the outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders.
The Boards of Directors of Guaranty Federal and the Company believe
that the provisions described above are prudent and will reduce the Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Bank in the orderly deployment of the proceeds of the
Offerings into productive assets during the initial period after the Conversion
and Reorganization. The Boards of Directors believe these provisions are in the
best interests of the Bank, the Company, and the stockholders. In the judgment
of the Boards of Directors, the Company's Board will be in the best position to
determine the true value of the Company and to negotiate effectively for what
may be in the best interests of its stockholders. Accordingly, the Boards of
Directors of Guaranty Federal and the Company believe that it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with the Board of Directors of the Company and that these
provisions will encourage such negotiations and discourage hostile takeover
attempts. It is also the view of the Boards of Directors that these provisions
should not discourage persons from proposing a merger or other transaction at
prices reflective of the true value of the Company and which is in the best
interests of all stockholders.
Attempts to acquire financial institutions and their holding companies
have become increasingly common. Takeover attempts that have not been negotiated
with and approved by the Board of Directors of the Company present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and its stockholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of the Company's assets.
Despite the belief of the Bank and the Company as to the benefits to
stockholders of these provisions of the Certificate and Company Bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
that would not be approved by the Company's Board, but pursuant to which
stockholders may receive a substantial premium for their shares over
then-current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of the Company's Board of Directors and
management more difficult. The Boards of Directors of the Bank and the Company,
however, believe that the potential benefits outweigh the possible
disadvantages.
Other Restrictions on Acquisitions of Stock
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a mutual-to-stock conversion from transferring, or entering
into any agreement or understanding to transfer, the legal or beneficial
ownership of the subscription rights issued under a plan of conversion or the
stock to be issued upon their exercise. This regulation also prohibits any
person prior to the completion of a mutual-to-stock conversion from offering, or
making an announcement of an offer or intent to make an offer, to purchase such
subscription rights or stock. For three years following the mutual-to-stock
conversion, OTS regulations prohibit any person, without the prior approval of
the OTS, from acquiring or making an offer to acquire more than 10% of the stock
of any converted entity if such person is, or
121
<PAGE>
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless at least 60 days prior written notice
has been given to the OTS and the OTS has not objected to the proposed
acquisition. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a savings association or to
vote more than 25% of any class of voting securities of a savings association.
Under federal law (as well as the regulations referred to below) the term
"savings association" includes state-chartered and federally chartered
SAIF-insured institutions, federally chartered savings and loans and savings
banks whose accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an
insured institution or its holding company, a person, other than a company, must
give 60 days notice to the OTS and have received no OTS objection to such
acquisition of control, and a company must apply for and receive OTS approval of
the acquisition. Control, as defined under federal law, involves a 25% voting
stock test, control in any manner of the election of a majority of the
institution's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of an institution's voting stock, if the acquiror also is subject to any one
of either "control factors," constitutes a rebuttable determination of control
under the regulations. The determination of control may be rebutted by
submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances that would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies that acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
Effect of Employment Agreements and Stock Benefit Plans. The Bank
intends to enter into an employment agreement with President James E. Haseltine
that provides for payments in the event of termination of employment following a
change in control, as defined in the agreement, of 2.99 times the five year
average compensation paid to Mr. Haseltine. In addition, the Bank intends to
enter into employment agreements with eight other officers that provide for
payments in the event of termination of employment following a change in
control, as defined in the agreements. At June 30, 1997, such payments, in the
aggregate, would have totaled approximately $1.2 million, rendering an
acquisition,
122
<PAGE>
followed by termination of their employment, more expensive to a possible
acquiror as a result of these agreements. See "Management of the Bank -
Executive Compensation - Employment Agreements." Furthermore, upon completion of
the Conversion and Reorganization, the Company intends to adopt stock benefit
plans which provide that all awards will vest upon such change-in-control
provided OTS regulations in effect at that time permit such accelerated vesting.
See "Management of the Company Proposed Future Stock Benefit Plans."
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 10,000,000 shares of the common
stock, $0.10 par value per share, and 2,000,000 shares of preferred stock, $0.01
par value per share. The Company currently expects to issue up to 5,410,019
shares of Common Stock in the Conversion and Reorganization. The Company does
not intend to issue any shares of preferred stock in the Offerings, nor are
there any present plans to issue such preferred stock following the Conversion
and Reorganization. The aggregate par value of the issued shares will constitute
the capital account of the Company. The balance of the aggregate Purchase Price
will be recorded for accounting purposes as additional paid-in capital. See
"Capitalization." The Common Stock will represent nonwithdrawable capital and
will not be insured by the Company, the Bank, the FDIC, or any other government
agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of Preferred Stock
issued in the future may have voting rights, if any. Except as discussed in
"Comparison of Stockholders' Rights - Limitations on Acquisitions of Voting
Stock and Voting Rights," each holder of the Common Stock will be entitled to
one vote for each share held of record on all matters submitted to a vote of
holders of the Common Stock. Stockholders will not be permitted to cumulate
their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits in Guaranty Federal and accrued interest
thereon); (ii) any accrued dividend claims; (iii) liquidation preferences of any
Preferred Stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion and Reorganization for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
who continue their deposits at the Bank.
Restrictions on Acquisition of the Common Stock. See "Certain
Restrictions on Acquisition of the Company" for a discussion of the limitations
on acquisition of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock that
may be issued. Therefore, the Board of Directors may sell shares of capital
stock of the Company without first offering such shares to existing stockholders
of the Company. The Common Stock is not subject to a call for redemption, and
the outstanding shares of Common Stock when issued and upon receipt by the
Company of the Purchase Price therefor will be fully paid and non-assessable.
123
<PAGE>
Transfer Agent and Registrar. Registrar and Transfer Co. is expected to
act as the transfer agent and registrar for the Common Stock of the Company.
Issuance of Additional Shares. Except in the Offerings and possibly
pursuant to the 1998 RSP or 1994 Option Plan or the 1998 Option Plan, the
Company has no present plans, proposals, arrangements or understandings to issue
additional authorized shares of the Common Stock. In the future, the authorized
but unissued and unreserved shares of the Common Stock will be available for
general corporate purposes, including, but not limited to, possible issuance as
stock dividends, in connection with mergers or acquisitions, under a cash
dividend reinvestment or stock purchase plan, in a public or private offering,
or under employee benefit plans. See "Pro Forma Data." Normally no stockholder
approval would be required for the issuance of these shares, except as described
herein or as otherwise required to approve a transaction in which additional
authorized shares of the Common Stock are to be issued.
For additional information, see "Dividend Policy," "Regulation" and
"Federal and State Taxation" with respect to restrictions on the payment of cash
dividends; "The Conversion and Reorganization Certain Restrictions on Purchase
or Transfer After the Conversion and Reorganization" relating to certain
restrictions on the transferability of shares purchased by directors and
officers; and "Certain Restrictions on Acquisition of the Company" for
information regarding restrictions on acquiring Common Stock of the Company.
Preferred Stock
None of the 2,000,000 authorized shares of preferred stock of the
Company will be issued in the Conversion and Reorganization. After the
Conversion and Reorganization are completed, the Board of Directors of the
Company will be authorized to issue preferred stock and to fix and state voting
powers, designations, preferences or other special rights of such shares and the
qualifications, limitations and restrictions thereof, but without stockholder
approval. If and when issued, the preferred stock is likely to rank prior to the
Common Stock as to dividend rights, liquidation preferences, or both, and may
have full or limited voting rights. The Board of Directors, without stockholder
approval, can issue preferred stock with voting and conversion rights that could
adversely affect the voting power of the holders of the Common Stock. The Board
of Directors has no present intention to issue any shares of preferred stock.
LEGAL OPINIONS
The legality of the Common Stock has been passed upon for Guaranty
Federal and the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C. Certain legal matters for Friedman, Billings, Ramsey & Co., Inc. may be
passed upon by Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation,
Washington, D.C.
TAX OPINIONS
The federal income tax consequences of the Conversion and
Reorganization have been opined upon for Guaranty Federal and the Company by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. The Missouri income tax
consequences of the Conversion have been opined upon for Guaranty Federal and
the Company by Carnahan, Evans, Cantwell & Brown, P.C.
124
<PAGE>
EXPERTS
The consolidated financial statements of the Bank and subsidiaries as
of June 30, 1997 and 1996 and for each of the years in the three-year period
ended June 30, 1997 have been included herein and elsewhere in the registration
statement and in the Application for Conversion filed with the OTS in reliance
upon the report of Baird, Kurtz & Dobson, independent certified public
accountants, appearing elsewhere herein, such report given upon the authority of
said firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of a summary of
its letter to the Bank setting forth its opinions as to the estimated pro forma
market value of the Common Stock to be issued upon the completion of the
Conversion and Reorganization and the absence of value of subscription rights
and to the use of its name and statements with respect to it appearing herein.
REGISTRATION REQUIREMENTS
The Common Stock of the Company will be registered pursuant to Section
12(g) of the Exchange Act prior to completion of the Conversion and
Reorganization. The Company will be subject to the information, proxy
solicitation, insider trading restrictions, tender offer rules, periodic
reporting and other requirements of the SEC under the Exchange Act. The Company
is not expected to deregister the Common Stock under the Exchange Act for a
period of at least three years following the Conversion and Reorganization.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock and Exchange Shares offered
hereby. As permitted by the rules and regulations of the SEC, this Prospectus
does not contain all the information set forth in the registration statement.
Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically.^
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Conversion and Reorganization. Pursuant to the rules
and regulations of the OTS, this Prospectus omits certain information contained
in that Application. The Application may be examined at the principal office of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Midwest Regional
Office of the OTS, 122 W. John Carpenter Freeway, Suite 600, Irving, Texas
75039, without charge.
Copies of the Certificate of Incorporation and Bylaws of the Company
are available without charge from the Bank.
125
<PAGE>
GUARANTY FEDERAL SAVINGS BANK
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Accountants' Report F-2
Consolidated Balance Sheets as of
June 30, 1997 and 1996 F-3
Consolidated Statements of Income
for the Years Ended June 30, 1997, 1996 and 1995 28
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
All schedules are omitted because they are not required or applicable
or the required information is shown in the financial statements or the notes
thereto.
Financial statements of the Company have not been provided because the
Company has not conducted any operations to date.
F-1
<PAGE>
[Baird Kurtz & Dobson Letterhead]
Independent Accountants' Report
Board of Directors
Guaranty Federal Savings Bank
Springfield, Missouri
We have audited the accompanying consolidated balance sheets of
GUARANTY FEDERAL SAVINGS BANK (a 69%-Owned Subsidiary of Guaranty Federal
Bancshares, M.H.C.) as of June 30, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 1997. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of GUARANTY FEDERAL
SAVINGS BANK as of June 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/Baird, Kurtz & Dobson
July 31, 1997
Springfield, Missouri
F-2
<PAGE>
Guaranty Federal Savings Bank
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS
------
1997 1996
---- ----
<S>
<C> <C>
Cash $ 417,485 301,911
Interest-bearing deposits in other financial institutions 3,399,866 2,372,646
------------ ------------
Cash and cash equivalents 3,817,351 2,674,557
Available-for-sale securities 3,360,000 7,842,380
Held-to-maturity securities (approximate fair value 1997 - $8,373,000,
1996 - $9,696,000 8,585,753 9,865,719
Mortgage-backed securities, held-to-maturity 15,813,890 20,067,249
Mortgage loans held for sale 5,903,002 3,416,576
Loans receivable, net 152,232,295 131,612,835
Accrued interest receivable
Loans 996,014 885,596
Investments 165,949 311,238
Mortgage-backed securities 149,598 184,175
Prepaid expenses and other assets 1,963,875 1,913,512
Foreclosed assets held for sale 210,155 1,527
Premises and equipment 6,267,157 6,391,743
------------ ------------
Total assets $199,465,039 185,167,107
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits $151,246,482 157,007,890
Federal Home Loan Bank advances 18,150,844 --
Advances from borrowers for taxes and insurance 674,618 575,486
Accrued expenses and other liabilities 666,427 496,567
Accrued interest payable 131,245 17,873
Income taxes payable 289,268 158,127
Deferred income taxes 816,000 325,000
------------ ------------
Total liabilities 171,974,884 158,580,943
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital Stock
Common stock, $1 par value; authorized 8,000,000
shares; issued and outstanding 3,125,000 shares 3,125,000 3,125,000
Additional paid-in capital 3,687,356 3,555,814
Retained earnings, substantially restricted 18,620,219 18,645,939
------------ ------------
25,432,575 25,326,753
Unrealized appreciation on available-for-sale securities,
net of income taxes 1997 - $1,208,000, 1996 - $740,000 2,057,580 1,259,411
------------ ------------
Total stockholders' equity 27,490,155 26,586,164
------------ ------------
Total liabilities and stockholders' equity $199,465,039 185,167,107
============ ============
</TABLE>
See Notes to Consolidated Financial Statements F-3
<PAGE>
Guaranty Federal Savings Bank
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Additional Appreciation on
Common Paid-In Retained Available-for-Sale
Stock Capital Earnings Securities, Net Total
----- ------- -------- --------------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994 $ -- -- 16,562,542 -- 16,562,542
Adoption of FAS 115, net of income
taxes of $558,000 -- -- -- 950,390 950,390
Net income -- -- 1,329,985 -- 1,329,985
Stock issued 3,125,000 3,899,532 -- -- 7,024,532
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $104,000 -- -- -- 176,489 176,489
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1995 3,125,000 3,899,532 17,892,527 1,126,879 26,043,938
Net income -- -- 1,753,412 -- 1,753,412
Dividends on common stock,
($.32 per share) -- -- (1,000,000) -- (1,000,000)
Recognition and Retention Plan
(RRP) expense -- 120,925 -- -- 120,925
Contributions to RRP Trust -- (464,643) -- -- (464,643)
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $78,000 -- -- -- 132,532 132,532
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996 3,125,000 3,555,814 18,645,939 1,259,411 26,586,164
Net income -- -- 1,161,780 -- 1,161,780
Dividends on common stock,
($.38 per share) -- -- (1,187,500) -- (1,187,500)
Dividends received on RRP stock -- 11,987 -- -- 11,987
Recognition and Retention Plan
(RRP) expense -- 106,197 -- -- 106,197
Reduction of shares in RRP Trust -- 13,358 -- -- 13,358
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $468,000 -- -- -- 798,169 798,169
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1997 $ 3,125,000 3,687,356 18,620,219 2,057,580 27,490,155
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements F-4
<PAGE>
Guaranty Federal Savings Bank
Consolidated Statements of Cash Flows
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,161,780 1,753,412 1,329,985
Items not requiring (providing) cash:
Deferred income taxes 22,000 128,000 71,000
Depreciation 441,367 384,988 132,964
Provision (credit) for loan losses -- (1,211,502) 16,350
(Gain) loss on loans, available-for-sale
investment securities and
mortgage-backed securities (61,468) (43,065) 103,473
(Gain) loss on sale of premises and equipment (5,169) 79,218 --
Gain on sale of foreclosed assets (9,921) -- --
FHLB stock dividends received -- (34,200) --
Amortization of deferred income,
premiums and discounts (220,135) (102,016) (124,184)
Origination of loans held for sale (6,626,148) (6,364,845) (1,575,680)
Proceeds from sale of loans held for sale 4,134,389 5,361,589 --
RRP expense 106,197 120,925 --
Changes in:
Accrued interest receivable 69,448 (107,366) (150,093)
Prepaid expenses and other assets (11,357) (76,843) 272,420
Accrued expenses and other liabilities 283,466 102,140 (92,449)
Income taxes payable 131,141 51,567 (60,105)
----------- ----------- -----------
Net cash provided by (used in) operating activities (584,410) 42,002 (76,319)
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements F-5
<PAGE>
Guaranty Federal Savings Bank
Consolidated Statements of Cash Flows (Continued)
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans $(20,918,542) (12,266,153) (12,925,498)
Principal payments on mortgage-backed securities,
held-to-maturity 4,300,576 4,627,722 2,484,927
Purchases of mortgage-backed securities,
held-to-maturity -- (10,833,592) (2,173,785)
Purchase of premises and equipment (337,112) (2,132,191) (2,745,099)
Proceeds from sale of premises and equipment 25,500 262,941 --
Proceeds from sales of available-for-sale securities 5,318,175 2,348,454 8,860,215
Proceeds from maturities of available-for-sale securities -- 1,000,000 --
Purchase of available-for-sale securities -- (248,638) (5,259,671)
Proceeds from maturities of held-to-maturity securities 1,739,461 5,607,624 2,870,149
Purchases of held-to-maturity securities -- (2,002,500) --
Refund of restricted cash deposit -- -- 34,301
Proceeds from sale of foreclosed assets 362,900 -- --
Capitalized costs on foreclosed assets (90,167) 2,227 148,927
------------ ------------ ------------
Net cash used in investing activities (9,599,209) (13,634,106) (8,705,534)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (1,187,500) (1,000,000) --
Cash dividends received on RRP Stock 11,987 -- --
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 4,944,356 3,314,286 (5,681,201)
Net increase (decrease) in certificates of deposit (10,705,764) 14,098,895 4,258,871
Advances from borrowers for taxes and insurance 99,132 (32,101) (5,243)
Proceeds from FHLB advances 31,163,750 -- 4,000,000
Repayments of FHLB advances (13,012,906) (4,000,000) --
Proceeds from sale of common stock -- -- 7,024,532
Contributions to RRP Trust -- (464,643) --
Reduction of shares in RRP Trust 13,358 -- --
------------ ------------ ------------
Net cash provided by financing activities 11,326,413 11,916,437 9,596,959
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,142,794 (1,675,667) 815,106
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,674,557 4,350,224 3,535,118
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 3,817,351 2,674,557 4,350,224
============ ============ ============
See Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
- ------------
In April 1995, Guaranty Federal Savings & Loan Association reorganized
from a federally chartered mutual savings and loan association into a mutual
holding company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent
with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock
savings bank was chartered. The Bank issued 3,125,000 shares of common stock in
connection with the reorganization, the majority of which are owned by the MHC
(see Note 17).
Nature of Operations
- --------------------
The Bank is primarily engaged in providing a full range of banking and
mortgage services to individual and corporate customers in southwest Missouri.
It also provides other services, such as insurance and annuities. The Bank is
subject to competition from other financial institutions. The Bank also is
subject to the regulation of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Bank
and its wholly-owned subsidiary, Guaranty Financial Services of Springfield,
Inc. All significant intercompany profits, transactions and balances have been
eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the valuation of foreclosed assets held for sale, management
obtains independent appraisals for significant properties.
Management believes that the allowances for losses on loans and the
valuation of foreclosed assets held for sale are adequate. While management uses
available information to recognize losses on loans and foreclosed assets held
for sale, changes in economic conditions may necessitate revision of these
estimates in future years. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowances for losses on loans and valuation of foreclosed assets held for sale.
Such agencies may require the Bank to recognize additional losses based on their
judgments of information available to them at the time of their examination.
Cash and Investments in Debt and Equity Securities
- --------------------------------------------------
Regulations require the Bank to maintain an amount equal to 5.0% of
savings deposits (net of loans on savings deposits) plus short-term borrowings
in cash and US government and other approved securities.
Available-for-sale securities, which include any security for which the
Bank has no immediate plan to sell but which may be sold in the future, are
carried at fair value. Realized gains and losses, based on specifically
identified amortized cost of the specific security, are included in other
income. Unrealized gains and losses are recorded, net of related income tax
effects, in stockholders' equity. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method over the
period to maturity.
F-7
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Cash and Investments in Debt and Equity Securities (Continued)
- ---------------------------------------------------------------
Held-to-maturity securities, which include any security for which the
Bank has the positive intent and ability to hold until maturity, are carried at
historical cost adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted, respectively, to
interest income using the level-yield method over the period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
Mortgage Loans Held for Sale and In Process of Origination
- ----------------------------------------------------------
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value occurs.
Forward commitments to sell mortgage loans are sometimes acquired to reduce
market risk on mortgage loans in the process of origination and mortgage loans
held for sale. Gains and losses resulting from sales of mortgage loans are
recognized when the respective loans are sold to investors. Gains and losses are
determined by the difference between the selling price plus the value of
retained servicing rights for loans originated after the adoption of SFAS 122 on
July 1, 1996, and the carrying amount of the loans sold, net of discounts
collected or paid and considering a normal servicing rate. Forward commitments
related to loans in the process of origination are not marked to market.
Accordingly, gains and losses are deferred until such time as the loans are
originated and sold or when it is determined that the commitment cannot be
fulfilled. Fees received from borrowers to guarantee the funding of mortgage
loans held for sale and fees paid to investors to ensure the ultimate sale of
such mortgage loans are recognized as income or expense when the loans are sold
or when it becomes evident that the commitment will not be used.
Loans
- -----
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loan Servicing
- --------------
The cost of originated mortgage-servicing rights is amortized over the
shorter of the actual or contractual loan life. Impairment of mortgage-servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market rate. For
purposes of measuring impairment, the rights are stratified based on the
prepayment risk characteristics of the underlying loan. The predominant
characteristic currently used for stratification is type of loan. The amount of
impairments recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is increased by provisions charged to
expense and reduced by provisions credited to expense and loans charged off, net
of recoveries. The allowance is maintained at a level considered adequate to
provide for loan losses, based on the Bank's evaluation of the loan portfolio,
as well as on prevailing and anticipated economic conditions and historical
losses by loan category. General allowances have been established, based upon
the aforementioned factors, and allocated to the individual loan categories.
Allowances are accrued on specific loans evaluated for impairment for which the
basis of each loan, including accrued interest, exceeds the discounted amount of
expected future collections of interest and principal or, alternatively, the
fair value of loan collateral.
A loan is considered impaired when it is probable that the Bank will not
receive all amounts due according to the contractual terms of the loan. This
includes loans that are delinquent ninety days or more (nonaccrual loans) and
certain other loans identified by management. Accrual of interest is
discontinued, and interest accrued and unpaid is removed, at the time such
amounts are delinquent ninety days. Interest is recognized for nonaccrual loans
only upon receipt.
F-8
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Foreclosed Assets Held for Sale
- -------------------------------
Assets acquired by foreclosure or in settlement of debt and held for
sale are valued at estimated fair value as of the date of foreclosure, and a
related valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair value.
Changes in the valuation allowance are charged or credited to noninterest
expense.
Premises and Equipment
- ----------------------
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line and accelerated
methods over the estimated useful lives of the assets, which range from 5 to 45
years.
Fee Income
- ----------
Loan origination fees, net of direct origination costs, are recognized
as income over the contractual life of the loan using the level-yield method.
Loan servicing income represents fees earned for servicing real estate mortgage
loans owned by various investors.
Income Taxes
- ------------
Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
Cash Equivalents
- ----------------
The Bank considers all highly liquid interest-bearing deposits in other
financial institutions with an initial maturity of three months or less to be
cash equivalents.
Regulatory Matters
- ------------------
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--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 judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to adjusted
tangible assets (as defined). Management believes, as of June 30, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank 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 following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
F-9
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk. Dollar
amounts are expressed in thousands.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Stockholders equity,
and ratio to total assets ........ $ 27,490 13.8
Unrealized appreciation on
available-for-sale securities .... (2,058)
---------
Tangible capital,
and ratio to adjusted total assets $ 25,432 13.0% $ 2,943 1.5%
========= ==== ======= ===
Tier 1 (core) capital,
and ratio to adjusted total assets $ 25,432 13.0% $ 5,886 3.0% $ 9,810 5.0%
========= ==== ======= === ========= ===
Tier 1 (core) capital,
and ratio to risk-weighted assets $ 25,432 22.1% $ 6,914 6.0%
=========
Allowance for loan losses -
Tier 2 capital ................... 1,440
-----
Total risk-based capital,
and ratio to risk-weighted assets $ 26,872 23.3 $ 9,218 8.0% $ 11,523 10.0%
========= ==== ======= === ========= ====
Total assets ............................. $ 199,465
=========
Adjusted total assets .................... $ 196,199
=========
Risk-weighted assets ..................... $ 115,231
=========
</TABLE>
The amount of dividends that the Bank may pay is subject to various
regulatory limitations. At June 30, 1997, approximately $9,077,000 was available
from the Bank's retained earnings, without regulatory approval, for distribution
as dividends.
Earnings Per Share
- ------------------
Earnings per common share for 1997, 1996 and 1995, since the conversion,
are based on net income divided by the weighted average number of common shares
outstanding. Average shares include the weighted average number of common shares
considered outstanding, plus the shares issuable upon exercise of stock options
after the assumed repurchase of common shares with the related proceeds as
follows.
Weighted Average Shares
Number of Common Shares Issuable
----------------------- --------
1997 3,149,062 24,062
1996 3,125,933 933
1995 (post conversion) 3,125,000 --
Reclassifications
- -----------------
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 financial statements presentation. These reclassifications had no effect on
net income.
F-10
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Impact of Future Accounting Pronouncements
- ------------------------------------------
The FASB recently adopted SFAS 128, "Earnings Per Share." This statement
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share. The statement also requires dual presentation of basic
and diluted earnings per share by entities with complex capital structures and
requires a reconciliation of the numerators and denominators between the two
calculations. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Management has not
estimated the impact, if any, of adopting SFAS 128 on the Bank's financial
statements.
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair values of available-for-sale
securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Equity Securities:
FHLMC stock $ 94,000 3,266,000 -- 3,360,000
-------------- --------- ----------- ---------
$ 94,000 3,266,000 -- 3,360,000
============== ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Debt Securities:
US Treasury $ 5,248,308 35,822 -- 5,284,130
US government agencies 501,006 5,244 -- 506,250
-------------- --------- ----------- ---------
5,749,314 41,066 -- 5,790,380
Equity Securities:
FHLMC stock 94,000 1,958,000 -- 2,052,000
-------------- --------- ----------- ---------
$ 5,843,314 1,999,066 -- 7,842,380
============== ========= =========== =========
</TABLE>
The amortized cost and approximate fair values of held-to-maturity
securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Debt Securities:
US government agencies $ 8,585,753 5,143 (217,896) 8,373,000
================ ===== ======== =========
</TABLE>
F-11
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
Debt Securities:
US government agencies ......................................... $ 9,865,719 -- (169,719) 9,696,000
=========== ======== ======== =========
</TABLE>
Maturities of held-to-maturity debt securities at June 30, 1997:
<TABLE>
<CAPTION>
Amortized Approximate
Cost Fair Value
---- ----------
<S> <C> <C>
Due in one through five years .................................. $ 7,002,471 6,785,000
Due after ten years ............................................ 1,583,282 1,588,000
----------- ---------
$ 8,585,753 8,373,000
=========== =========
</TABLE>
Proceeds from sales of available-for-sale securities were $5,318,175 for
the year ended June 30, 1997, with resultant gross gains of $27,897 and gross
losses of $102. Proceeds from sales of available-for-sale securities were
$2,348,454 for the year ended June 30, 1996, with resultant gross gains of
$106,677 and gross losses of $21,484. Proceeds from sales of available-for-sale
securities were $8,860,215 for the year ended June 30, 1995, with resultant
gross gains of $16,796 and gross losses of $120,269. There were no sales of debt
securities from the "held-to-maturity" portfolio for the years ended June 30,
1997, 1996 or 1995.
NOTE 3: MORTGAGE-BACKED SECURITIES
The amortized cost and approximate fair values of held-to-maturity
mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Certificates:
GNMA ................................................. $ 5,941,453 370,547 -- 6,312,000
FHLMC ................................................ 8,189,400 105,212 (234,612) 8,060,000
FNMA ................................................. 1,683,037 35,963 -- 1,719,000
----------- ------- ------- ----------
$15,813,890 511,722 (234,612) 16,091,000
=========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Certificates:
GNMA ................................................. $ 7,316,456 355,544 -- 7,672,000
FHLMC ................................................ 10,219,383 -- (30,383) 10,198,000
FNMA ................................................. 2,531,410 410 (51,820) 2,480,000
----------- ------- ------- ----------
$20,067,249 355,954 (82,203) 20,341,000
=========== ======= ======= ==========
</TABLE>
There were no sales of mortgage-backed securities for the years ending
June 30, 1997, 1996 and 1995.
F-12
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at June 30, 1997 and 1996, include:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate - residential mortgage
One to four family units $ 110,537,731 95,501,514
Multi-family 15,456,727 13,701,131
Real estate - construction 25,148,543 21,729,463
Real estate - commercial 8,323,579 8,738,522
Commercial loans 383,116 254,909
Installment loans 4,492,833 1,053,049
Loans on savings accounts 719,657 529,952
------------- -----------
165,062,186 141,508,540
Undisbursed portion of
loans-in-process (10,475,789) (7,572,330)
Allowance for loan losses (2,177,009) (2,108,059)
Unearned discounts (216,141) (237,520)
Deferred loan costs, net 39,048 22,204
------------- -----------
$ 152,232,295 131,612,835
============= ===========
</TABLE>
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 2,108,059 1,718,316 1,703,435
Provision (credit) charged to operations -- (1,211,502) 16,350
Loans charged off (62,768) (4,648) (5,511)
Recoveries 131,718 1,406,860 4,042
Allowances reclassified to loans which
were previously classified as in-
substance foreclosures (Note 5) -- 199,033 --
----------- --------- ---------
Balance, end of year $ 2,177,009 2,108,059 1,718,316
=========== ========= =========
</TABLE>
The weighted average interest rate on loans at June 30, 1997 and 1996,
was 8.43% and 8.19%, respectively.
The Bank serviced mortgage loans for others amounting to $14,165,126,
$11,290,426 and $7,315,988 at June 30, 1997, 1996 and 1995 respectively.
Impaired loans totaled $1,257,352 at June 30, 1997, and $393,398 at June
30, 1996 with a related allowance for loan losses of $206,897 and $147,302,
respectively. At June 30, 1997 and 1996, respectively, impaired loans of $75,956
and $0 had no related allowance for loan losses.
Interest of $66,676 and $995 was recognized on average impaired loans of
$1,342,217 and $157,574 for 1997 and 1996 respectively. No interest was
recognized on impaired loans on a cash basis during 1997 and 1996.
NOTE 5: FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale consist of the following:
1997 1996
---- ----
Foreclosed real estate $210,155 1,527
Valuation allowance -- --
-------- -----
$210,155 1,527
======== =====
F-13
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 5: FORECLOSED ASSETS HELD FOR SALE (Continued)
Changes in the valuation allowance on foreclosed assets were as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $ -- 45,637 45,637
Valuation allowance related to
in-substance foreclosures -- (45,637) --
------ ------- ------
Balance, end of year $ -- -- 45,637
====== ======= ======
As of July 1, 1995, the Bank implemented Statement of Financial
Accounting Standard No. 114. While implementation had no material effect on net
income, in accordance with the new pronouncement, loans totaling $851,818, net
of the valuation allowance, which were previously classified as in-substance
foreclosures and reported as part of foreclosed assets held-for-sale have been
reclassified to loans along with $199,033 of related allowances for
collectability.
NOTE 6: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as
follows:
1997 1996
---- ----
Land $ 993,445 993,445
Buildings and improvements 5,244,129 5,002,248
Furniture, fixtures and equipment 1,330,275 1,278,811
Automobiles 20,243 36,706
----------- ---------
7,588,092 7,311,210
Accumulated depreciation (1,320,935) (919,467)
----------- ---------
$ 6,267,157 6,391,743
=========== =========
Depreciation expense was $441,367, $384,988 and $132,964 for the years
ended June 30, 1997, 1996 and 1995, respectively.
NOTE 7: DEPOSITS
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------------- ---------------------------------------
Weighted Percentage Weighted Percentage
Average of Average of
Rate Balance Deposits Rate Balance Deposits
---- ------- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Core Deposits:
Demand 0.00% $ 2,334,159 1.5% 0.00% $ 1,534,264 1.0%
NOW 2.34 9,385,517 6.2 2.36 6,624,905 4.2
Money market 3.62 8,288,164 5.5 3.16 5,263,386 3.3
Passbook savings 2.76 8,621,308 5.7 3.06 10,262,237 6.5
----------- ---- ----------- ----
2.64 28,629,148 18.9 2.69 23,684,792 15.0
----------- ---- ----------- ----
Certificates:
0% - 3.99% 2.75 5,928 0.0 3.00 49,859 0.1
4.00% - 5.99% 5.47 108,383,612 71.7 5.34 106,243,545 67.7
6.00% - 7.99% 6.40 14,227,794 9.4 6.44 27,029,694 17.2
----------- ---- ----------- ----
5.58 122,617,334 81.1 5.56 133,323,098 85.0
----------- ---- ----------- ----
Total Deposits 5.02 $151,246,482 100.0% 5.13 $157,007,890 100.0%
============ ===== ============ =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum balance
of $100,000 was approximately $8,000,000 and
F-14
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 7: DEPOSITS (Continued)
$8,780,000 at June 30, 1997 and 1996, respectively. The deposit accounts of the
Bank are insured by the Savings Association Insurance Fund to a maximum of
$100,000.
A summary of savings certificates by maturity at June 30, 1997, is as
follows:
Fiscal year ending:
June 30, 1998 $ 81,479,645
June 30, 1999 27,125,222
June 30, 2000 6,342,552
June 30, 2001 4,034,303
June 30, 2002 3,130,335
Thereafter 505,277
-------------
$ 122,617,334
=============
A summary of interest expense on deposits is as follows:
1997 1996 1995
---- ---- ----
NOW and Money Market accounts $ 406,025 276,460 244,705
Savings accounts 258,143 314,557 462,655
Certificate accounts 6,823,212 7,633,893 5,766,502
Early withdrawal penalties (16,287) (24,884) (30,266)
----------- --------- ---------
$ 7,471,093 8,200,026 6,443,596
=========== ========= =========
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES
At June 30, 1997, Federal Home Loan Bank advances consisted of the
following:
Weighted
Average
Maturity Date Rate Amount
------------- ---- ------
1998 5.90% $ 5,000,000
1999 6.22 3,000,000
2000 6.11 7,528,750
2001 -- --
2002 6.21 1,635,000
Thereafter 6.84 987,094
---- -----------
6.12 $18,150,844
==== ===========
The FHLB requires the Bank to maintain FHLB stock, investment securities
and first mortgage loans free of other pledges, liens and encumbrances in an
amount equal to at least 150% of outstanding advances as collateral for such
borrowings.
NOTE 9: INCOME TAXES
In computing federal income taxes for taxable years prior to July 1,
1996, the Bank has been allowed an 8% deduction from otherwise taxable income as
a statutory bad debt deduction, subject to limitations based on aggregate loans
and savings balances. In August 1996 this statutory bad debt deduction was
repealed and is no longer available for thrifts. In addition, bad debt reserves
accumulated after 1987, which are presently included as a component of the net
deferred tax liability, must be recaptured over a six year period. The amount of
the deferred tax liability which must be recaptured is $338,000 as of June 30,
1997.
F-15
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 9: INCOME TAXES (Continued)
As of June 30, 1997 and 1996, retained earnings includes approximately
$5,075,000 for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $1,878,000 at June 30, 1997 and 1996.
The provision for income taxes consists of:
1997 1996 1995
---- ---- ----
Taxes currently payable $ 642,500 898,000 619,000
Deferred income taxes 22,000 128,000 71,000
---------- --------- -------
$ 664,500 1,026,000 690,000
========== ========= =======
The tax effects of temporary differences related to deferred taxes shown on
the June 30, 1997 and 1996, balance sheets are:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan and foreclosed asset losses $ 778,000 779,000
Accrued compensated absences 19,000 17,000
Accrued retirement plan costs 33,000 52,000
Unrealized loss on loans held for sale 80,000 88,000
RRP expense 57,000 45,000
----------- --------
967,000 981,000
----------- --------
Deferred tax liabilities:
FHLB stock dividends 207,000 207,000
Deferred loan fees/costs 15,000 9,000
Tax bad debt reserves in excess of base year 338,000 350,000
Mortgage servicing rights 15,000 --
Unrealized appreciation on available-for-sale securities 1,208,000 740,000
----------- --------
1,783,000 1,306,000
----------- --------
Net deferred tax liability $ (816,000) (325,000)
=========== ========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income
tax expense at the Bank's effective rate is shown below:
1997 1996 1995
---- ---- ----
Computed at statutory rate 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State financial institution tax 3.3 4.5 3.6
Tax-exempt interest -- (.5) (1.7)
Change in deferred tax valuation allowance -- -- (.1)
Other (.9) (1.1) (1.6)
---- ---- ----
Actual tax provision 36.4% 36.9% 34.2%
==== ==== ====
State legislation provides that savings and loan associations will be
taxed based on an annual privilege tax of 7% of net income. The privilege tax is
included in provision for income taxes.
Deferred income taxes related to the change in unrealized appreciation
on available-for-sale securities, shown in stockholders' equity, were
approximately $468,000 and $78,000 for 1997 and 1996, respectively.
F-16
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and Cash Equivalents
- -------------------------
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate those assets' fair value.
Available-For-Sale and Held-To-Maturity Securities and Mortgage-Backed
Securities
- --------------------------------------------------------------------------------
Fair values for investment and mortgage-backed securities equal quoted
market prices, if available. If quoted market prices are not available, fair
values are estimated based on quoted market prices of similar securities. The
carrying amount of accrued interest approximates its fair value.
Mortgage Loans Held for Sale
- ----------------------------
For homogeneous categories of loans, such as mortgage loans held for
sale, fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.
Loans
- -----
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Loans with
similar characteristics are aggregated for purposes of the calculations. The
carrying amount of accrued interest approximates its fair value.
Deposits
- --------
The fair value of demand deposits and savings accounts is the amount
payable on demand at the reporting date (i.e., their carrying amounts). The fair
value of fixed-maturity certificates of deposit is estimated using a discounted
cash flow calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
Federal Home Loan Bank Advances
- -------------------------------
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Commitments to Extend Credit, Letters of Credit and Lines of Credit
- -------------------------------------------------------------------
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of letters of credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
The following table presents estimated fair values of the Bank's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves significant
judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Because no market exists for certain of these financial instruments and because
management does not intend to sell these financial instruments, the Bank does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
F-17
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,817,351 3,871,351 2,674,557 2,674,557
Available-for-sale securities 3,360,000 3,360,000 7,842,380 7,842,380
Held-to-maturity securities 8,585,753 8,373,000 9,865,719 9,696,000
Mortgage-backed securities 15,813,890 16,091,000 20,067,249 20,341,000
Mortgage loans held for sale 5,903,002 5,903,002 3,416,576 3,416,576
Loans, net of allowance for loan losses 152,232,295 155,505,000 131,612,835 137,373,000
Interest receivable 1,311,561 1,311,561 1,381,009 1,381,009
Financial liabilities:
Deposits 151,246,482 150,926,000 157,007,890 157,084,000
Federal Home Loan Bank advances 18,150,844 18,180,000 -- --
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit -- -- -- --
Unused lines of credit -- -- -- --
</TABLE>
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Estimates related to the allowance for loan losses are reflected in the footnote
regarding loans. Current vulnerabilities due to certain concentrations of credit
risk are discussed in the footnote on commitments and credit risk.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Noncash Investing and Financing Activities
Transfer of insubstance foreclosed assets to loans $ -- 652,785 --
Assets held-for-sale transferred to investment
securities and mortgage-backed securities -- -- 14,602,295
Loans held for sale transferred to
loans receivable portfolio -- 708,700 --
Loans receivable transferred to loans held for sale -- -- 1,588,468
Loans receivable transferred to foreclosed
assets held for sale 471,440 -- --
Additional Cash Payment Information
Interest paid 8,198,629 8,266,794 6,572,589
Income taxes paid 582,319 845,682 697,739
</TABLE>
NOTE 13: EMPLOYEE BENEFIT PLANS
The Bank participates in a multiemployer pension plan covering all
employees who have met minimum service requirements. As a member of a
multiemployer pension plan, disclosures of plan assets and liabilities for
individual employers are not required or practicable. Due to changes enacted
under the Tax Reform Act of 1986, qualified pension plans require benefit
accruals for any active employee working beyond age 65 with respect to service
completed on or after July 1, 1988. Internal Revenue Service interpretations
require retroactive credit for the period between age 65 and July 1, 1988.
F-18
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)
As a result, the Bank has accrued an unfunded liability of $87,005 and
$139,843 at June 30, 1997 and 1996, respectively, to provide for prior service
credit to its eligible employees. Pension plan expense was $128,785, $156,013
and $173,889 for the years ended June 30, 1997, 1996 and 1995 respectively.
The Bank has established a Recognition and Retention Plan (RRP) for the
benefit of directors, officers and employees of the Bank and its subsidiary. The
RRP was voted on and approved by the Bank's stockholders at the October 18,
1995, annual stockholders' meeting. The RRP provides directors, officers and
employees of the Bank with a proprietary interest in the Bank in a manner
designed to encourage these individuals to remain with the Bank.
The Plan is administered by a Committee consisting of members of the
Bank's Board of Directors. Under the Plan, the Committee can award up to 38,895
shares of the Bank's common stock to selected directors, officers and employees.
As of June 30, 1997, all shares have been awarded. A total of 5,629 shares had
been forfeited as of June 30, 1997. The awards vest at the rate of 20% per year
over a five-year period. Compensation expense is recognized based on the Bank's
stock price on the date the Plan was ratified by stockholders, which was $11.00
per share. The Bank recognized $106,197 and $120,925 of expense under the RRP in
1997 and 1996, respectively. Shares to be issued under the RRP are purchased on
the open market by a separate RRP Trust. The Bank contributed $464,643 to the
Trust for stock purchases during the year ended June 30, 1996. These
contributions have been accounted for as a reduction of stockholders' equity.
In addition to the RRP, the Bank has established the 1994 Stock Option
and Incentive Plan for the benefit of certain directors, officers and employees
of the Bank and its subsidiary. The Plan was voted on and approved by
stockholders at the October18, 1995, annual stockholders' meeting. The Plan is
administered by the Bank Option Committee. Under the Plan, the Option Committee
may grant stock options or awards of up to 97,237 shares of the Bank's common
stock.
The stock options may be either incentive stock options or nonqualified
stock options. Incentive stock options can be granted only to participants who
are employees of the Bank or its subsidiary. The option price must not be less
than the market value of the Bank stock on the date of grant. All options expire
no later than 10 years from the date of grant. The options vest at the rate of
20% per year over a five-year period.
A summary of the status of the plan at June 30, 1997 and 1996, and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------ --------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ----------------- ------ ----------------
Outstanding,
<S> <C> <C> <C> <C>
Beginning of Year 84,375 $ 11.62 97,237 $ 11.62
Granted 6,640 11.55 -- --
Exercised -- -- -- --
Forfeited (12,459) 11.62 (12,862) --
------ ------- ------ -------
End of Year 78,556 $ 11.61 84,375 $ 11.62
====== ======= ====== =======
Options Exercisable,
End of Year 14,383 --
====== ======
</TABLE>
F-19
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)
The fair value of each option granted is estimated on the date of the
grant using the Black Scholes pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Dividends per share $0.33 0.32
Risk-Free Interest Rate 6.36% 5.54
Expected Life of Options 5 years 5 years
Weighted-Average Fair Value of Options Granted During Year $2.51 2.46
</TABLE>
The following table summarizes information about stock options under the
Plan outstanding at June 30, 1997:
Options Outstanding Options Exercisable
------------------------------- ---------------------
Range of Number Remaining Number Exercise
Exercise Prices Outstanding Contractual Life Exercisable Price
- --------------- ----------- ---------------- ----------- -----
$ 11.25 2,640 9.5 years -- --
$ 11.62 71,916 8.5 years 14,383 $ 11.62
$ 11.75 4,000 9.0 years -- --
The Bank applies APB Opinion 25 and related Interpretations in
accounting for its plans, and no compensation cost has been recognized for the
Plan. Had compensation cost for the Bank's Plan been determined based on the
fair value at the dates using Statement of Financial Accounting Standards No.
123, the Bank's net income would have decreased by $32,187 and $16,083 and
earnings per share would have decreased by $0.01 for 1997 and 1996. The effects
of applying this statement for either recognizing compensation cost or providing
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years because options vest over several years and
additional awards generally are made each year.
NOTE 14: TRANSACTION WITH RELATED PARTIES
The Bank had a loan to the MHC for the purchase of and secured by
certain real estate in Southwest Missouri. This loan is payable in monthly
installments of interest at Prime plus 2% with the principal balance due in
August 1998. The principal balance of the loan was $600,000 and $906,500 on June
30, 1997 and June 30, 1996, respectively.
Beginning in November 1995, the Bank leased office space to the MHC at
$200 per month. Rental income pursuant to this agreement was $2,400 and $1,400
in 1997 and 1996, respectively. The rental is negotiable November 1 of each
subsequent year.
At June 30, 1997 and 1996, mortgage loans outstanding to executive
officers of the Bank amounted to $281,000 and $382,000, respectively. In
management's opinion, such loans and other extensions of credit and deposits
were made in the ordinary course of business and were made on substantially the
same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons. Further, in management's
opinion, these loans did not involve more than normal risk of collectability or
present other unfavorable features.
F-20
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 15: LEASES
In September 1995, the Bank completed construction of a new home office
facility. The Bank does not require full use of the building, so it leases the
excess space to other tenants. As of June 30, 1997, the Bank has signed leases
on all 8,938 square feet available for lease in the building. One lease
agreement is with the holding company of the Bank as discussed in Note 14. The
following minimum lease payments will be received as a result of leases signed
as of June 30, 1997:
1998 $ 116,216
1999 97,601
2000 59,740
2001 54,762
---------
$ 328,319
=========
NOTE 16: COMMITMENTS AND CREDIT RISK
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a casebycase basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counter party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, commercial real estate and
residential real estate.
At June 30, 1997 and 1996, the Bank had outstanding commitments to
originate loans of approximately $2,084,000 and $850,000, respectively. The
commitments extend over varying periods of time with the majority being
disbursed within a thirtyday period. At June 30, 1997 and 1996, commitments of
$395,000 and $140,000, respectively, were at fixed rates and $1,689,000 and
$710,000, respectively, were at floating market rates. Interest rates on fixed
rate commitments ranged from 7.6% to 8.4% as of June 30, 1997.
Forward commitments to sell mortgage loans are obligations to deliver
loans at a specified price on or before a specified date. The Bank acquires such
commitments to reduce market risk on mortgage loans in the process of
origination and mortgage loans held for sale. Related forward commitments to
sell mortgage loans amounted to approximately $1,069,000 and $35,000 at June 30,
1997 and 1996, respectively.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers. The Bank had no outstanding letters of credit at June 30, 1997 and
1996.
Lines of credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's credit worthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for on balance
sheet instruments.
At June 30, 1997, the Bank had granted unused lines of credit to
borrowers aggregating approximately $266,000 and $2,275,000 for commercial lines
and open-end consumer lines, respectively. At June 30, 1996, unused lines of
credit to borrowers aggregated approximately $66,000 for commercial lines and
$1,837,000 for open-end consumer lines.
F-21
<PAGE>
Guaranty Federal Savings Bank
Notes to Consolidated Financial Statements
Years Ended June 30, 1997, 1996 and 1995
NOTE 16: COMMITMENTS AND CREDIT RISK (Continued)
Although the Bank grants consumer loans, the majority of its loan
originations are single or multi-family residential real estate in Springfield,
Missouri, and the surrounding area. At June 30, 1997, the Bank had eighteen
borrowers with balances in excess of $1,000,000 each, aggregating $35,171,000
for which the collateral is primarily singlefamily and multi-family residential
rental real estate and commercial real estate. At June 30, 1996, the Bank had
fifteen borrowers with balances in excess of $1,000,000 each, aggregating
$30,259,000 for which the collateral is primarily single-family and multifamily
residential rental real estate and commercial real estate. Also, at June 30,
1997 and 1996, the Bank had $19,340,000 and $13,590,000, respectively, in
construction loans to or guaranteed by builders of primarily residential
property.
NOTE 17: REORGANIZATION TO A MUTUAL HOLDING COMPANY
In connection with the Reorganization in April 1995, Guaranty Federal
Savings and Loan Association (the "Association") reorganized from a federally
chartered mutual savings and loan association into a federal mutual holding
company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). As part of the
reorganization, the Association incorporated a de novo federally chartered stock
savings bank, Guaranty Federal Savings Bank (the "Bank") and transferred most of
its assets and all its liabilities to the Bank. The Bank issued 3,125,000 shares
of its common stock (par value $1.00) of which 972,365 shares were sold to
parties other than the MHC, thus creating a minority ownership interest in the
Bank. The shares had an initial public offering price of $8 per share, resulting
in gross sales proceeds of $7,778,920. Costs related to the stock issuance,
which have been applied to reduce the gross proceeds, were $654,388. Also
$100,000 was transferred to the MHC for initial capitalization in connection
with Reorganization. The net proceeds of $7,024,532 have been included in common
stock and capital surplus on the accounts of the Bank.
As long as they remain depositors of the Bank, persons who prior to the
reorganization had liquidation rights with respect to the Association will
continue to have such rights solely with respect to the MHC.
For a period of three years after the reorganization, no person, other
than the MHC, may directly or indirectly acquire the beneficial ownership of
more than 10% of the common stock of the Bank without prior approval of the
Office of Thrift Supervision.
In May 1997, the Boards of Directors of the Bank and MHC announced a
plan whereby the Bank would be wholly owned by a newly formed stock holding
company. Each share of Bank common stock currently owned by public stockholders
shall be automatically converted into shares of the Holding Company common stock
based upon an exchange ratio. Subscription rights to purchase the remainder of
the conversion stock will be granted to certain eligible depositors and other
members of the Bank and MHC. Any shares not sold in the subscription offering
will be offered to certain persons in a community offering. The Conversion and
Reorganization are subject to several contingencies, including the receipt of
regulatory approval, the approval of the depositors of the Bank and the approval
of the stockholders of the Bank.
Costs incurred in connection with this reorganization are being
deferred and will be recorded as a reduction of the proceeds from this offering.
Should approval of the conversion not be obtained, all costs will be expensed.
As of June 30, 1997 there have been approximately $25,000 of costs incurred
related to the reorganization.
Subsequent to conversion, deposit account holders and borrowers will
not have voting rights in the Bank. Voting rights will be vested exclusively
with the stockholders of the Bank. Deposit account holders will continue to be
insured by the Savings Association Insurance Fund. A liquidation account will be
established at the time of conversion in an amount equal to the total net worth
of the Bank as of the date of the latest balance sheet contained in the final
offering circular. Each eligible deposit account holder will be entitled to a
proportionate share of this account in the event of a complete liquidation of
the Bank, and only in such event. This share will be reduced if the account
holder's savings deposit falls below the amount on the dates of record and will
cease to exist if the account is closed. The liquidation account will never be
increased despite any increase after conversion in the related savings deposit
of an account holder. The Bank may not declare or pay a cash dividend, or
purchase any of its stock, if the effect would be to reduce the net worth of the
Bank below the amount of its liquidation account or below its minimum regulatory
capital.
F-22
<PAGE>
Glossary
Affiliate means a Person who, directly or indirectly, through one or
more intermediaries, controls or is controlled by or is under common control
with the Person specified.
Associate, when used to indicate a relationship with any Person, means
(i) a corporation or organization (other than the Mutual Holding Company, the
Bank, a majority-owned subsidiary of the Bank or the Company) of which such
Person is a director, officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such Person has a substantial beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary capacity,
provided, however, that such term shall not include any Tax-Qualified Employee
Stock Benefit Plan of the Company or the Bank in which such Person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such Person, or any relative of
such spouse, who has the same home as such Person or who is a director or
officer of the Company or the Bank or any of the subsidiaries of the foregoing.
Bank means Guaranty Federal Savings Bank in its mutual or stock form or
Guaranty Federal Savings Bank following consummation of the Conversion and
Reorganization, as the context of the reference indicates.
Bank Common Stock means the common stock of the Bank, par value $1.00
per share, which stock is not and will not be insured by the FDIC or any other
governmental authority.
Bank Merger means the merger of Interim B with and into the Bank
pursuant to the Plan of Reorganization which is included as an appendix to the
Plan.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Common Stock of the Company, par value $.10 per
share, which stock cannot and will not be insured by the FDIC or any other
governmental authority.
Community Offering means the offering for sale by the Company of any
shares of Common Stock not subscribed for in the Subscription Offering or Public
Stockholders' Offering to (i) natural persons residing in the Local Community,
and (ii) such other Persons within or without the State of Missouri as may be
selected by the Company and the Bank within their sole discretion.
Company means Guaranty Federal Bancshares, Inc., a corporation
organized under the laws of the State of Delaware. The Company is a first-tier,
wholly owned subsidiary of the Bank. Upon completion of the Conversion and
Reorganization, the Company will hold all of the outstanding capital stock of
the Bank.
A - 1
<PAGE>
Control (including the terms "controlling," "controlled by," and "under
common control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Conversion Stock means the Common Stock to be issued through the
Offerings and, therefore, excludes Exchange Shares.
Conversion and Reorganization means (i) the conversion of the Mutual
Holding Company to an interim federal stock savings association and the
subsequent merger, pursuant to which the Mutual Holding Company will cease to
exist, (ii) the Bank Merger, pursuant to which the Bank will become a wholly
owned subsidiary of the Company and, in connection therewith, each share of Bank
Common Stock outstanding immediately prior to the effective time thereof that is
held by Public Stockholders shall automatically be converted, without further
action by the holder thereof, into and become the right to receive shares of
Common Stock based on the Exchange Ratio, plus cash in lieu of any fractional
share interest, and (iii) the issuance of Common Stock by the Company in the
Offerings, which will increase the number of shares of Common Stock outstanding
and the capitalization of the Company and the Bank.
Deposit Account means savings and demand accounts, including passbook
accounts, money market deposit accounts and negotiable order of withdrawal
accounts, and certificates of deposit and other authorized accounts of the Bank
held by a Member.
Director, Officer and Employee means the terms as applied respectively
to any person who is a director, officer or employee of the Mutual Holding
Company, the Bank or any subsidiary thereof.
Eligible Account Holder means any Person holding a Qualifying Deposit
on the Eligibility Record Date for purposes of determining subscription rights
and establishing subaccount balances in the liquidation account to be
established pursuant to the Plan.
Eligibility Record Date means the date for determining Qualifying
Deposits of Eligible Account Holders and is the close of business on December
31, 1995.
Estimated Price Range means the range of the estimated aggregate pro
forma market value of the Conversion Stock to be issued in the Offerings, as
determined by the Independent Appraiser.
Exchange Ratio means the rate at which shares of Common Stock will be
exchanged for shares of Bank Common Stock held by the Public Stockholders in
connection with the Bank Merger. The exact rate shall be determined by the
Mutual Holding Company and the Bank in order to ensure that upon consummation of
the Conversion and Reorganization the Public Stockholders will own in the
aggregate approximately the same percentage of the Common Stock to be
outstanding upon completion of the Conversion and Reorganization as the
percentage of
A - 2
<PAGE>
Bank Common Stock owned by them in the aggregate on the Effective Date, as
adjusted in accordance with OTS policy to reflect any special dividends declared
by the Bank and waived by the Mutual Holding Company, but before giving effect
to (a) cash paid in lieu of any fractional interests of Common Stock and (b) any
shares of Common Stock purchased by the Public Stockholders in the Offerings or
tax-qualified employee stock benefit plans thereafter.
Exchange Shares means the shares of Common Stock to be issued to the
Public Stockholders in connection with the Bank Merger.
ESOP means the employee stock ownership plan.
FBR means Friedman, Billings, Ramsey & Co., Inc., who has been engaged
to render financial advisory advice to the Primary Parties and serve as the
selling agent in the Offerings.
FDIC means the Federal Deposit Insurance Corporation or any successor
thereto.
FHLB means the Federal Home Loan Bank.
FHLMC means the Federal Home Loan Mortgage Corporation.
GNMA means the Government National Mortgage Association.
Guaranty Federal means Guaranty Federal Savings Bank.
Independent Appraiser means the independent investment banking or
financial consulting firm retained by the Holding Company and the Bank to
prepare an appraisal of the estimated pro forma market value of the Common
Stock.
Interim A means Guaranty Federal Interim Bancshares, an interim federal
stock savings bank, which will be formed as a result of the conversion of
Guaranty Federal Bancshares, M.H.C. into the stock form of organization.
Interim B means Guaranty Federal Interim Savings Bank, which will be
formed as a first-tier, wholly owned subsidiary of the Company to facilitate the
Bank Merger.
IRS means Internal Revenue Service.
Local Community means Greene County, Missouri.
Member means any Person qualifying as a member of the Mutual Holding
Company in accordance with its mutual charter and bylaws and the laws of the
United States.
A - 3
<PAGE>
MHC Merger means the merger of Interim A with and into the Bank
pursuant to the Plan of Merger that is included as an appendix to the Plan
Mutual Holding Company means Guaranty Federal Bancshares, M.H.C. prior
to its conversion into an interim federal stock savings bank.
OCC means the Office of the Comptroller of the Currency.
Offerings means the Subscription Offering, the Public Stockholders'
Offering, the Community Offering and the Syndicated Community Offering, if
applicable.
Officer means the president, senior vice-president, secretary,
treasurer or principal financial officer, comptroller or principal accounting
officer and any other person performing similar functions with respect to any
organization whether incorporated or unincorporated.
Order Form means the form or forms provided by the Company to a
Participant or other Person by which Common Stock may be ordered in the
Offerings. The Order Form includes a certification that, among other things, a
prospectus has been received, and the risks described in the prospectus have
been reviewed.
Other Member means a Voting Member who is not an Eligible Account
Holder or a Supplemental Eligible Account Holder.
OTS means the Office of Thrift Supervision or any successor thereto.
Participant means any Eligible Account Holder, Tax-Qualified Employee
Stock Benefit Plan, Supplemental Eligible Account Holder and Other Member.
Person means an individual, a corporation, a partnership, an
association, a joint stock company, a trust, an unincorporated organization or a
government or any political subdivision thereof.
Plan and Plan of Conversion means the Plan of Conversion and Agreement
and Plan of Reorganization, as amended, as adopted by the Boards of Directors of
the Mutual Holding Company, the Bank and the Company.
Primary Parties means the Mutual Holding Company, the Bank and the
Company.
Prospectus means the one or more documents to be used in offering the
Conversion Stock in the Offerings.
Public Stockholders means those Persons who own shares of Bank Common
Stock, excluding the Mutual Holding Company, as of the Stockholder Voting Record
Date.
A - 4
<PAGE>
Public Stockholders' Offering means the offering for sale by the
Company of any shares of Common Stock not subscribed for in the Subscription
Offering to Public Stockholders, at the sole discretion of the Bank and Company.
Purchase Price means the $10.00 price per share at which the Conversion
Stock is sold by the Holding Company in the Offerings.
Qualifying Deposit means the aggregate balance of all Deposit Accounts
in the Bank of (i) an Eligible Account Holder at the close of business on the
Eligibility Record Date, provided such aggregate balance is not less than $50,
and (ii) a Supplemental Eligible Account Holder at the close of business on the
Supplemental Eligibility Record Date, provided such aggregate balance is not
less than $50.
Resident means any person who, on the date designated for that category
of subscriber in the Plan, maintained a bona fide residence within the Local
Community and has manifested an intent to remain within the Local Community for
a period of time. The designated dates for Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are the Eligibility
Record Date, the Supplemental Eligibility Record Date and the Voting Record
Date, respectively. To the extent the person is a corporation or other business
entity, the principal place of business or headquarters must be within the Local
Community in order to qualify as a Resident. To the extent the person is a
personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
The Bank may utilize deposit or loan records or such other evidence provided to
it to make a determination as to whether a person is a bona fide resident of the
Local Community. Subscribers in the Community Offering who are natural persons
also will have a purchase preference if they were residents of the Local
Community on the date of the Prospectus. In all cases, however, such
determination shall be in the sole discretion of the Bank and the Company.
RP Financial means RP Financial, L.C., which has been engaged as the
Independent Appraiser.
SAIF means the Savings Association Insurance Fund of the FDIC.
SEC means the Securities and Exchange Commission.
Special Meeting means the Special Meeting of Members of the Mutual
Holding Company called for the purpose of submitting the Plan to the Members for
their approval, including any adjournments of such meeting.
Stockholders means those Persons who own shares of Bank Common Stock.
A - 5
<PAGE>
Stockholders' Meeting means the annual or special meeting of
Stockholders of the Bank called for the purpose of submitting the Plan to the
Stockholders for their approval, including any adjournments of such meeting.
Stockholder Voting Record Date means the date for determining the
Public Stockholders of the Bank eligible to vote at the Stockholders' Meeting.
Subscription Offering means the offering of the Common Stock to
Participants.
Subscription Rights means nontransferable rights to subscribe for
Common Stock granted to Participants pursuant to the terms of the Plan.
Supplemental Eligible Account Holder means any Person holding a
Qualifying Deposit at the close of business on the Supplemental Eligibility
Record Date.
Supplemental Eligibility Record Date means the date for determining
Qualifying Deposits of Supplemental Eligible Account Holders and is the close of
business on September 30, 1997.
Syndicated Community Offering means the offering for sale by a
syndicate of broker-dealers to the general public of shares of Common not
purchased in the Subscription Offering, Public Stockholders' Offering and the
Community Offering.
Tax-Qualified Employee Stock Benefit Plan means any defined benefit
plan or defined contribution plan, such as an employee stock ownership plan,
stock bonus plan, profit-sharing plan or other plan, which is established for
the benefit of the employees of the Company and the Bank and which, with its
related trust, meets the requirements to be "qualified" under Section 401 of the
Code as from time to time in effect. A "Non-Tax-Qualified Employee Stock Benefit
Plan" is any defined benefit plan or defined contribution stock benefit plan
which is not so qualified.
Voting Member means a Person who at the close of business on the Voting
Record Date is entitled to vote as a Member of the Mutual Holding Company.
Voting Record Date means the date or dates for determining the
eligibility of Members to vote at the Special Meeting and is the close of
business on ______________ 1997.
A - 6
<PAGE>
<TABLE>
<CAPTION>
======================================================================= ===========================================================
<S> <C>
No dealer, salesman or other person has been authorized to give
any information or to make any representations not contained in
this Prospectus in connection with the offering made hereby, and,
if given or made, such information or representations must not be Up to 5,410,019 Shares
relied upon as having been authorized by the Bank, the Company (Anticipated Maximum)
or the Selling Agent. This Prospectus does not constitute an offer Common Stock
to sell, or the solicitation of an offer to buy, any of the securities
offered hereby to any person in any jurisdiction in which such
offer or solicitation would be unlawful. Neither the delivery of
this Prospectus by the Bank, the Mutual Holding Company, the
Company or the Agent nor any sale made hereunder shall in any
circumstances create an implication that there has been no change [Logo]
in the affairs of the Bank or the Company since any of the dates
as of which information is furnished herein or since the date hereof.
-------------------
TABLE OF CONTENTS
Page Guaranty Federal Bancshares, Inc.
----
Summary........................................ 1
Selected Consolidated Financial and Other Data.
Recent Developments............................ (Proposed Holding Company for
Management's Discussion and Analysis of Guaranty Federal Savings Bank
Recent Developments..........................
Risk Factors................................... Common Stock
Guaranty Federal Bancshares, Inc............... par value $0.10 per share
The Bank ......................................
Guaranty Federal Bancshares, M.H.C.............
Use of Proceeds................................
Dividend Policy................................ ----------
Market for Common Stock........................
Capitalization................................. PROSPECTUS
Historical and Pro Forma Capital Compliance....
Pro Forma Data................................. ----------
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........
Business of the Bank...........................
Regulation.....................................
Federal and State Taxation.....................
Management of the Company......................
Management of the Bank.........................
Beneficial Ownership of Common Stock...........
The Conversion and Reorganization..............
Comparison of Stockholders' Rights............. FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Certain Restrictions on Acquisition of
the Company..................................
Description of Capital Stock of the Company....
Legal Opinions.................................
Tax Opinions................................... Dated November ___, 1997
Experts........................................
Registration Requirements......................
Additional Information.........................
Index to Consolidated Financial Statements..... F-1
Glossary....................................... A-1
Until the later of __________ ___, 1997, or 25 days after
commencement of the offering of Common Stock, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
======================================================================= ==========================================================
</TABLE>
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) List of Exhibits:
1 Agency Agreement with Friedman, Billings, Ramsey & Co., Inc.
2 Amended Plan of Conversion of Guaranty Federal Bancshares, M.H.C. and
Agreement and Plan of Reorganization between Guaranty Federal Bancshares,
M.H.C. and Guaranty Federal Savings Bank
3(i) Certificate of Incorporation of Guaranty Federal Bancshares, Inc.
3(ii) Bylaws of Guaranty Federal Bancshares, Inc.*
4 Specimen Stock Certificate of Guaranty Federal Bancshares, Inc.*
5 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities
registered*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 Missouri Tax Opinion of Carnahan, Evans, Cantwell & Brown, P.C.
8.3 Statement of RP Financial, LC. as to the value of subscription rights*
10.1 1994 Stock Option Plan of Guaranty Federal Savings Bank*
10.2 1994 Recognition and Retention Plan of Guaranty Federal Savings Bank*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (included with Exhibits 5 and
8.1)
23.2 Consent of Baird, Kurtz & Dobson
23.3 Consent of RP Financial, LC.*
23.4 Consent of Carnahan, Evans, Cantwell & Brown, P.C. (included with Exhibit 8.2)
24 Power of Attorney (included with signature page)*
99.1 Appraisal Report of RP Financial, LC. dated as of September 5, 1997.*
</TABLE>
- -------------------
* Previously filed
<PAGE>
(b) Financial Statements and Schedules:
Except for schedules required for electronic filers, financial
statement schedules are omitted because they are not required or are not
applicable or the required information is shown in the financial statements or
the notes thereto.
^
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Springfield,
Missouri, as of November 5, 1997.
GUARANTY FEDERAL BANCSHARES, INC.
/s/James E. Haseltine
-------------------------------------
James E. Haseltine
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the following
persons in the capacities indicated as of November 5, 1997.
/s/James E. Haseltine /s/George L. Hall*
- ---------------------------------------------- --------------------------
James E. Haseltine George L. Hall
President and Chief Executive Officer Director
(Principal Executive Officer)
/s/Bruce Winston /s/Ivy L. Rogers*
- ---------------------------------------------- --------------------------
Bruce Winston Ivy L. Rogers
Vice President and Chief Financial Officer Director
(Principal Financial and Accounting Officer)
/s/Jack L. Barham* /s/Gary Lipscomb*
- ---------------------------------------------- --------------------------
Jack L. Barham Gary Lipscomb
Chairman of the Board and Director Director
/s/Wayne V. Barnes*
- ----------------------------------------------
Wayne V. Barnes
Director
*Signed pursuant to a power of attorney
EXHIBIT 1
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Up to 5,410,019 Shares
COMMON STOCK
($.10 Par Value)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
----------------
____________, 1997
Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
Guaranty Federal Bancshares, Inc., a Delaware corporation (the
"Company"), Guaranty Federal Bancshares, M.H.C. (the "MHC") and Guaranty Federal
Savings Bank, Springfield, Missouri, a federal stock savings bank (the "Bank"),
with its deposit accounts insured by the Savings Association Insurance Fund
("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC"),
hereby confirm their agreement with Friedman, Billings, Ramsey & Co., Inc. (the
"Agent") as follows (defined terms used herein shall have the same definition
given in the Prospectus dated ____________, 1997 unless otherwise defined
herein):
Section 1. The Offering. The MHC, in accordance with its plan of
conversion adopted by its Board of Directors (the "Plan"), intends to convert to
an interim federal stock savings bank and simultaneously merge with and into the
Bank, pursuant to which the MHC will cease to exist (the "Conversion"). In
connection with the Conversion, the Company will form an interim savings bank
subsidiary, which will then merge with and into the Bank, pursuant to which the
Bank will become a wholly-owned subsidiary of the Holding Company. In connection
therewith, each share of Bank Common Stock outstanding immediately prior to the
effective time that is held by Public Stockholders shall be automatically
converted, without further action by the holder thereof, into and become the
right to receive shares of Company Common Stock based on the Exchange Ratio,
plus cash in lieu of any fractional share interest.
Pursuant to the Plan and in connection with the Conversion, the Company
is offering up to 3,795,000 shares of its common stock (the "Conversion Stock")
in a subscription and community offering (the "Offerings"). Conversion Stock is
first being offered in a subscription offering with nontransferable subscription
rights being granted, in the following order of priority,
1
<PAGE>
to (i) depositors of the Bank with account balances of $50.00 or more as of the
close of business on December 31, 1995 ("Eligible Account Holders"); (ii) the
Bank's ESOP; (iii) depositors of the Bank with account balances of $50.00 or
more as of the close of business on September 30, 1997 ("Supplemental Eligible
Account Holders"); (iv) depositors of the Bank as of the close of business on
______________, 1997 (other than Eligible Account Holders and Supplemental
Eligible Account Holders) and borrowers of the Bank as of the close of business
on ________________ who continue to be borrowers as of the close of business on
______________, 1997 ("Other Members") and (v) stockholders of the Bank, other
than the Mutual Holding Company ("Public Stockholders"). Subscription rights
will expire if not exercised by [ ], Missouri time, on ______________, 1997,
unless extended.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered in the Community Offering to certain members of the general public to
whom a copy of the Prospectus is delivered, with preference given to natural
persons residing in the Local Community. It is anticipated that shares not
subscribed for in the Subscription and Community Offerings will be offered to
certain members of the general public in a Syndicated Community Offering. The
Primary Parties reserve the absolute right to reject or accept any orders in the
Community Offering or the Syndicated Community Offering, in whole or in part,
either at the time of receipt of an order or as soon as practicable following
the Expiration Date.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-_____) (the
"Registration Statement") containing a prospectus relating to the Offerings for
the registration of the Shares under the Securities Act of 1933 (the "1933
Act"), and has filed such amendments thereof, if any, and such amended
prospectuses as may have been required to the date hereof. The prospectus, as
amended, on file with the Commission at the time the Registration Statement
initially became effective is hereinafter called the "Prospectus," except that
if any prospectus is filed by the Company pursuant to Rule 424(b) or (c) of the
rules and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations") differing from the prospectus on file at the time the Registration
Statement initially becomes effective, the term "Prospectus" shall refer to the
prospectus filed pursuant to Rule 424(b) or (c) from and after the time said
prospectus is filed with the Commission.
In accordance with the regulations of the Office of Thrift Supervision
("OTS") governing the conversions of savings associations (the "Conversion
Regulations"), the MHC has filed with the OTS an Application for Conversion on
Form AC (the "Conversion Application"), including the prospectus, and has filed
such amendments thereto, if any, as may have been required by the OTS. The
Conversion Application has been approved by the OTS and the related Prospectus
has been authorized for use by the OTS. The Company has also filed an
Application H-(e)1 with the OTS to become the saving and loan holding company of
the Bank, which has been approved.
Section 2. Retention of the Agent; Compensation; Sale and Delivery of
the Shares. Subject to the terms and conditions herein set forth, the Company,
the MHC and the Bank hereby
2
<PAGE>
appoint the Agent as their financial advisor and marketing agent to utilize its
best efforts to solicit subscriptions for Shares of the Company's Common Stock
and to advise and assist the Company and the Bank with respect to the Company's
sale of the Shares in the Offerings and in the areas of market making, research
coverage and syndicate formation (if necessary).
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, the Agent
accepts such appointment and agrees to consult with and advise the Company, the
MHC and the Bank as to the matters set forth in the letter agreement ("Letter
Agreement"), dated June 25, 1997, between the Bank and the Agent (a copy of
which is attached hereto as Exhibit A). It is acknowledged by the Company, the
MHC and the Bank that the Agent shall not be required to purchase any Shares and
shall not be obligated to take any action which is inconsistent with all
applicable laws, regulations, decisions or orders. In the event of a Syndicated
Community Offering, the Agent will assemble and manage a selling group of
broker-dealers which are members of the National Association of Securities
Dealers, Inc. (the "NASD") to participate in the solicitation of purchase orders
for shares under a selected dealers' agreement ("Selected Dealers' Agreement"),
the form of which is set forth as Exhibit B to this Agreement.
The obligations of the Agent pursuant to this Agreement shall terminate
upon the completion or termination or abandonment of the Plan by the Company or
upon termination of the Offerings, but in no event later than 45 days after the
completion of the Subscription Offering (the "End Date"). All fees or expenses
due to the Agent but unpaid will be payable to the Agent in next day funds at
the earlier of the Closing Date (as hereinafter defined) or the End Date. In the
event the Offerings are extended beyond the End Date, the Company, the MHC, the
Bank and the Agent may agree to renew this Agreement under mutually acceptable
terms.
In the event the Company is unable to sell a minimum of 2,805,000
Shares within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the Shares,
the full amount which it may have received from them plus accrued interest as
set forth in the Prospectus; and none of the parties to this Agreement shall
have any obligation to the other parties hereunder, except as set forth in this
Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Offerings are terminated for any reason not
attributable to the action or inaction of the Agent, the Agent shall be paid the
fees due to the date of such termination pursuant to subparagraphs (a) and (b)
below.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on
the Closing Date (as hereinafter defined) against payment to the Company by any
means authorized by the Plan, provided, however, that no funds shall be released
to the Company until the conditions specified in Section 7 hereof shall have
been complied with to the reasonable satisfaction of the Agent and their
counsel. The release of Shares against payment therefor shall
3
<PAGE>
be made on a date and at a place acceptable to the Company, the MHC, the Bank
and the Agent (it being understood that such date shall not be more than ten
business days after termination of the Offering) or such other time or place as
shall be agreed upon by the Company, the MHC, the Bank and the Agent.
Certificates for shares shall be delivered directly to the purchasers in
accordance with their directions. The date upon which the Company shall release
or deliver the Shares sold in the Offering, in accordance with the terms herein,
is called the "Closing Date."
The Agent shall receive the following compensation for its services
hereunder:
(a) A financial advisory fee to the Agent in the amount of $20,000,
of which $10,000 has been paid and of which $10,000 will be paid
upon OTS approval of the Plan application. Such fees shall be
deemed to be earned when due. Should the Conversion be terminated
for any reason not attributable to the action or inaction of the
Agent, the Agent shall have earned and be entitled to be paid
fees accruing through the stage at which point the termination
occurred, including any accrued legal fees expanded by the Agent.
(b) A Marketing Fee of $150,000 (which includes the financial
advisory fee), payable to the Agent on the Closing Date.
(c) The decision to utilize other selected Broker-Dealers will be
made jointly by the Agent and the Bank. Selected broker-dealers
who assist in the subscription or purchase, excluding those
shares purchased by the Bank's officers, directors or employees
or by any ESOP, tax-qualified or stock based compensation plans
(except IRA's) or similar plan created by the Bank for some or
all of its directors or employees or by member depositors in the
original subscription phase of the offering, will be paid a fee
not to exceed 4% of the aggregate Actual Purchase Price of the
shares of common stock sold by them in the Subscription and/or
Community Offerings. The Agent's fee for such shares shall equal
1.5% of the aggregate Actual Purchase Price of the shares of
common stock sold by selected broker-dealers in the Subscription
and/or Community Offering. Fees with respect to subscriptions or
purchases effected with the assistance of Registered
Representatives employed by a Broker/Dealer other than the Agent
shall be paid to the Agent at Closing and then transmitted by the
Agent to such Broker/Dealer.
(d) The Bank and the Company hereby agree to reimburse the Agent,
from time to time upon the Agent's request, for its reasonable
out-of-pocket expenses, including without limitation, accounting,
communication, travel expenses, and legal fees and expenses, for
amounts not to exceed $50,000. Further, the Bank will reimburse
the Agent for (i) up to $35,000 of legal fees, and (ii) expenses
of such counsel. The Bank will bear the expenses of the Offerings
customarily borne by issuers including, without limitation, OTS,
SEC, "Blue Sky," and NASD filing and registration fees; the fees
of the Bank's accountants, conversion agent, data processor,
attorneys, appraiser, transfer agent and registrar, printing,
mailing and
4
<PAGE>
marketing expenses associated with the Conversion; and the fees
set forth under this Section 2.
Full payment of the Agent's actual and accountable expenses, advisory
fees and compensation shall be made in next day funds on the earlier of the
Closing Date or a determination by the Bank to terminate or abandon the Plan.
In the event of an oversubscription or other event, which causes the
Offerings to continue beyond the original expiration date or a resolicitation of
subscribers, the parties agree to renegotiate the expense cap on legal fees
applicable to the Agent.
Section 3. Prospectus; Offering. The Shares are to be initially offered
in the Offerings at the Purchase Price as defined and set forth on the cover
page of the Prospectus.
Section 4. Representations and Warranties. The Company, the MHC and the
Bank jointly and severally represent and warrant to the Agent on the date hereof
as follows:
(a) The Registration Statement was declared effective by the
Commission on _________, 1997. At the time the Registration Statement,
including the Prospectus contained therein (including any amendment or
supplement thereto), became effective, the Registration Statement
complied in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and the Registration Statement, including
the Prospectus contained therein (including any amendment or supplement
thereto), and any information regarding the Company or the Bank
contained in Sales Information (as such term is defined in Section 8
hereof) authorized by the Company or the Bank for use in connection
with the Offerings, did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, and at the time any Rule
424(b) or (c) Prospectus was filed with the Commission and at the
Closing Date referred to in Section 2, the Registration Statement,
including the Prospectus contained therein (including any amendment or
supplement thereto), any information regarding the Company or the Bank
contained in Sales Information (as such term is defined in Section 8
hereof) authorized by the Company or the Bank for use in connection
with the Offerings will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this Section 4(a) shall not apply to statements or
omissions made in reliance upon and in conformity with written
information furnished to the Company or the Bank by the Agent expressly
regarding the Agent for use in the Prospectus under the caption "The
Conversion-Marketing Arrangements" or statements in or omissions from
any Sales Information or information filed pursuant to state securities
or blue sky laws or regulations regarding the Agent.
5
<PAGE>
(b) The Conversion Application was approved by the OTS on
_________, 1997 and the related Prospectus has been authorized for use
by the OTS. At the time of the approval of the Conversion Application,
including the Prospectus (including any amendment or supplement
thereto), by the OTS and at all times subsequent thereto until the
Closing Date, the Conversion Application, including the Prospectus
(including any amendment or supplement thereto), will comply in all
material respects with the Conversion Regulations except to the extent
waived by the OTS. The Conversion Application, including the Prospectus
(including any amendment or supplement thereto), does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties
in this Section 4(b) shall not apply to statements or omissions made in
reliance upon and in conformity with written information furnished to
the Company, the MHC or the Bank by the Agent expressly regarding the
Agent for use in the Prospectus contained in the Conversion Application
under the caption "The Conversion-Marketing Arrangements" or statements
in or omissions from any sales information or information filed
pursuant to state securities or blue sky laws or regulations regarding
the Agent.
(c) The Company filed with the OTS the Holding Company
Application H-(e)1 which has been approved as of the date hereof.
(d) No order has been issued by the OTS preventing or
suspending the use of the Prospectus and no action by or before any
such government entity to revoke any approval, authorization or order
of effectiveness related to the Conversion is, to the best knowledge of
the Company, the MHC or the Bank, pending or threatened.
(e) At the Closing Date referred to in Section 2, the Plan
will have been adopted by the Boards of Directors of the Company, the
MHC and the Bank and the offer and sale of the Shares will have been
conducted in all material respects in accordance with the Plan, the
Conversion Regulations, and all other applicable laws, regulations,
decisions and orders, including all terms, conditions, requirements and
provisions precedent to the Conversion imposed upon the Company, the
MHC or the Bank by the OTS, the Commission or any other regulatory
authority and in the manner described in the Prospectus. To the best
knowledge of the Company, no person has sought to obtain review of the
final action of the OTS in approving or taking no objection to the Plan
or in approving or taking no objection to the Conversion or the Holding
Company Application pursuant to the Conversion Regulations or any other
statute or regulation.
(f) The Bank has been organized and is a validly existing
federally chartered savings and loan association in stock form of
organization and upon the Conversion will continue as such, is duly
authorized to conduct its business and own its property as described in
the Registration Statement and the Prospectus; the Bank has obtained
all material licenses, permits and other governmental authorizations
currently required for the
6
<PAGE>
conduct of its business; all such licenses, permits and governmental
authorizations are in full force and effect, and the Bank is in all
material respects complying with all laws, rules, regulations and
orders applicable to the operation of its business; the Bank is
existing under the laws of the United States and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which its ownership of property or leasing or
property or the conduct of its business requires such qualification,
unless the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on the
condition, financial or otherwise, or the business, operations or
income of the Bank. The Bank does not own equity securities or any
equity interest in any other business enterprise except as described in
the Prospectus or as would not be material to the operations of the
Bank. Upon completion of the sale by the Company of the Shares
contemplated by the Prospectus, (i) the MHC will be succeeded by the
Company, a Delaware corporation, as the holding company of the Bank,
(ii) all of the authorized and outstanding capital stock of the Bank
will be owned by the Company, and (iii) the Company will have no direct
subsidiaries other than the Bank. The Conversion will have been
effected in all material respects in accordance with all applicable
statutes, regulations, decisions and orders; and, except with respect
to the filing of certain post-sale, post- Conversion reports, and
documents in compliance with the 1933 Act Regulations or the OTS's
resolutions or letters of approval or no objection taken, all terms,
conditions, requirements and provisions with respect to the Conversion
(except those that are conditions subsequent) imposed by the Commission
or the OTS, if any, will have been complied with by the Company, the
MHC and the Bank in all material respects or appropriate waivers will
have been obtained and all material notice and waiting periods will
have been satisfied, waived or elapsed.
(g) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus, and the Company is qualified
to do business as a foreign corporation in each jurisdiction in which
the conduct of its business requires such qualification, except where
the failure to so qualify would not have a material adverse effect on
the condition, financial or otherwise, or the business, operations or
income of the Company. The Company has obtained all material licenses,
permits and other governmental authorizations currently required for
the conduct of its business; all such licenses, permits and
governmental authorizations are in full force and effect, and the
Company is in all material respects complying with all laws, rules,
regulations and orders applicable to the operation of its business.
(h) The MHC has been duly organized and is a validly existing
federally chartered mutual holding company, with corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus,
and the MHC is qualified to do business as a foreign corporation in
each jurisdiction in which the conduct of its business requires such
qualification, except where the failure to so qualify would not have a
material adverse effect on the condition,
7
<PAGE>
financial or otherwise, or the business, operations or income of the
MHC. The MHC has obtained all material licenses, permits and other
governmental authorizations currently required for the conduct of its
business; all such licenses, permits and governmental authorizations
are in full force and effect, and the MHC is in all material respects
complying with all laws, rules, regulations and orders applicable to
the operation of its business.
(i) The Bank is a member of the Federal Home Loan Bank of Des
Moines ("FHLB-Des Moines"). The deposit accounts of the Bank are
insured by the FDIC up to the applicable limits; and no proceedings for
the termination or revocation of such insurance are pending or, to the
best knowledge of the Company, the MHC or the Bank, threatened. Upon
consummation of the Conversion, the liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders
will be duly established in accordance with the requirements of the
Conversion Regulations.
(j) The Company, the MHC and the Bank have good and marketable
title to all real property and other assets material to the business of
the Company, the MHC and the Bank and to those properties and assets
described in the Registration Statement and Prospectus as owned by
them, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Registration
Statement and Prospectus or are not material to the business of the
Company, the MHC and the Bank taken as a whole; and all of the leases
and subleases material to the business of the Company, the MHC and the
Bank under which the Company, the MHC or the Bank hold properties,
including those described in the Registration Statement and Prospectus,
are in full force and effect.
(k) The Company, the MHC and the Bank have received an opinion
of their special counsel, Malizia, Spidi, Sloane & Fisch, P.C., with
respect to the federal income tax consequences of the conversion of the
MHC from mutual to stock form, the acquisition of the capital stock of
the Bank by the Company and the sale of the Shares as described in the
Registration Statement and the Prospectus, and an opinion from Baird,
Kurtz & Dobson ("Baird, Kurtz") with respect to the Missouri state
income tax consequences of the proposed transaction; all material
aspects of the opinions of Malizia, Spidi, Sloane & Fish, P.C. and
Baird, Kurtz are accurately summarized in the Prospectus; and the facts
and representations upon which such opinions are based are truthful,
accurate and complete.
(l) The Company, the MHC and the Bank have all such power,
authority, authorizations, approvals and orders as may be required to
enter into this Agreement, to carry out the provisions and conditions
hereof and to issue and sell (i) the capital stock of the Bank to the
Company and (ii) the Shares to be sold by the Company as provided
herein and as described in the Prospectus.
(m) The Company, the MHC and the Bank are not in violation of
any directive received from the OTS, the FDIC, or any other agency to
make any material change in the method of conducting their businesses
so as to comply in all material respects with all
8
<PAGE>
applicable statutes and regulations (including, without limitation,
regulations, decisions, directives and orders of the OTS and the FDIC)
and, except as set forth in the Registration Statement and the
Prospectus, there is no suit or proceeding or charge or action before
or by any court, regulatory authority or governmental agency or body,
pending or, to the knowledge of the Company, the MHC and the Bank,
threatened, which might materially and adversely affect the Conversion,
the performance of this Agreement or the consummation of the
transactions contemplated in the Plan and as described in the
Registration Statement and the Prospectus or which might result in any
material adverse change in the condition (financial or otherwise),
earnings, capital or properties of the Company, or the Bank, or which
would materially affect their properties and assets.
(n) The financial statements which are included in the
Prospectus fairly present the financial condition, results of
operations, retained earnings and cash flows of the Bank at the
respective dates thereof and for the respective periods covered thereby
and comply as to form in all material respects with the applicable
accounting requirements of Title 12 of the Code of Federal Regulations
and generally accepted accounting principles (including those requiring
the recording of certain assets at their current market value). Such
financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied through the periods
involved, present fairly in all material respects the information
required to be stated therein and are consistent with the most recent
financial statements and other reports filed by the Bank with the OTS,
and the FDIC, except that accounting principles employed in such
regulatory filings conform to the requirements of such authorities and
not necessarily to generally accepted accounting principles. The other
financial, statistical and pro forma information and related notes
included in the Prospectus present fairly the information shown therein
on a basis consistent with the audited and unaudited financial
statements of the Bank included in the Prospectus, and as to the pro
forma adjustments, the adjustments made therein have been properly
applied on the basis described therein.
(o) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus; (i) there has
not been any material adverse change, financial or otherwise, in the
condition of the Company, the MHC, the Bank or in the earnings, capital
or properties of the Company, the MHC or the Bank, whether or not
arising in the ordinary course of business; (ii) there has not been any
material increase in the long-term debt of the Bank or in loans past
due 90 days or more or real estate acquired by foreclosure, by
deed-in-lieu of foreclosure or deemed in-substance foreclosure or any
material decrease in surplus and reserves or total assets of the Bank
nor has the Company or the Bank issued any securities or incurred any
liability or obligation for borrowing other than in the ordinary course
of business; (iii) there have not been any material transactions
entered into by the Company, the MHC or the Bank, except with respect
to those transactions entered into in the ordinary course of business;
(iv) the capitalization, liabilities, assets, properties and business
of the Company, the MHC and the Bank conform in all material respects
to the descriptions thereof contained in the
9
<PAGE>
Prospectus; and (v) neither the Company, the MHC nor the Bank has any
material contingent liabilities, except as set forth in the Prospectus.
(p) As of the date hereof and as of the Closing Date, neither
the Company, the MHC nor the Bank is in violation of its articles of
incorporation or bylaws or charter or bylaws, as applicable, or in
default in the performance or observance of any material obligation,
agreement, covenant, or condition contained in any material contract,
lease, loan agreement, indenture or other instrument to which it is a
party or by which it or any of its property may be bound; the
consummation of the Conversion, the execution, delivery and performance
of this Agreement and the consummation of the transactions herein
contemplated have been duly and validly authorized by all necessary
corporate action on the part of the Company and the Bank and this
Agreement has been validly executed and delivered by the Company, the
MHC and the Bank and is the valid, legal and binding Agreement of the
Company, the MHC and the Bank enforceable in accordance with its terms,
except as the enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, conservatorship, receivership
or other similar laws now or hereafter in effect relating to or
affecting the enforcement of creditors' rights generally or the rights
of creditors of Federal savings institutions and their holding
companies, (ii) general equitable principles, (iii) laws relating to
the safety and soundness of insured depository institutions, and (iv)
applicable law or public policy with respect to the indemnification
and/or contribution provisions contained herein, and except that no
representation or warranty need be made as to the effect or
availability of equitable remedies or injunctive relief (regardless of
whether such enforceability is considered in a proceeding in equity or
at law). The consummation of the transactions herein contemplated will
not: (i) conflict with or constitute a breach of, or default under, the
articles of incorporation and bylaws of the Company or the charters and
bylaws of the Bank or the MHC (in either mutual or capital stock form),
or any material contract, lease or other instrument to which the
Company, the MHC or the Bank has a beneficial interest, or any
applicable law, rule, regulation or order; (ii) violate any
authorization, approval, judgment, decree, order, statute, rule or
regulation applicable to the Company, the MHC or the Bank, except for
such violations which would not have a material adverse effect on the
financial condition and results of operations of the Company, the MHC
and the Bank on a consolidated basis; or (iii) with the exception of
the liquidation account established in the Conversion, result in the
creation of any material lien, charge or encumbrance upon any property
of the Company, the MHC or the Bank.
(q) No default exists, and no event has occurred which with
notice or lapse of time, or both, would constitute a default on the
part of the Company, the MHC or the Bank, in the due performance and
observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, note, bank loan or credit agreement or any
other instrument or agreement to which the Company, the MHC or the Bank
is a party or by which any of them or any of their property is bound or
affected except such defaults which would not have a material adverse
effect on the financial condition or results of operations of the
Company, the MHC and the Bank on a consolidated basis; such agreements
are in
10
<PAGE>
full force and effect; and no other party to any such agreements has
instituted or, to the best knowledge of the Company, the MHC or the
Bank, threatened any action or proceeding wherein the Company, the Bank
or the MHC would or might be alleged to be in default thereunder under
circumstances where such action or proceeding, if determined adversely
to the Company, the MHC or the Bank, would have a material adverse
effect on the Company, the MHC and the Bank, taken as a whole.
(r) Upon consummation of the Conversion, the authorized,
issued and outstanding equity capital of the Company will be within the
range set forth in the Prospectus under the caption "Capitalization,"
and, other than shares issued to the Bank which shall be canceled on
the Closing Date, no shares of Common Stock have been or will be issued
and outstanding prior to the Closing Date referred to in Section 2; the
Shares will have been duly and validly authorized for issuance and,
when issued and delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan and in
the Prospectus, will be duly and validly issued, fully paid and
non-assessable; no preemptive rights exist with respect to the Shares;
and the terms and provisions of the Shares will conform in all material
respects to the description thereof contained in the Registration
Statement and the Prospectus. To the best knowledge of the Company, the
MHC and the Bank, upon the issuance of the Shares, good title to the
Shares will be transferred from the Company to the purchasers thereof
against payment therefor, subject to such claims as may be asserted
against the purchasers thereof by third-party claimants.
(s) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares, except for
the approval or non-objection, as applicable, of the Commission, the
OTS, and any necessary qualification, notification, registration or
exemption under the securities or blue sky laws of the various states
in which the Shares are to be offered, and except as may be required
under the rules and regulations of the NASD and/or the Nasdaq National
Market.
(t) Baird, Kurtz, which has certified the financial statements
of the Bank included in the Prospectus as of June 30, 1997 and 1996 and
for each of the years in the three year period ended June 30, 1997, has
advised the Company, the MHC and the Bank in writing that they are,
with respect to the Company, the MHC and the Bank, independent public
accountants within the meaning of the Code of Professional Ethics of
the American Institute of Certified Public Accountants and Title 121 of
the Code of Federal Regulations and Section 571.2(c)(3).
(u) RP Financial, LC which has prepared the Bank's Conversion
Valuation Appraisal Report as of ______, 1997 (as amended or
supplemented, if so amended or supplemented) (the "Appraisal"), has
advised the Company in writing that it is independent of the Company,
the MHC and the Bank within the meaning of the Conversion Regulations.
11
<PAGE>
(v) The Company, the MHC and the Bank have timely filed all
required federal, state and local tax returns; the Company, the MHC and
the Bank have paid all taxes that have become due and payable in
respect of such returns, except where permitted to be extended, have
made adequate reserves for similar future tax liabilities and no
deficiency has been asserted with respect thereto by any taxing
authority.
(w) The Company, the MHC and the Bank are in compliance in all
material respects with the applicable financial recordkeeping and
reporting requirements of the Currency and Foreign Transactions
Reporting Act of 1970, as amended, and the regulations and rules
thereunder.
(x) To the knowledge of the Company, the MHC and the Bank,
neither the Company, the MHC, the Bank nor employees of the Company,
the MHC or the Bank have made any payment of funds of the Company, the
MHC or the Bank as a loan for the purchase of the Shares (other than a
loan by the Company to the ESOP) or made any other payment of funds
prohibited by law, and no funds have been set aside to be used for any
payment prohibited by law.
(y) Prior to the Conversion, the Bank had ___________ shares
of authorized capital stock, of which _________ shares were issued and
outstanding, and the MHC was not authorized to issue shares. Neither
the Bank, the Company nor the MHC has: (i) other than as described in
the Prospectus issued any securities within the last 18 months (except
for notes to evidence other bank loans and reverse repurchase
agreements or other liabilities in the ordinary course of business or
as described in the Prospectus); (ii) had any material dealings within
the 12 months prior to the date hereof with any member of the NASD, or
any person related to or associated with such member, other than
discussions and meetings relating to the proposed offering and routine
purchases and sales of United States government and agency securities;
(iii) entered into a financial or management consulting agreement
except as contemplated hereunder and except for the Letter Agreement
set forth in Exhibit A; and (iv) engaged any intermediary between the
Agents and the Company, the MHC and the Bank in connection with the
offering of the Shares, and no person is being compensated in any
manner for such service.
(z) The Company, the MHC and the Bank have not relied upon the
Agent or the Agent's counsel for any legal, tax or accounting advice in
connection with the Conversion.
(aa) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
Any certificates signed by an officer of the Company, the MHC or the
Bank pursuant to the conditions of this Agreement and delivered to the Agent or
its counsel that refers to this Agreement shall be deemed to be a representation
and warranty by the Company, the MHC or the
12
<PAGE>
Bank to the Agent as to the matters covered thereby with the same effect as if
such representation and warranty were set forth herein.
Section 5. Representations and Warranties of the Agent. The Agent
represents and warrants to the Company, the MHC and the Bank that:
(a) The Agent is a corporation and is validly existing in good
standing under the laws of the State of Delaware with full
power and authority to provide the services to be furnished to
the Bank, the MHC and the Company hereunder.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary action on the
part of the Agent, and this Agreement has been duly and
validly executed and delivered by the Agent and is the legal,
valid and binding agreement of the Agent, enforceable in
accordance with its terms.
(c) Each of the Agent and its employees, agents and
representatives who shall perform any of the services
hereunder shall be duly authorized and empowered, and shall
have all licenses, approvals and permits necessary to perform
such services.
(d) The execution and delivery of this Agreement by the Agent,
the consummation of the transactions contemplated hereby and
compliance with the terms and provisions hereof will not
conflict with, or result in a breach of, any of the terms,
provisions or conditions of, or constitute a default (or event
which with notice or lapse of time or both would constitute a
default) under, the articles of incorporation of the Agent or
any agreement, indenture or other instrument to which the
Agent is a party or by which it or its property is bound.
(e) No approval of any regulatory or supervisory or other
public authority is required in connection with the Agent's
execution and delivery of this Agreement, except as may have
been received.
(f) There is no suit or proceeding or charge of action before
or by any court, regulatory authority or government agency or
body or, to the knowledge of the Agent, pending or threatened,
which might materially adversely affect the Agent's
performance of this Agreement.
Section 5.1 Covenants of the Company, the MHC and the Bank. The
Company, the MHC and the Bank hereby jointly and severally covenant with the
Agent as follows:
(a) The Company has filed the Registration Statement with the
Commission. The Company will not, at any time after the date the
Registration Statement is declared effective, file any amendment or
supplement to the Registration Statement without
13
<PAGE>
providing the Agent and its counsel an opportunity to review such
amendment or supplement or file any amendment or supplement to which
amendment or supplement the Agent or its counsel shall reasonably
object.
(b) The MHC has filed the Conversion Application with the OTS.
The Bank will not, at any time after the Conversion Application is
approved by the OTS, file any amendment or supplement to such
Conversion Application without providing the Agent and its counsel an
opportunity to review such amendment or supplement or file any
amendment or supplement to which amendment or supplement the Agent or
its counsel shall reasonably object.
(c) The Company has filed the Holding Company Application with
the OTS. The Company will not, at any time before the Holding Company
Application is approved by the OTS, file any amendment or supplement to
such Holding Company Application without providing the Agent and its
counsel an opportunity to review the nonconfidential portions of such
amendment or supplement or file any amendment or supplement to which
amendment or supplement the Agent or its counsel shall reasonably
object.
(d) The Company and the Bank will use their best efforts to
cause any post-effective amendment to the Registration Statement to be
declared effective by the Commission and any post-effective amendment
to the Conversion Application to be approved by the OTS and will
immediately upon receipt of any information concerning the events
listed below notify the Agent: (i) when the Registration Statement, as
amended, has become effective; (ii) when the Conversion Application, as
amended, has been approved by the OTS; (iii) when the Holding Company
Application, as amended, has been approved by the OTS; (iv) of any
comments from the Commission, the OTS or any other governmental entity
with respect to the Conversion or the transactions contemplated by this
Agreement; (v) of the request by the Commission, the OTS or any other
governmental entity for any amendment or supplement to the Registration
Statement, the Conversion Application or the Holding Company
Application or for additional information; (vi) of the issuance by the
Commission, the OTS or any other governmental entity of any order or
other action suspending the Offering or the use of the Registration
Statement or the Prospectus or any other filing of the Company or the
Bank under the Conversion Regulations, or other applicable law, or the
threat of any such action; (vii) the issuance by the Commission, the
OTS or any state authority of any stop order suspending the
effectiveness of the Registration Statement or the approval of the
Conversion Application or Holding Company Application, or of the
initiation or threat of initiation or threat of any proceedings for any
such purpose; or (viii) of the occurrence of any event mentioned in
paragraph (h) below. The Company, the MHC and the Bank will make every
reasonable effort (i) to prevent the issuance by the Commission, the
OTS or any state authority of any such order and, if any such order
shall at any time be issued, (ii) to obtain the lifting thereof at the
earliest possible time.
14
<PAGE>
(e) The Company, the MHC and the Bank will deliver to the
Agent and to its counsel two conformed copies of the Registration
Statement, the Conversion Application and the Holding Company
Application, as originally filed and of each amendment or supplement
thereto, including all exhibits. Further, the Company, the MHC and the
Bank will deliver such additional copies of the foregoing documents to
counsel to the Agent as may be required for any NASD and blue sky
filings.
(f) The Company, the MHC and the Bank will furnish to the
Agent, from time to time during the period when the Prospectus (or any
later prospectus related to this offering) is required to be delivered
under the 1933 Act or the Securities Exchange Act of 1934 (the "1934
Act"), such number of copies of such Prospectus (as amended or
supplemented) as the Agent may reasonably request for the purposes
contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or
the rules and regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes the Agent to use the Prospectus
(as amended or supplemented, if amended or supplemented) in any lawful
manner contemplated by the Plan in connection with the sale of the
Shares by the Agent.
(g) The Company, the MHC and the Bank will comply with any and
all material terms, conditions, requirements and provisions with
respect to the Conversion and the transactions contemplated thereby
imposed by the Commission, the OTS, the Conversion Regulations or the
OTS, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and
the 1934 Act Regulations to be complied with prior to or subsequent to
the Closing Date and when the Prospectus is required to be delivered,
the Company, the MHC and the Bank will comply, at their own expense,
with all material requirements imposed upon them by the Commission, the
OTS, the Conversion Regulations or the OTS, and by the 1933 Act, the
1933 Act Regulations, the 1934 Act and the 1934 Act Regulations,
including, without limitation, Rule 10b-5 under the 1934 Act, in each
case as from time to time in force, so far as necessary to permit the
continuance of sales or dealing in shares of Common Stock during such
period in accordance with the provisions hereof and the Prospectus.
(h) If, at any time during the period when the Prospectus
relating to the Shares is required to be delivered, any event relating
to or affecting the Company, the MHC or the Bank shall occur, as a
result of which it is necessary or appropriate, in the opinion of
counsel for the Company, the MHC and the Bank or in the reasonable
opinion of the Agent's counsel, to amend or supplement the Registration
Statement or Prospectus in order to make the Registration Statement or
Prospectus not misleading in light of the circumstances existing at the
time the Prospectus is delivered to a purchaser, the Company and the
Bank will at their expense, prepare and file with the Commission and
the OTS and furnish to the Agent a reasonable number of copies of an
amendment or amendments of, or a supplement or supplements to, the
Registration Statement or Prospectus (in form and substance
satisfactory to the Agent and its counsel after a reasonable time for
review) which will amend or supplement the Registration Statement or
Prospectus so that as amended or supplemented it will not contain an
untrue statement of a material fact or omit
15
<PAGE>
to state a material fact necessary in order to make the statements
therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading. For the purpose
of this Agreement, the Company, the MHC and the Bank each will timely
furnish to the Agent such information with respect to itself as the
Agent may from time to time reasonably request.
(i) The Company, the MHC and the Bank will take all necessary
actions, in cooperating with the Agent, and furnish to whomever the
Agent may direct, such information as may be required to qualify or
register the Shares for offering and sale by the Company or to exempt
such Shares from registration, or to exempt the Company as a
broker-dealer and its officers, directors and employees as
broker-dealers or agents under the applicable securities or blue sky
laws of such jurisdictions in which the Shares are required under the
Conversion Regulations to be sold or as the Agent and the Company, the
MHC and the Bank may reasonably agree upon; provided, however, that the
Company shall not be obligated to file any general consent to service
of process or to qualify to do business in any jurisdiction in which it
is not so qualified. In each jurisdiction where any of the Shares shall
have been qualified or registered as above provided, the Company will
make and file such statements and reports in each fiscal period as are
or may be required by the laws of such jurisdiction.
(j) The liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders will be duly
established and maintained in accordance with the requirements of the
OTS, and such Eligible Account Holders and Supplemental Eligible
Account Holders who continue to maintain their savings accounts in the
Bank will have an inchoate interest in their pro rata portion of the
liquidation account which shall have a priority superior to that of the
holders of shares of Common Stock in the event of a complete
liquidation of the Bank.
(k) The Company, the MHC and the Bank will not sell or issue,
contract to sell or otherwise dispose of, for a period of 90 days after
the Closing Date, without the Agent's prior written consent, any shares
of Common Stock other than the Shares or other than in connection with
any plan or arrangement described in the Prospectus.
(l) The Company shall register its Common Stock under Section
12(g) of the 1934 Act concurrent with the Offerings pursuant to the
Plan and shall request that such registration be effective upon
completion of the Conversion. The Company shall maintain the
effectiveness of such registration for not less than three (3) years or
such shorter period as may be required by the OTS.
(m) During the period during which the Company's Common Stock
is registered under the 1934 Act or for three years from the date
hereof, whichever period is greater, the Company will furnish to its
stockholders as soon as practicable after the end of each fiscal year
an annual report of the Company (including a consolidated balance sheet
and statements of consolidated income, stockholders' equity and cash
flows of the Company
16
<PAGE>
and its subsidiaries as at the end of and for such year, certified by
independent public accountants in accordance with Regulation S-X under
the 1933 Act and the 1934 Act).
(n) During the period of three years from the date hereof, the
Company will furnish to the Agent: (i) as soon as practicable after
such information is publicly available, a copy of each report of the
Company furnished to or filed with the Commission under the 1934 Act or
any national securities exchange or system on which any class of
securities of the Company is listed or quoted (including, but not
limited to, reports on Forms 10-K, 10- Q and 8-K and all proxy
statements and annual reports to stockholders), (ii) a copy of each
other non-confidential report of the Company mailed to its stockholders
or filed with the Commission, the OTS or any other supervisory or
regulatory authority or any national securities exchange or system on
which any class of securities of the Company is listed or quoted, each
press release and material news items and additional documents and
information with respect to the Company or the Bank as the Agent may
reasonably request; and (iii) from time to time, such other
nonconfidential information concerning the Company or the Bank as the
Agent may reasonably request.
(o) The Company and the Bank will use the net proceeds from
the sale of the Shares in the manner set forth in the Prospectus under
the caption "Use of Proceeds."
(p) Other than as permitted by the Conversion Regulations, the
HOLA, the 1933 Act, the 1933 Act Regulations, and the laws of any state
in which the Shares are registered or qualified for sale or exempt from
registration, neither the Company, the MHC nor the Bank will distribute
any prospectus, offering circular or other offering material in
connection with the offer and sale of the Shares.
(q) The Company will use its best efforts to (i) encourage and
assist two market makers to establish and maintain a market for the
Shares and (ii) list the Shares on a national or regional securities
exchange or on the Nasdaq National Market effective on or prior to the
Closing Date.
(r) The Bank will maintain appropriate arrangements for
depositing all funds received from persons mailing subscriptions for or
orders to purchase Shares in the Offerings on an interest bearing basis
at the rate described in the Prospectus until the Closing Date and
satisfaction of all conditions precedent to the release of the Bank's
obligation to refund payments received from persons subscribing for or
ordering Shares in the Offerings in accordance with the Plan and as
described in the Prospectus or until refunds of such funds have been
made to the persons entitled thereto or withdrawal authorizations
cancelled in accordance with the Plan and as described in the
Prospectus. The Bank will maintain such records of all funds received
to permit the funds of each subscriber to be separately insured by the
FDIC (to the maximum extent allowable) and to enable the Bank to make
the appropriate refunds of such funds in the event that such refunds
are required to be made in accordance with the Plan and as described in
the Prospectus.
17
<PAGE>
(s) The Company will promptly take all necessary action to
register as a savings and loan holding company under the HOLA within 90
days of the Closing Date.
(t) The Company and the Bank will take such actions and
furnish such information as are reasonably requested by the Agent in
order for the Agent to ensure compliance with the NASD's
"Interpretation Relating to Free Riding and Withholding."
(u) Neither the Bank nor the MHC will amend the Plan of
Conversion without notifying the Agent prior thereto.
(v) The Company shall assist the Agent, if necessary, in
connection with the allocation of the Shares in the event of an
oversubscription and shall provide the Agent with any information
necessary to assist the Company in allocating the Shares in such event
and such information shall be accurate and reliable.
(w) Prior to the Closing Date, the Company, the MHC and the
Bank will inform the Agent of any event or circumstances of which it is
aware as a result of which the Registration Statement, the Conversion
Application and/or Prospectus, as then amended or supplemented, would
contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading.
(x) Prior to the Closing Date, the Company will have received
approval of the OTS to acquire the Bank.
Section 5.2 Covenants of the Agent. The Agent hereby covenants with the
Company, the MHC and the Bank as follows:
(a) During the period when the Prospectus is used, the Agent
will comply, in all material respects and at its own expense, with all
requirements imposed upon it by the OTS and, to the extent applicable,
by the 1933 Act and the 1934 Act and the rules and regulations
promulgated thereunder.
(b) The Agent shall return unused prospectuses, if any, to the
Company promptly upon the completion of the Conversion.
(c) The Agent will distribute the Prospectuses or offering
materials in connection with the sales of the common stock only in
accordance with OTS regulations, the 1933 Act and the rules and
regulations promulgated thereunder.
(d) The Agent shall assist the Bank in maintaining
arrangements for the deposit of funds and the making of refunds, as
appropriate (as described in Section 5.1(r)), and shall perform the
allocation of shares in the event of an oversubscription, in
conformance with the Plan and applicable regulations and based upon
information furnished to the Agent by the Bank (as described in Section
5.1(v)).
18
<PAGE>
Section 6. Payment of Expenses. Whether or not the Conversion is
completed or the sale of the Shares by the Company is consummated, the Company,
the MHC and the Bank jointly and severally agree to pay or reimburse the Agent
for: (a) all filing fees in connection with all filings with the NASD; (b) any
stock issue or transfer taxes which may be payable with respect to the sale of
the Shares; (c) all reasonable expenses of the Conversion including but not
limited to the Company, the MHC and the Bank's attorneys' fees, transfer agent,
registrar and other agent charges, fees relating to auditing and accounting or
other advisors and costs of printing all documents necessary in connection with
the Conversion; and (d) all reasonable out-of-pocket expenses incurred by the
Agent not to exceed $50,000 (including legal fees and expenses). Such
out-of-pocket expenses include, but are not limited to, travel, communications
and postage. However, such out-of-pocket expenses do not include expenses
incurred with respect to the matters set forth in (a) or (b) above. In the event
the Company is unable to sell a minimum of 2,805,000 Shares or the Conversion is
terminated or otherwise abandoned, the Company, the MHC and the Bank shall
reimburse the Agent in accordance with Section 2 hereof.
Section 7. Conditions to the Agent's Obligations. The Agent's
obligations hereunder, as to the Shares to be delivered at the Closing Date, are
subject, to the extent not waived by the Agent, to the condition that all
representations and warranties of the Company, the MHC and the Bank herein are,
at and as of the commencement of the Offerings and at and as of the Closing
Date, true and correct in all material respects, the condition that the Company,
the MHC and the Bank shall have performed all of their obligations hereunder to
be performed on or before such dates, and to the following further conditions:
(a) At the Closing Date, the Company, the MHC and the Bank
shall have conducted the Conversion in all material respects in
accordance with the Plan, the Conversion Regulations, and all other
applicable laws, regulations, decisions and orders, including all
terms, conditions, requirements and provisions precedent to the
Conversion imposed upon them by the OTS.
(b) The Registration Statement shall have been declared
effective by the Commission, the Conversion Application approved by the
OTS, and the Holding Company Application approved by the OTS not later
than 5:30 p.m. on the date of this Agreement, or with the Agent's
consent at a later time and date; and at the Closing Date, no stop
order suspending the effectiveness of the Registration Statement shall
have been issued under the 1933 Act or proceedings therefore initiated
or threatened by the Commission, or any state authority and no order or
other action suspending the authorization of the Prospectus or the
consummation of the Conversion shall have been issued or proceedings
therefore initiated or, to the Company's, the MHC's or the Bank's
knowledge, threatened by the Commission, the OTS or any state
authority.
(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing
Date and addressed to the Agent and for its benefit, of
Malizia, Spidi, Sloane & Fisch, P.C., special
19
<PAGE>
counsel for the Company, the MHC and the Bank, in form and
substance to the effect that:
(i) The Company has been duly incorporated
and is validly existing as a corporation under the laws of the
State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the
Prospectus.
(ii) The Bank has been duly organized and is
a validly existing federal savings association in capital
stock form of organization, duly authorized to conduct its
business and own its property as described in the Registration
Statement and Prospectus. All of the outstanding capital stock
of the Bank will be duly authorized and, upon payment
therefor, will be validly issued, fully paid and
non-assessable and will be owned by the Company, free and
clear of any liens, encumbrances, claims or other
restrictions.
(iii) The MHC has been duly organized and is
a validly existing federal mutual holding company duly
authorized to conduct its business and own its property as
described in the Registration Statement and Prospectus.
(iv) The Bank is a member of the FHLB-Des
Moines. The deposit accounts of the Bank are insured by the
FDIC up to the maximum amount allowed under law and no
proceedings for the termination or revocation of such
insurance are pending or, to such counsel's Actual Knowledge,
threatened; the description of the liquidation account as set
forth in the Prospectus under the caption "The Conversion and
Reorganization-Liquidation Rights" to the extent that such
information constitutes matters of law and legal conclusions
has been reviewed by such counsel and is accurate in all
material respects.
(v) Upon consummation of the Conversion, the
authorized, issued and outstanding capital stock of the
Company will be within the range set forth in the Prospectus
under the caption "Capitalization," and except for shares
issued upon incorporation of the Company, no shares of Common
Stock have been issued prior to the Closing Date; at the time
of the Conversion, the Shares subscribed for pursuant to the
Offerings will have been duly and validly authorized for
issuance, and when issued and delivered by the Company
pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and the Prospectus, will
be duly and validly issued and fully paid and non-assessable;
the issuance of the Shares is not subject to preemptive rights
and the terms and provisions of the Shares conform in all
material respects to the description thereof contained in the
Prospectus. To such counsel's Actual Knowledge, upon the
issuance of the Shares, good title to the Shares will be
transferred from the Company to the purchasers thereof against
payment therefor, subject to such claims as may be asserted
against the purchasers thereof by third-party claimants.
20
<PAGE>
(vi) The execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by
all necessary action on the part of the Company, the MHC, and
the Bank; and this Agreement is a valid and binding obligation
of the Company, the MHC and the Bank, enforceable in
accordance with its terms, except as the enforceability
thereof may be limited by (i) bankruptcy, insolvency,
moratorium, reorganization, conservatorship, receivership or
other similar laws now or hereafter in effect relating to or
affecting the enforcement of creditors' rights generally or
the rights of creditors of savings institutions and their
holding companies, (ii) general equitable principles, (iii)
laws relating to the safety and soundness of insured
depository institutions, and (iv) applicable law or public
policy with respect to the indemnification and/or contribution
provisions contained herein, including, without limitation,
the provisions of Section 23A and 23B of the Federal Reserve
Act, and except that no opinion need to be expressed as to the
effect or availability of equitable remedies or injunctive
relief (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(vii) The Conversion Application has been
approved by the OTS and the Prospectus has been authorized for
use by the OTS. The OTS has approved the Holding Company
Application, and the purchase by the Company of all of the
issued and outstanding capital stock of the Bank has been
authorized by the OTS and no action has been taken, and to
such counsel's Actual Knowledge, none is pending or
threatened, to revoke any such authorization or approval.
(viii) The Plan has been duly adopted by the
required vote of the directors of the Company, the MHC and the
Bank and, based upon the certificate of the inspector of
election, by the members of the MHC and the stockholders of
the Bank.
(ix) Subject to the satisfaction of the
conditions to the OTS's approval of to the Conversion, no
further approval, registration, authorization, consent or
other order of or notice to any federal or Delaware regulatory
agency is required in connection with the execution and
delivery of this Agreement, the issuance of the Shares and the
consummation of the Conversion, except as may be required
under the securities or blue sky laws of various jurisdictions
(as to which no opinion need be rendered) and except as may be
required under the rules and regulations of the NASD and/or
the Nasdaq National Market (as to which no opinion need be
rendered).
(x) The Registration Statement is effective
under the 1933 Act and no stop order suspending the
effectiveness has been issued under the 1933 Act or
proceedings therefor initiated or, to such counsel's Actual
Knowledge, threatened by the Commission.
21
<PAGE>
(xi) At the time the Conversion Application,
including the Prospectus contained therein, was approved by
the OTS, the Conversion Application, including the Prospectus
contained therein, complied as to form in all material
respects with the requirements of the Conversion Regulations,
federal law and all applicable rules and regulations
promulgated thereunder (other than the financial statements,
the notes thereto, and other tabular, financial, statistical
and appraisal data included therein, as to which no opinion
need be rendered).
(xii) At the time that the Registration
Statement became effective, (i) the Registration Statement (as
amended or supplemented, if so amended or supplemented) (other
than the financial statements, the notes thereto and other
tabular, financial, statistical and appraisal data included
therein, as to which no opinion need be rendered) complied as
to form in all material respects with the requirements of the
1933 Act and the 1933 Act Regulations, and (ii) the Prospectus
(other than the financial statements, the notes thereto and
other tabular, financial, statistical and appraisal data
included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the
requirements of the 1933 Act, the 1933 Act Regulations, the
Conversion Regulations and federal law.
(xiii) The terms and provisions of the
Shares of the Company conform, in all material respects, to
the description thereof contained in the Registration
Statement and Prospectus, and the form of certificate used to
evidence the Shares is in due and proper form.
(xiv) There are no legal or governmental
proceedings pending or to such counsel's Actual Knowledge,
threatened which are required to be disclosed in the
Registration Statement and Prospectus, other than those
disclosed therein, and to such counsel's Actual Knowledge, all
pending legal and governmental proceedings to which the
Company, the MHC or the Bank is a party or of which any of
their property is the subject, which are not described in the
Registration Statement and the Prospectus, including ordinary
routine litigation incidental to the Company's, the MHC's or
the Bank's business, are, considered in the aggregate, not
material.
(xv) To such counsel's Actual Knowledge,
there are no material contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments required to be
described or referred to in the Conversion Application, the
Registration Statement or the Prospectus or required to be
filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto in the
Conversion Application, the Registration Statement or the
Prospectus. The description in the Conversion Application, the
Registration Statement and the Prospectus of such documents
and exhibits is accurate in all material respects and fairly
presents the information required to be shown.
22
<PAGE>
(xvi) To such counsel's Actual Knowledge,
the Company, the MHC and the Bank have conducted the
Conversion, in all material respects, in accordance with all
applicable requirements of the Plan and applicable federal
law, and the Plan complies in all material respects with all
applicable Delaware and federal laws, rules, regulations,
decisions and orders including, but not limited to, the
Conversion Regulations (except where a written waiver has been
received); no order has been issued by the OTS, the Commission
or any state authority to suspend the Offerings or the use of
the Prospectus, and no action for such purposes has been
instituted or, to such counsel's Actual Knowledge, threatened
by the OTS or the Commission or any state authority and, to
such counsel's Actual Knowledge, no person has sought to
obtain regulatory or judicial review of the final action of
the OTS approving the Plan, the Conversion Application, the
Holding Company Application or the Prospectus.
(xvii) To such counsel's Actual Knowledge,
the Company, the MHC and the Bank have obtained all material
federal and Delaware licenses, permits and other governmental
authorizations currently required for the conduct of their
businesses and all such licenses, permits and other
governmental authorizations are in full force and effect, and
the Company, the MHC and the Bank are in all material respects
complying therewith, except where the failure to have such
licenses, permits and other governmental authorizations or the
failure to be in compliance therewith would not have a
material adverse affect on the business or operations of the
Bank, the MHC and the Company, taken as a whole.
(xviii) To such counsel's Actual Knowledge,
neither the Company, the MHC nor the Bank is in violation of
its articles of incorporation, bylaws, or charter, as
applicable, or, to such counsel's Actual Knowledge, in default
or violation of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which it is a
party or by which it or its property may be bound except for
such defaults or violations which would not have a material
adverse impact on the financial condition or results of
operations of the Company, the MHC nor the Bank on a
consolidated basis; to such counsel's Actual Knowledge, the
execution and delivery of this Agreement, the occurrence of
the obligations herein set forth and the consummation of the
transactions contemplated herein will not conflict with or
constitute a breach of, or default under, or result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company, the MHC or the Bank
pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the
Company, the MHC or the Bank is a party or by which any of
them may be bound, or to which any of the property or assets
of the Company, the MHC or the Bank is subject (other than the
establishment of a liquidation account), and such action will
not result in any violation of the provisions of the articles
of incorporation, bylaws or charter, as applicable, of the
Company, the MHC or the Bank, or any applicable federal or
23
<PAGE>
Delaware law, act, regulation (except that no opinion need be
rendered with respect to the securities or blue sky laws of
various jurisdictions or the rules and regulations of the NASD
and/or the Nasdaq National Market) or order or court order,
writ, injunction or decree.
(xix) The Company's articles of
incorporation and bylaws comply in all material respects with
the General Corporation Law ("GCL") of the State of Delaware.
The Bank's and the MHC's charter and bylaws comply in all
material respects with the HOLA and the rules and regulations
of the OTS.
(xx) To such counsel's Actual Knowledge,
neither the Company, the MHC nor the Bank is in violation of
any directive from the OTS or the FDIC to make any material
change in the method of conducting its respective business.
(xxi) The information in the Prospectus
under the captions "Regulation," "The Conversion and
Reorganization," "Restrictions on Acquisition of the Company"
and "Description of Capital Stock of the Company," to the
extent that such information constitutes matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is correct
in all material respects. The description of the Conversion
process under the caption "The Conversion and Reorganization"
in the Prospectus has been reviewed by such counsel and is in
all material respects correct. The discussion of statutes or
regulations described or referred to in the Prospectus are
accurate summaries and fairly present the information required
to be shown. The information under the caption "The Conversion
and Reorganization-Tax Aspects" has been reviewed by such
counsel and constitutes a correct summary of the opinions
rendered by Malizia, Spidi, Sloane & Fisch, P.C. and Baird,
Kurtz to the Company, the MHC and the Bank with respect to
such matters.
In giving such opinion, such counsel may rely as to
all matters of fact on certificates of officers or directors
of the Company, the MHC and the Bank and certificates of
public officials. Such counsel's opinion shall be limited to
matters governed by federal laws and by the State of Delaware
General Corporation Law. With respect to matters involving the
application of Delaware law, such counsel may rely, to the
extent it deems proper and as specified in its opinion, upon
the opinion of local counsel (providing that such counsel
states that it believes the Agent is justified in relying upon
such specified opinion or opinions). The opinion of Malizia,
Spidi, Sloane & Fisch, P.C. shall be governed by the Legal
Opinion Accord ("Accord") of the American Bar Association
Section of Business Law (1991). The term "Actual Knowledge" as
used herein shall have the meaning set forth in the Accord.
For purposes of such opinion, no proceedings shall be deemed
to be pending, no order or stop order shall be deemed to be
issued, and no action shall be deemed to be instituted unless,
in each case, a director or executive officer of the Company,
the MHC or the Bank shall have received a copy of such
24
<PAGE>
proceedings, order, stop order or action. In addition, such
opinion may be limited to present statutes, regulations and
judicial interpretations and to facts as they presently exist;
in rendering such opinion, such counsel need assume no
obligation to revise or supplement it should the present laws
be changed by legislative or regulatory action, judicial
decision or otherwise; and such counsel need express no view,
opinion or belief with respect to whether any proposed or
pending legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any regulatory
agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the Conversion or
any aspect thereof. Such counsel may assume that any agreement
is the valid and binding obligation of any parties to such
agreement other than the Company, the MHC or the Bank.
In addition, such counsel shall provide a letter
stating that during the preparation of the Conversion
Application, the Registration Statement and the Prospectus,
they participated in conferences with certain officers of, the
independent public and internal accountants for, and other
representatives of the Company, the MHC and the Bank, at which
conferences the contents of the Conversion Application, the
Registration Statement and the Prospectus and related matters
were discussed and, while such counsel has not confirmed the
accuracy or completeness of or otherwise verified the
information contained in the Conversion Application, the
Registration Statement or the Prospectus, and does not assume
any responsibility for such information, based upon such
conferences and a review of documents deemed relevant for the
purpose of rendering their opinion (relying as to materiality
as to factual matters on certificates of officers and other
factual representations by the Company, the MHC and the Bank),
nothing has come to their attention that would lead them to
believe that the Conversion Application, the Registration
Statement, the Prospectus, or any amendment or supplement
thereto (other than the financial statements, the notes
thereto, and other tabular, financial, statistical and
appraisal data included therein as to which no opinion need be
rendered) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(2) The favorable opinion, dated as of the Closing
Date and addressed to the Agent and for its benefit, of the
Bank's local counsel, in form and substance to the effect
that, to the best of such counsel's knowledge, (i) the
Company, the MHC and the Bank have good and marketable title
to all properties and assets which are material to the
business of the Company, the MHC and the Bank and to those
properties and assets described in the Registration Statement
and Prospectus, as owned by them, free and clear of all liens,
charges, encumbrances or restrictions, except such as are
described in the Registration Statement and Prospectus, or are
not material in relation to the business of the Company, the
MHC and the Bank considered as one enterprise; (ii) all of the
leases and subleases material to the business of the Company,
the MHC and the Bank under which the
25
<PAGE>
Company, the MHC and the Bank hold properties, as described in
the Registration Statement and Prospectus, are in full force
and effect; (iii) the Bank is duly qualified as a foreign
corporation to transact business and is in good standing in
each jurisdiction in which its ownership of property or
leasing of property or the conduct of its business requires
such qualification, unless the failure to be so qualified in
one or more of such jurisdictions would not have a material
adverse effect on the condition, financial or otherwise, or
the business, operations or income of the Bank; and (iv) the
MHC is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which
its ownership of property or leasing of property or the
conduct of its business requires such qualification, unless
the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on the
condition, financial or otherwise, or the business, operations
or income of the MHC.
(3) The favorable opinion, dated as of the Closing
Date, of Luse Lehman Gorman Pomerenk & Schick, P.C., the
Agent's counsel, with respect to such matters as the Agent may
reasonably require. Such opinion may rely upon the opinions of
counsel to the Company, the MHC and the Bank, and as to
matters of fact, upon certificates of officers and directors
of the Company, the MHC and the Bank delivered pursuant hereto
or as such counsel shall reasonably request.
(d) At the Closing Date, the Agents shall receive a
certificate of the Chief Executive Officer and the Chief Financial
Officer of the Company and a certificate of the Chief Executive Officer
and the Chief Financial Officer of the MHC and the Bank, both dated as
of such Closing Date, to the effect that: (i) they have reviewed the
Prospectus and, in their opinion, at the time the Prospectus became
authorized for final use, the Prospectus did not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; (ii) since the date the
Prospectus became authorized for final use, no material adverse change
in the condition, financial or otherwise, or in the earnings, capital,
properties or business of the Company, the MHC and the Bank has
occurred and, to their knowledge, no other event has occurred, which
should have been set forth in an amendment or supplement to the
Prospectus which has not been so set forth, and the conditions set
forth in this Section 7 have been satisfied; (iii) since the respective
dates as of which information is given in the Registration Statement
and Prospectus, there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, capital or
properties of the Company, the MHC or the Bank, independently, or of
the Company, the MHC and the Bank considered as one enterprise, whether
or not arising in the ordinary course of business; (iv) the
representations and warranties in Section 4 are true and correct with
the same force and effect although expressly made at and as of the
Closing Date; (v) the Company, the MHC and the Bank have complied in
all material respects with all agreements and satisfied all conditions
on their part to be performed or satisfied at or prior to the Closing
Date and will comply in all material respects with all obligations to
be satisfied by them after Conversion; (vi) no stop order suspending
the
26
<PAGE>
effectiveness of the Registration Statement has been initiated or, to
the best knowledge of the Company, the MHC or the Bank, threatened by
the Commission or any state authority; (vii) no order suspending the
Offerings, the Conversion, the acquisition of all of the shares of the
Bank by the Company or the effectiveness of the Prospectus has been
issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, the MHC or the Bank, threatened by the OTS,
the Commission or any state authority; and (viii) to the best knowledge
or the Company or the Bank, no person has sought to obtain review of
the final action of the OTS approving the Plan.
(e) Prior to and at the Closing Date: (i) in the reasonable
opinion of the Agent, there shall have been no material adverse change
in the condition, financial or otherwise (other than as a result of a
change in law or regulation and affecting the savings association
industry as a whole), or in the earnings or business of the Company,
the MHC or the Bank independently, or of the Company, the MHC and the
Bank considered as one enterprise, from that as of the latest dates as
of which such condition is set forth in the Prospectus other than
transactions referred to or contemplated therein; (iii) the Company,
the MHC or the Bank shall not have received from the OTS or the FDIC
any direction (oral or written) to make any material change in the
method of conducting their business with which it has not complied
(which direction, if any, shall have been disclosed to the Agents) or
which materially and adversely would affect the business, operations or
financial condition or income of the Company, the MHC and the Bank
considered as one enterprise; (iv) the Company, the MHC and the Bank
shall not have been in default (nor shall any event have occurred
which, with notice or lapse of time or both, would constitute a
default) under any provision of any agreement or instrument relating to
any outstanding indebtedness; (v) no action, suit or proceedings, at
law or in equity or before or by any federal or state commission, board
or other administrative agency, shall be pending or, to the knowledge
of the Company, the MHC or the Bank, threatened against the Company,
the MHC or the Bank or affecting any of their properties wherein an
unfavorable decision, ruling or finding would materially and adversely
affect the business operations, financial condition or income of the
Company, the MHC and the Bank considered as one enterprise; and (vi)
the Shares have been qualified or registered for offering and sale or
exempted therefrom under the securities or blue sky laws of the
jurisdictions as the Agents shall have requested and as agreed to by
the Company and the Bank.
(f) Concurrently with the execution of this Agreement, the
Agents shall receive a letter from Baird, Kurtz dated as of the date of
the Prospectus and addressed to the Agent: (i) confirming that Baird,
Kurtz is a firm of independent public accountants within the meaning of
Rule 101 of the Code of Professional Ethics of the American Institute
of Certified Public Accountants and applicable regulations of the OTS
and FDIC and stating in effect that in Baird, Kurtz's opinion the
financial statements of the Bank as of June 30, 1997 and 1996 and for
each of the three years in the period ended June 30, 1997, as are
included in the Prospectus and covered by their opinion included
therein, comply as to form in all material respects with the applicable
accounting requirements and related published rules and regulations of
the OTS, the FDIC and the 1933 Act; (ii) a statement
27
<PAGE>
from Baird, Kurtz in effect that, on the basis of certain agreed upon
procedures (but not an audit in accordance with generally accepted
auditing standards) consisting of a reading of the latest available
unaudited interim consolidated financial statements of the Bank
prepared by the Bank, a reading of the minutes of the meetings of the
Board of Directors and members of the Bank and consultations with
officers of the Bank responsible for financial and accounting matters,
nothing came to their attention which caused them to believe that: (A)
the unaudited financial statements included in the Prospectus, are not
in conformity with the 1933 Act, applicable accounting requirements of
the OTS, the FDIC and generally accepted accounting principles applied
on a basis substantially consistent with that of the audited financial
statements included in the Prospectus; or (B) during the period from
the date of the latest unaudited consolidated financial statements
included in the Prospectus to a specified date not more than three
business days prior to the date of the Prospectus, except as has been
described in the Prospectus, there was any material increase in
borrowings, other than normal deposit fluctuations, by the Bank; or (C)
there was any decrease in consolidated net assets of the Bank at the
date of such letter as compared with amounts shown in the latest
unaudited consolidated statement of condition included in the
Prospectus; and (iii) a statement from Baird, Kurtz that, in addition
to the audit referred to in their opinion included in the Prospectus
and the performance of the procedures referred to in clause (ii) of
this subsection (f), they have compared with the general accounting
records of the Bank, which are subject to the internal controls of the
Bank, the accounting system and other data prepared by the Bank,
directly from such accounting records, to the extent specified in such
letter, such amounts and/or percentages set forth in the Prospectus as
the Agent may reasonably request; and they have reported on the results
of such comparisons.
(g) At the Closing Date, the Agent shall receive a letter from
Baird, Kurtz dated the Closing Date, addressed to the Agent, confirming
the statements made by them in the letter delivered by them pursuant to
subsection (f) of this Section 7, the "specified date" referred to in
clause (ii) of subsection (f) thereof to be a date specified in such
letter, which shall not be more than three business days prior to the
Closing Date.
(h) At the Closing Date, the Agent shall receive a letter from
RP Financial, LC, dated the date thereof and addressed to counsel for
the Agent (i) confirming that said firm is independent of the Company,
the MHC and the Bank and is experienced and expert in the area of
corporate appraisals within the meaning of Title 12 of the Code of
Federal Regulations, Part 303, (ii) stating in effect that the
Appraisal prepared by such firm complies in all material respects with
the applicable requirements of Title 12 of the Code of Federal
Regulations, and (iii) further stating that their opinion of the
aggregate pro forma market value of the Company, the MHC and the Bank
expressed in their Appraisal dated as of _______, 1997, and most
recently updated, remains in effect.
(i) The Company, the MHC and the Bank shall not have sustained
since the date of the latest audited financial statements included in
the Prospectus any material loss or interference with their businesses
from fire, explosion, flood or other calamity, whether
28
<PAGE>
or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Registration Statement and Prospectus.
(j) At or prior to the Closing Date, the Agent shall receive:
(i) a copy of the letter from the OTS approving the Conversion
Application and authorizing the use of the Prospectus; (ii) a copy of
the order from the Commission declaring the Registration Statement
effective; (iii) certificates from the OTS evidencing the existence of
the Bank and the MHC; (iv) certificates of good standing from the State
of Delaware evidencing the good standing of the Company; (v) a
certificate from the FDIC evidencing the Bank's insurance of accounts,
(vi) a certificate of the FHLB-Des Moines evidencing the Bank's
membership thereof; and (vii) a copy of the letter from the OTS
approving the Company's Holding Company Application.
(k) As soon as available after the Closing Date, the Agent
shall receive, upon request, a copy of the Company's Delaware
Certificate of Incorporation.
(l) Subsequent to the date hereof, there shall not have
occurred any of the following: (i) a suspension or limitation in
trading in securities generally on the New York Stock Exchange or in
the over-the-counter market, or quotations halted generally on the
Nasdaq National Market, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been
required by either of such exchanges or the NASD or by order of the
Commission or any other governmental authority; (ii) a general
moratorium on the operations of commercial banks or federal savings
associations or a general moratorium on the withdrawal of deposits from
commercial banks or federal savings associations declared by federal or
state authorities; (iii) the engagement by the United States in
hostilities which have resulted in the declaration, on or after the
date hereof, of a national emergency or war; or (iv) a material decline
in the price of equity or debt securities if the effect of such a
declaration or decline, in the Agent's reasonable judgment, makes it
impracticable or inadvisable to proceed with the Offerings or the
delivery of the shares on the terms and in the manner contemplated in
the Registration Statement and Prospectus.
Section 8. Indemnification.
(a) The Company, the MHC and the Bank jointly and severally
agree to indemnify and hold harmless the Agent, its officers,
directors, agents, servants and employees and each person, if any, who
controls the Agent within the meaning of Section 15 of the 1933 Act or
Section 20(a) of the 1934 Act , against any and all loss, liability,
claim, damage or expense whatsoever (including but not limited to
settlement expenses), joint or several, that the Agent or any of them
may suffer or to which the Agent and any such persons may become
subject under all applicable federal or state laws or otherwise, and to
promptly reimburse the Agent and any such persons upon written demand
for any expense (including fees and disbursements of counsel) incurred
by the Agent or any of
29
<PAGE>
them in connection with investigating, preparing or defending any
actions, proceedings or claims (whether commenced or threatened) to the
extent such losses, claims, damages, liabilities or actions: (i) arise
out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement
(or any amendment or supplement thereto), preliminary or final
Prospectus (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto), the Holding
Company Application or any blue sky application or other instrument or
document executed by the Company, the MHC or the Bank based upon
written information supplied by the Company, the MHC or the Bank filed
in any state or jurisdiction to register or qualify any or all of the
Shares or to claim an exemption therefrom, or provided to any state or
jurisdiction to exempt the Company as a broker-dealer or its officers,
directors and employees as broker-dealers or agents, under the
securities laws thereof (collectively, the "Blue Sky Application"), or
any application or other document, advertisement, oral statement or
communication ("Sales Information") prepared, made or executed by or on
behalf of the Company, the MHC or the Bank with their consent or based
upon written or oral information furnished by or on behalf of the
Company, the MHC or the Bank, whether or not filed in any jurisdiction,
in order to qualify or register the Shares or to claim an exemption
therefrom under the securities laws thereof; (ii) arise out of or based
upon the omission or alleged omission to state in any of the foregoing
documents or information, a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii)
arise from any theory of liability whatsoever relating to or arising
from or based upon the Registration Statement (or any amendment or
supplement thereto), preliminary or final Prospectus (or any amendment
or supplement thereto), the Conversion Application (or any amendment or
supplement thereto), any Blue Sky Application or Sales Information or
other documentation distributed in connection with the Conversion;
provided, however, that no indemnification is required under this
paragraph (a) to the extent such losses, claims, damages, liabilities
or actions arise out of or are based upon any untrue material statement
or alleged untrue material statements in, or material omission or
alleged material omission from, the Registration Statement (or any
amendment or supplement thereto), preliminary or final Prospectus (or
any amendment or supplement thereto), the Conversion Application, any
Blue Sky Application or Sales Information made in reliance upon and in
conformity with information furnished in writing to the Company or the
Bank by the Agent regarding the Agent and provided further that such
indemnification shall be to the extent permitted by the OTS and the
FDIC.
(b) The Agent agrees to indemnify and hold harmless the
Company, the MHC and the Bank, their directors and officers and each
person, if any, who controls the Company, the MHC or the Bank within
the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934
Act against any and all loss, liability, claim, damage or expense
whatsoever (including but not limited to settlement expenses), joint or
several, which they, or any of them, may suffer or to which they, or
any of them may become subject under all applicable federal and state
laws or otherwise, and to promptly reimburse the Company, the MHC, the
Bank, and any such persons upon written demand for any expenses
30
<PAGE>
(including reasonable fees and disbursements of counsel) incurred by
them, or any of them, in connection with investigating, preparing or
defending any actions, proceedings or claims (whether commenced or
threatened) to the extent such losses, claims, damages, liabilities or
actions arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto) or the preliminary
or final Prospectus (or any amendment or supplement thereto), or are
based upon the omission or alleged omission to state in any of the
foregoing documents a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Agent's obligations under this Section 8(b) shall
exist only if and only to the extent (i) that such untrue statement or
alleged untrue statement was made in, or such material fact or alleged
material fact was omitted from, the Registration Statement (or any
amendment or supplement thereto), the preliminary or final Prospectus
(or any amendment or supplement thereto) or the Conversion Application
(or any amendment or supplement thereto), any Blue Sky Application or
Sales Information in reliance upon and in conformity with information
furnished in writing to the Company or the Bank by the Agent regarding
the Agent. In no case shall the Agent be liable or responsible for any
amount in excess of the fees received by the Agent pursuant to Section
2 of this Agreement.
(c) Each indemnified party shall given prompt written notice
to each indemnifying party of any action, proceeding, claim (whether
commenced or threatened), or suit instituted against it in respect of
which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve it from any liability which it may
have on account of this Section 8 or otherwise. An indemnifying party
may participate at its own expense in the defense of such action. In
addition, if it so elects within a reasonable time after receipt of
such notice, an indemnifying party, jointly with any other indemnifying
parties receiving such notice, may assume defense of such action with
counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably
object to such assumption on the ground that there may be legal
defenses available to them that are different from or in addition to
those available to such indemnifying party. If an indemnifying party
assumes the defense of such action, the indemnifying parties shall not
be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action, proceeding
or claim, other than reasonable costs of investigation. In no event
shall the indemnifying parties be liable for the fees and expenses of
more than one separate firm of attorneys (and any special counsel that
said firm may retain) for each indemnified party in connection with any
one action, proceeding or claim or separate but similar or related
actions, proceedings or claims in the same jurisdiction arising out of
the same general allegations or circumstances.
(d) The agreements contained in this Section 8 and in Section
9 hereof and the representations and warranties of the Company, the MHC
and the Bank set forth in this Agreement shall remain operative and in
full force and effect regardless of: (i) any
31
<PAGE>
investigation made by or on behalf of the Agent or its officers,
directors or controlling persons, agents or employees or by or on
behalf of the Company, the MHC or the Bank or any officers, directors
or controlling persons, agents or employees of the Company, the MHC or
the Bank; (ii) deliver of and payment hereunder for the Shares; or
(iii) any termination of this Agreement.
Section 9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or the Agent, the Company,
the Bank and the Agent shall contribute to the aggregate losses, claims, damages
and liabilities (including any investigation, legal and other expenses incurred
in connection with, and any amount paid in settlement of, any action, suit or
proceeding of any claims asserted, but after deducting any contribution received
by the Company, the Bank or the Agent from persons other than the other party
thereto, who may also be liable for contribution) in such proportion so that the
Agent are responsible for that portion represented by the percentage that the
fees paid to the Agent pursuant to Section 2 of this Agreement (not including
expenses) bears to the gross proceeds received by the Company from the sale of
the Shares in the Offerings and the Company and the Bank shall be responsible
for the balance. If, however, the allocation provided above is not permitted by
applicable law or if the indemnified party failed to give the notice required
under Section 8 above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative fault of the Company and the Bank
on the one hand and the Agent on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions, proceedings or claims in respect thereto), but also the relative
benefits received by the Company and the Bank on the one hand and the Agent on
the other from the Offerings (before deducting expenses). The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company and/or
the Bank on the one hand or the Agent on the other and the parties' relative
intent, good faith, knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company, the Bank and the Agent agree
that it would not be just and equitable if contribution pursuant to this Section
9 were determined by pro-rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to above
in this Section 9. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions, proceedings or
claims in respect thereof) referred to above in this Section 9 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action, proceeding
or claim. It is expressly agreed that the Agent shall not be liable for any
loss, liability, claim, damage or expense or be required to contribute any
amount which in the aggregate exceeds the amount paid (excluding reimbursable
expenses) to the Agent under this Agreement. It is understood that the above
stated limitation on the Agent's liability is essential to the Agent and that
the Agent would not have entered into this Agreement if such limitation had not
been agreed to by the parties to this Agreement. No person found guilty of any
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to
32
<PAGE>
contribution from any person who was not found guilty of such fraudulent
misrepresentation. The obligations of the Company and the Bank under this
Section 9 and under Section 8 shall be in addition to any liability which the
Company and the Bank may otherwise have. For purposes of this Section 9, each of
the Agent's, the Company's or the Bank's officers and directors and each person,
if any, who controls the Agent or the Company or the Bank within the meaning of
the 1933 Act and the 1934 Act shall have the same rights to contribution as the
Agent, the Company or the Bank. Any party entitled to contribution, promptly
after receipt of notice of commencement of any action, suit, claim or proceeding
against such party in respect of which a claim for contribution may be made
against another party under this Section 9, will notify such party from whom
contribution may be sought, but the omission to so notify such party shall not
relieve the party from whom contribution may be sought from any other obligation
it may have hereunder or otherwise than under this Section 9.
Section 10. Survival of Agreements, Representations and Indemnities.
The respective indemnities of the Company, the Bank and the Agent and the
representations and warranties and other statements of the Company and the Bank
set forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of the Agent, the Company, the Bank or any
controlling person referred to in Section 8 hereof, and shall survive the
issuance of the Shares, and any legal representative, successor or assign of the
Agent, the Company, the Bank, and any such controlling person shall be entitled
to the benefit of the respective agreements, indemnities, warranties and
representations.
Section 11. Termination. The Agent may terminate its obligations under
this Agreement by giving the notice indicated below in this Section 11 at any
time after this Agreement becomes effective as follows:
(a) In the event the Company fails to sell all of the Shares
by ___________, 1997, and in accordance with the provisions of the Plan
or as required by the Conversion Regulations, and applicable law, this
Agreement shall terminate upon refund by the Bank to each person who
has subscribed for or ordered any of the Shares the full amount which
it may have received from such person, together with interest as
provided in the Prospectus, and no party to this Agreement shall have
any obligation to the other hereunder, except for payment by the
Company and/or the Bank as set forth in Sections 2(a) and (d), 6, 8 and
9 hereof.
(b) If any of the conditions specified in Section 7 shall not
have been fulfilled when and as required by this Agreement unless
waived in writing, or by the Closing Date, this Agreement and all of
the Agent's obligations hereunder may be canceled by the Agent by
notifying the Company, the MHC and the Bank of such cancellation in
writing or by telegram at any time at or prior to the Closing Date, and
any such cancellation shall be without liability of any party to any
other party except as otherwise provided in Sections 2, 6, 8 and 9
hereof.
33
<PAGE>
(c) If the Agent elects to terminate this Agreement as
provided in this Section, the Company, the MHC and the Bank shall be
notified promptly by the Agent by telephone or telegram, confirmed by
letter.
The Company, the MHC and the Bank may terminate this Agreement in the
event the Agent is in material breach of the representations and warranties or
covenants contained in Section 5 and such breach has not been cured after the
Company and the Bank have provided the Agent with notice of such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
Section 12. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to the
Agent shall be mailed, delivered or telegraphed and confirmed to Friedman,
Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia
22209-1710, Attention: Richard A. Buckner (with a copy to Luse Lehman Gorman
Pomerenk & Schick, P.C., Attention: Robert B. Pomerenk, Esq.) and, if sent to
the Company, the MHC and the Bank, shall be mailed, delivered or telegraphed and
confirmed to the Company, the MHC and the Bank at 1341 West Battlefield,
Springfield, Missouri 65807, Attention: James E. Haseltine, President and Chief
Executive Officer (with a copy to Malizia, Spidi, Sloane & Fisch, P.C.,
Attention: Charles Sloane, Esq.)
Section 13. Parties. The Company, the MHC and the Bank shall be
entitled to act and rely on any request, notice, consent, waiver or agreement
purportedly given on behalf of the Agent, when the same shall have been given by
the undersigned. The Agent shall be entitled to act and rely on any request,
notice, consent, waiver or agreement purportedly given on behalf of the Company,
the MHC or the Bank, when the same shall have been given by the undersigned or
any other officer of the Company, the MHC or the Bank. This Agreement shall
inure solely to the benefit of, and shall be binding upon, the Agent, the
Company, the MHC, the Bank, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained. It is understood and
agreed that this Agreement is the exclusive agreement among the parties hereto,
and supersedes any prior agreement among the parties and may not be varied
except in writing signed by all the parties.
Section 14. Closing. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by the Agent
and the Company, the MHC and the Bank. At the closing, the Company, the MHC and
the Bank shall deliver to the Agent in next day funds the commissions, fees and
expenses due and owing to the Agent as set forth in Sections 2 and 6 hereof and
the opinions and certificates required hereby and other documents deemed
reasonably necessary by the Agent shall be executed and delivered to effect the
sale of the Shares as contemplated hereby and pursuant to the terms of the
Prospectus.
Section 15. Partial Invalidity. In the event that any term, provision
or covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in
34
<PAGE>
whole or in part, the remainder hereof and the application of said term,
provision or covenant to any other circumstances or situation shall not be
affected thereby, and each term, provision or covenant herein shall be valid and
enforceable to the full extent permitted by law.
Section 16. Construction. This Agreement shall be construed in
accordance with the laws of the State of Delaware.
Section 17. Counterparts. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
35
<PAGE>
EXHIBIT B
GUARANTY FEDERAL BANCSHARES, INC.
Up to 3,795,000 Shares (Anticipated Maximum)
(Par Value $.10 Per Share)
Selected Dealers' Agreement
---------------------------
______________, 1997
Gentlemen:
We have agreed to assist Guaranty Federal Savings Bank (the "Bank"), a
federally chartered stock savings bank, and the Bank's federal mutual holding
company, Guaranty Federal Bancshares, M.H.C. (the "MHC"), in connection with the
offer and sale of up to 3,795,000 shares of the conversion common stock, par
value $.10 per share (the "Common Stock") of Guaranty Federal Bancshares, Inc.
(the "Company"), a Delaware corporation, to be issued in connection with the
conversion of the MHC. The total number of shares of Common Stock to be offered
may be decreased to a minimum of 25 shares. The price per share has been fixed
at $10.00. The Common Stock, the number of shares to be issued, and certain of
the terms on which they are being offered, are more fully described in the
enclosed Prospectus dated _________, 1997 (the "Prospectus"). In connection with
the Conversion, the Company, on a best-efforts basis is offering for sale
between 2,805,000 and 3,795,000 shares (the "Shares") of the Common Stock, in a
Subscription Offering, as defined, as contemplated by Office of Thrift
Supervision (the "OTS") Regulation. Any Shares not sold in the Subscription
Offering will be offered to the general public in a community offering (the
"Community Offering") giving preference to residents of the Bank's Local
Community, as defined in the Prospectus.
The Subscription and Community Offerings are being conducted under a
Plan of Conversion (the "Plan") adopted by the Bank and the MHC pursuant to
which the MHC intends to convert from a federal mutual holding company to a
Delaware stock corporation (the "Company") (the "Conversion"). As part of the
Conversion, the Bank will sell all its to-be-issued common stock to the Company
which, in turn, will sell the Common Stock to the public as provided for in the
Plan. The Subscription and Community Offerings are further being conducted in
accordance with the regulations of the OTS subject to the restrictions contained
in the Plan.
The Common Stock is also being offered in accordance with the Plan by
broker/dealers licensed by the National Association of Securities Dealers, Inc.
("NASD"), which have been approved by the Bank ("Approved Brokers").
We are offering the selected dealers (of which you are one) the
opportunity to participate in the solicitation of offers to buy the Common Stock
and we will pay you a fee in the amount of four percent (4%) of the dollar
amount of the Common Stock sold on behalf of the Company by
<PAGE>
you, as evidenced by the authorized designation of your firm on the order form
or forms for payment therefor to the special account established by the Bank for
the purpose of holding such funds. It is understood, of course, that payment of
your fee will be made only out of compensation received by us for the Common
Stock sold on behalf of the Company by you, as evidenced in accordance with the
preceding sentence. As soon as practicable after the closing date of the
offering, we will remit to you, only out of our compensation as provided above,
the fees to which you are entitled hereunder.
Each order form for the purchase of Common Stock must set forth the
identity and address of each person to whom the certificates for such Common
Stock should be issued and delivered. Such order form also must clearly identify
your firm in order for you to receive compensation. You shall instruct any
subscriber who elects to send his order form to you to make any accompanying
check payable to "Guaranty Federal Bancshares, Inc."
This offer is made subject to the terms and conditions herein set forth
and is made only to selected dealers who are members in good standing of the
NASD who are to comply with all applicable rules of the NASD, including, without
limitation, the NASD's Interpretation With Respect to Free-Riding and
Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice.
Orders for Common Stock will be subject to confirmation and we, acting
on behalf of the Company, the MHC and the Bank, reserve the right in our
unfettered discretion to reject any order in whole or in part, to accept or
reject orders in the order of their receipt or otherwise, and to allot. Neither
you nor any other person is authorized by the Company, the MHC and the Bank, or
by us to give any information or make any representations other than those
contained in the Prospectus in connection with the sale of any of the Common
Stock. No selected dealer is authorized to act as agent for us when soliciting
offers to buy the Common Stock from the public or otherwise. No selected dealer
shall engage in any stabilizing (as defined in Rule 10b-7 promulgated under the
Securities Exchange Act of 1934) with respect to the Company's Common Stock
during the offering.
We and each selected dealer assisting in selling Common Stock pursuant
hereto agree to comply with the applicable requirements of the Securities
Exchange Act of 1934 and applicable state rules and regulations. Each
customer-carrying selected dealer that is not a $250,000 net capital reporting
broker/dealer agrees that it will not use a sweep arrangement and that it will
transmit all customer checks by noon of the next business day after receipt
thereof. In addition, we and each selected dealer confirm that the Securities
and Exchange Commission interprets Rule 15c2-8 promulgated under the Securities
Exchange Act of 1934 as requiring that a Prospectus be supplied to each person
who is expected to receive a confirmation of sale 48 hours prior to delivery of
such person's order form.
We and each selected dealer further agree that to the extent that your
customers desire to pay for shares with funds held by or to be deposited with
us, in accordance with the interpretations of the Securities and Exchange
Commission of Rule 15c2-4 promulgated under the Securities and
B-2
<PAGE>
Exchange Act of 1934, either (a) upon receipt of an executed order form or
direction to execute an order form on behalf of a customer to forward the
offering price of the Common Stock ordered on or before twelve noon Delaware
time of the next business day following receipt or execution of an order form by
us to the Company for deposit in a segregated account or (b) to solicit
indications of interest in which event (i) we will subsequently contact any
customer indicating interest to confirm the interest and give instructions to
execute and return an order form or to receive authorization to execute the
order form on the customer's behalf, (ii) we will mail acknowledgments of
receipt of orders to each customer confirming interest on the business day
following such confirmation, (iii) we will debit accounts of such customers on
the third business day (the "Debit Date") following receipt of the confirmation
referred to in (i), and (iv) we will forward complete order forms together with
such funds to the Company on or before twelve noon on the next business day and
each selected dealer acknowledges that if the procedure in (b) is adopted, our
customers' funds are not required to be in their accounts until the Debit Date.
Unless earlier terminated by us, this Agreement shall terminate upon
the closing date of the Conversion. We may terminate this Agreement or any
provisions hereof any time by written or telegraphic notice to you. Of course,
our obligations hereunder are subject to the successful completion of the
Conversion.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of shares of
Common Stock sold on behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem
advisable in respect of all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Common Stock has been qualified for sale under, or are exempt from
the requirements of, the respective blue sky laws of such states, but we assume
no responsibility or obligation as to your rights to sell Common Stock in any
state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned, or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the
State of Delaware.
B-3
<PAGE>
Please confirm your agreement hereto by signing and returning the
confirmations accompanying this letter at once to us at Friedman, Billings,
Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington,
Virginia 22209. The enclosed duplicate copy will evidence the agreement between
us.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
---------------------------------
Richard A. Buckner
Senior Vice President
CONFIRMED AS OF:
, 1997
- ---------------------------
- --------------------------------------
(Name of Dealer)
By:
---------------------------------
Its:
---------------------------------
B-4
EXHIBIT 2
<PAGE>
PLAN OF CONVERSION
of
GUARANTY FEDERAL BANCSHARES, M.H.C.
and
AGREEMENT AND PLAN OF REORGANIZATION
between
GUARANTY FEDERAL BANCSHARES, M.H.C.
and
GUARANTY FEDERAL SAVINGS BANK
as amended
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section
Number Page
- ------ ----
<S> <C> <C> <C>
1. Introduction............................................................................ 1
2. Definitions............................................................................. 3
3. General Procedure for Conversion and Reorganization..................................... 9
4. Total Number of Shares and Purchase Price of
Conversion Stock...................................................................... 11
5. Subscription Rights of Eligible Account Holders (First Priority)........................ 12
6. Subscription Rights of the Tax-Qualified Employee Stock
Benefit Plans (Second Priority)....................................................... 13
7. Subscription Rights of Supplemental Eligible Account Holders
(Third Priority)...................................................................... 14
8. Subscription Rights of Other Members (Fourth Priority).................................. 15
9. Public Stockholders' Offering .......................................................... 16
10. Community Offering, Syndicated Community Offering
and Other Offerings................................................................... 16
11. Limitations on Subscriptions and Purchases of Conversion Stock........................... 18
12. Timing of Subscription Offering; Manner of Exercising
Subscription Rights and Order Forms................................................... 19
13. Payment for Conversion Stock............................................................ 21
14. Account Holders in Nonqualified States or Foreign Countries............................. 22
15. Voting Rights of Stockholders........................................................... 23
16. Liquidation Account..................................................................... 23
17. Transfer of Deposit Accounts............................................................ 24
18. Requirements Following Conversion and Reorganization for
Registration, Market Making and Stock Exchange Listing................................ 25
19. Directors and Officers of the Bank...................................................... 25
20. Requirements for Stock Purchases by Directors and Officers
Following the Conversion and Reorganization............................................ 25
21. Restrictions on Transfer of Stock....................................................... 25
22. Restrictions on Acquisition of Stock of the Holding Company............................. 26
23. Tax Rulings or Opinions................................................................. 27
24. Stock Compensation Plans................................................................ 27
25. Dividend and Repurchase Restrictions on Stock........................................... 27
26. Payment of Fees to Brokers.............................................................. 28
27. Effective Date.......................................................................... 28
28. Amendment or Termination of the Plan.................................................... 28
29. Interpretation of the Plan.............................................................. 29
Appendix A - Plan of Merger between the Mutual Holding Company and the Bank
Appendix B - Plan of Reorganization between the Bank, Interim B and the Holding
Company
</TABLE>
i
<PAGE>
1. INTRODUCTION
For purposes of this section, all capitalized terms have the meaning
ascribed to them in Section 2.
In April 1995, Guaranty Federal Savings Bank, a federally chartered mutual
savings institution reorganized into the mutual holding company form of
organization and consummated a sale of stock to its members. To accomplish this
transaction, the Bank organized a federally chartered, stock savings bank as a
wholly owned subsidiary. The mutual Bank then transferred substantially all of
its assets and liabilities to the stock Bank in exchange for shares of Bank
Common Stock, and reorganized itself into a federally chartered mutual holding
company known as Guaranty Federal Bancshares, M.H.C. and sold shares of Bank
Common Stock to parties other than the MHC. As of the date hereof, the Mutual
Holding Company and the Public Stockholders own an aggregate of 68.9% and 31.1%
of the outstanding Bank Common Stock, respectively.
The Boards of Directors of the Mutual Holding Company and the Bank believe
that a conversion of the Mutual Holding Company to stock form and reorganization
of the Bank pursuant to this Plan of Conversion is in the best interests of the
Mutual Holding Company and the Bank, as well as the best interests of their
respective Members and Stockholders. The Boards of Directors have determined
that this Plan of Conversion equitably provides for the interests of Members
through the granting of subscription rights and the establishment of a
liquidation account. The Conversion and Reorganization will result in the Bank
being wholly owned by a stock holding company, which is a more common structure
and form of ownership than a mutual holding company. In addition, the Conversion
and Reorganization will result in the raising of additional capital for the Bank
and the Holding Company and should result in a more active and liquid market for
the Holding Company Common Stock than currently exists for the Bank Common
Stock, although there can be no assurances that this will be the case. Finally,
the Conversion and Reorganization has been structured to reunite the accumulated
earnings and profits tax attribute retained by the Mutual Holding Company with
the retained earnings of the Bank through a tax-free reorganization. This will
increase the Bank's ability to pay dividends in the future.
If the Bank had undertaken a standard conversion involving the formation of
a stock holding company in 1995, applicable OTS regulations would have required
a greater amount of Bank Common Stock to be sold than was sold in the Bank's
initial public offering undertaken with the mutual holding company
reorganization. In addition, if a standard conversion had been conducted in
1995, management of the Bank believed that it would have been difficult to
profitably and prudently invest the larger amount of capital that would have
been raised, when compared to the amount of net proceeds raised in the Bank's
initial public offering. A standard conversion in 1995 also would have
immediately eliminated all aspects of the mutual form of organization and
possibly could have subjected the Bank to interference from stockholders and to
an unwanted acquisition or other change in control of the Bank.
1
<PAGE>
Subsequent to the decision of the Boards of Directors to form a the Mutual
Holding Company, there have been changes in the policies of the OTS relating to
mutual holding companies. In addition, market conditions for the stocks of
savings institutions and their holding companies have improved. The Bank has
also gained experience in being a company required to meet the filing
requirements of the Securities and Exchange Act of 1934 and in conducting
stockholder meetings and other stockholder matters, such as communications,
press releases, NASD matters and dividend payments. In light of the foregoing,
the Boards of Directors of the Mutual Holding Company and the Bank believe (i)
that it is in the best interests of such companies and their respective Members
and Stockholders to reorganize into the stock form of organization at this time,
and (ii) that the most feasible way to do so is through the Conversion and the
Reorganization.
In connection with the Conversion and Reorganization, the Bank will form a
new first-tier, wholly owned subsidiary known as Guaranty Federal Bancshares,
Inc. which will become the Holding Company upon consummation of the Conversion
and Reorganization. The Holding Company will in turn form Interim B as a wholly
owned subsidiary. As described in more detail herein, the Mutual Holding Company
will convert to an interim federal stock savings bank and will simultaneously
merge with and into the Bank pursuant to the Plan of Merger included as Appendix
A hereto, pursuant to which the Mutual Holding Company will cease to exist and a
liquidation account will be established by the Bank for the benefit of depositor
Members as of specified dates and Interim B will then merge with and into the
Bank pursuant to the Plan of Reorganization included as Appendix B hereto,
pursuant to which the Bank will become a wholly owned subsidiary of the Holding
Company. In connection therewith, each share of Bank Common Stock outstanding
immediately prior to the effective time thereof that is held by Public
Stockholders shall be automatically converted, without further action by the
holder thereof, into and become the right to receive shares of Holding Company
Common Stock based on the Exchange Ratio, plus cash in lieu of any fractional
share interest.
In connection with the Conversion and Reorganization, the Holding Company
will offer shares of Conversion Stock in the Offerings as provided herein.
Shares of Conversion Stock will be offered in a Subscription Offering in
descending order of priority to Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members.
Remaining shares may be subscribed for by Public Stockholders in the Public
Stockholders' Offering. Any shares of Conversion Stock remaining unsold after
the Subscription Offering and the Public Stockholders' Offering will be offered
for sale to the public through a Community Offering and/or Syndicated Community
Offering, as determined by the Boards of Directors of the Holding Company and
the Bank in their sole discretion.
The Conversion and Reorganization is intended to provide support to the
Bank's lending and investment activities and thereby enhance the Bank's
capabilities to serve the borrowing and other financial needs of the communities
it serves. The use of the Holding Company will provide greater organizational
flexibility and facilitate possible acquisitions and diversification.
2
<PAGE>
This Plan is subject to the approval of the OTS and also must be approved by
(1) at least a majority of the total number of votes eligible to be cast by
Voting Members of the Mutual Holding Company at the Special Meeting and (2)
holders of at least two-thirds of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
After the Conversion and Reorganization, the Bank will continue to be
regulated by the OTS, as its chartering authority, and by the FDIC, which
insures the Bank's deposits. In addition, the Bank will continue to be a member
of the Federal Home Loan Bank System, and all insured savings deposits will
continue to be insured by the FDIC up to the maximum amount provided by law.
2. DEFINITIONS
As used in this Plan, the terms set forth below have the following meanings:
Actual Purchase Price means the price per share at which the Conversion
Stock is ultimately sold by the Holding Company in the Offerings in accordance
with the terms hereof.
Affiliate means a Person who, directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control with the
Person specified.
Associate, when used to indicate a relationship with any Person, means (i) a
corporation or organization (other than the Mutual Holding Company, the Bank, a
majority-owned subsidiary of the Bank or the Holding Company) of which such
Person is a director, officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such Person has a substantial beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary capacity,
provided, however, that such term shall not include any Tax-Qualified Employee
Stock Benefit Plan of the Holding Company or the Bank in which such Person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such Person, or any relative of
such spouse, who has the same home as such Person or who is a director or
officer of the Holding Company or the Bank or any of the subsidiaries of the
foregoing.
Bank means Guaranty Federal Savings Bank in its mutual or stock form or
Guaranty Federal Savings Bank following consummation of the Conversion and
Reorganization, as the context of the reference indicates.
Bank Common Stock means the common stock of the Bank, par value $1.00 per
share, which stock is not and will not be insured by the FDIC or any other
governmental authority.
3
<PAGE>
Bank Merger means the merger of Interim B with and into the Bank pursuant to
the Plan of Reorganization included as Appendix B hereto.
Code means the Internal Revenue Code of 1986, as amended.
Community Offering means the offering for sale by the Holding Company of any
shares of Conversion Stock not subscribed for in the Subscription Offering or
Public Stockholders' Offering to (i) natural persons residing in the Local
Community, and (ii) such other Persons within or without the State of Missouri
as may be selected by the Holding Company and the Bank within their sole
discretion.
Control (including the terms "controlling," "controlled by," and "under
common control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Conversion and Reorganization means (i) the conversion of the Mutual Holding
Company to an interim federal stock savings association and the subsequent
merger, pursuant to which the Mutual Holding Company will cease to exist, (ii)
the Bank Merger, pursuant to which the Bank will become a wholly owned
subsidiary of the Holding Company and, in connection therewith, each share of
Bank Common Stock outstanding immediately prior to the effective time thereof
that is held by Public Stockholders shall automatically be converted, without
further action by the holder thereof, into and become the right to receive
shares of Holding Company Common Stock based on the Exchange Ratio, plus cash in
lieu of any fractional share interest, and (iii) the issuance of Conversion
Stock by the Holding Company in the Offerings as provided herein, which will
increase the number of shares of Holding Company Common Stock outstanding and
the capitalization of the Holding Company and the Bank.
Conversion Stock means the Holding Company Common Stock to be issued and
sold in the Offerings pursuant to the Plan of Conversion.
Deposit Account means savings and demand accounts, including passbook
accounts, money market deposit accounts and negotiable order of withdrawal
accounts, and certificates of deposit and other authorized accounts of the Bank
held by a Member.
Director, Officer and Employee means the terms as applied respectively to
any person who is a director, officer or employee of the Mutual Holding Company,
the Bank or any subsidiary thereof.
Eligible Account Holder means any Person holding a Qualifying Deposit on the
Eligibility Record Date for purposes of determining subscription rights and
establishing subaccount balances in the liquidation account to be established
pursuant to the provision herein.
4
<PAGE>
Eligibility Record Date means the date for determining Qualifying Deposits
of Eligible Account Holders and is the close of business on December 31, 1995.
Estimated Price Range means the range of the estimated aggregate pro forma
market value of the Conversion Stock to be issued in the Offerings, as
determined by the Independent Appraiser in accordance with Section 4 hereof.
Exchange Ratio means the rate at which shares of Holding Company Common
Stock will be exchanged for shares of Bank Common Stock held by the Public
Stockholders in connection with the Bank Merger. The exact rate shall be
determined by the Mutual Holding Company and the Bank in order to ensure that
upon consummation of the Conversion and Reorganization the Public Stockholders
will own in the aggregate approximately the same percentage of the Holding
Company Common Stock to be outstanding upon completion of the Conversion and
Reorganization as the percentage of Bank Common Stock owned by them in the
aggregate on the Effective Date, as adjusted in accordance with OTS policy to
reflect any special dividends declared by the Bank and waived by the Mutual
Holding Company, but before giving effect to (a) cash paid in lieu of any
fractional interests of Holding Company Common Stock and (b) any shares of
Conversion Stock purchased by the Public Stockholders in the Offerings or
tax-qualified employee stock benefit plans thereafter.
Exchange Shares means the shares of Holding Company Common Stock to be
issued to the Public Stockholders in connection with the Bank Merger.
FDIC means the Federal Deposit Insurance Corporation or any successor
thereto.
Holding Company means Guaranty Federal Bancshares, Inc., a corporation to be
organized under the laws of the State of Delaware. Such corporation will
initially be formed as a first-tier, wholly owned subsidiary of the Bank. Upon
completion of the Conversion and Reorganization, the Holding Company shall hold
all of the outstanding capital stock of the Bank.
Holding Company Common Stock means the Common Stock of the Holding Company,
par value $.10 per share, which stock cannot and will not be insured by the FDIC
or any other governmental authority.
Independent Appraiser means the independent investment banking or financial
consulting firm retained by the Holding Company and the Bank to prepare an
appraisal of the estimated pro forma market value of the Conversion Stock.
Initial Purchase Price means the price per share to be paid initially by
Participants for shares of Conversion Stock subscribed for in the Subscription
Offering, Public Stockholders for shares of Conversion Stock ordered in the
Public Stockholders' Offering and by Persons for shares of Conversion Stock
ordered in the Community Offering and/or Syndicated Community Offering.
5
<PAGE>
Interim A means Guaranty Federal Interim Bancshares, an interim federal
stock savings bank, which will be formed as a result of the conversion of
Guaranty Federal Bancshares, M.H.C. into the stock form of organization.
Interim B means Guaranty Federal Interim Savings Bank, which will be formed
as a first-tier, wholly owned subsidiary of the Holding Company to facilitate
the Bank Merger.
Local Community means all counties in which the Bank has its home office or
a branch office.
Member means any Person qualifying as a member of the Mutual Holding Company
in accordance with its mutual charter and bylaws and the laws of the United
States.
MHC Merger means the merger of Interim A with and into the Bank pursuant to
the Plan of Merger included as Appendix A hereto.
Mutual Holding Company means Guaranty Federal Bancshares, M.H.C. prior to
its conversion into an interim federal stock savings bank.
Offerings means the Subscription Offering, the Public Stockholders Offering,
the Community Offering and the Syndicated Community Offering, if applicable.
Officer means the president, senior vice-president, secretary, treasurer or
principal financial officer, comptroller or principal accounting officer and any
other person performing similar functions with respect to any organization
whether incorporated or unincorporated.
Order Form means the form or forms provided by the Holding Company,
containing all such terms and provisions as set forth herein, to a Participant
or other Person by which Conversion Stock may be ordered in the Offerings.
Other Member means a Voting Member who is not an Eligible Account Holder or
a Supplemental Eligible Account Holder.
OTS means the Office of Thrift Supervision or any successor thereto.
Participant means any Eligible Account Holder, Tax-Qualified Employee Stock
Benefit Plan, Supplemental Eligible Account Holder and Other Member.
Person means an individual, a corporation, a partnership, an association, a
joint stock company, a trust, an unincorporated organization or a government or
any political subdivision thereof.
Plan and Plan of Conversion means this Plan of Conversion and Agreement and
Plan of Reorganization as adopted by the Boards of Directors of the Mutual
Holding Company and the
6
<PAGE>
Bank and any amendment hereto approved as provided herein. The Board of
Directors of the Holding Company shall adopt this Plan as soon as practicable
following its organization, and the Board of Directors of Interim B shall adopt
the Plan of Reorganization included as Appendix B hereto as soon as practicable
following its organization.
Primary Parties means the Mutual Holding Company, the Bank and the Holding
Company.
Prospectus means the one or more documents to be used in offering the
Conversion Stock in the Offerings.
Public Stockholders means those Persons who own shares of Bank Common Stock,
excluding the Mutual Holding Company, as of the Stockholder Voting Record Date.
Public Stockholders' Offering means the offering for sale by the Holding
Company of any shares of Conversion Stock not subscribed for in the Subscription
Offering to Public Stockholders, at the sole discretion of the Bank and Holding
Company.
Qualifying Deposit means the aggregate balance of all Deposit Accounts in
the Bank of (i) an Eligible Account Holder at the close of business on the
Eligibility Record Date, provided such aggregate balance is not less than $50,
and (ii) a Supplemental Eligible Account Holder at the close of business on the
Supplemental Eligibility Record Date, provided such aggregate balance is not
less than $50.
Resident means any person who, on the date designated for that category of
subscriber in the Plan, maintained a bona fide residence within the Local
Community and has manifested an intent to remain within the Local Community for
a period of time. The designated dates for Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are the Eligibility
Record Date, the Supplemental Eligibility Record Date and the Voting Record
Date, respectively. To the extent the person is a corporation or other business
entity, the principal place of business or headquarters must be within the Local
Community in order to qualify as a Resident. To the extent the person is a
personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
The Bank may utilize deposit or loan records or such other evidence provided to
it to make a determination as to whether a person is a bona fide resident of the
Local Community. Subscribers in the Community Offering who are natural persons
also will have a purchase preference if they were residents of the Local
Community on the date of the Prospectus. In all cases, however, such
determination shall be in the sole discretion of the Bank and Holding Company.
SEC means the Securities and Exchange Commission.
Special Meeting means the Special Meeting of Members of the Mutual Holding
Company called for the purpose of submitting this Plan to the Members for their
approval, including any adjournments of such meeting.
7
<PAGE>
Stockholders means those Persons who own shares of Bank Common Stock.
Stockholders' Meeting means the annual or special meeting of Stockholders of
the Bank called for the purpose of submitting this Plan to the Stockholders for
their approval, including any adjournments of such meeting.
Stockholder Voting Record Date means the date for determining the Public
Stockholders of the Bank eligible to vote at the Stockholders' Meeting.
Subscription Offering means the offering of the Conversion Stock to
Participants.
Subscription Rights means nontransferable rights to subscribe for Conversion
Stock granted to Participants pursuant to the terms of this Plan.
Supplemental Eligible Account Holder means any Person holding a Qualifying
Deposit at the close of business on the Supplemental Eligibility Record Date.
Supplemental Eligibility Record Date, if applicable, means the date for
determining Qualifying Deposits of Supplemental Eligible Account Holders and
shall be required if the Eligibility Record Date is more than 15 months prior to
the date of the latest amendment to the Application for Conversion filed by the
Mutual Holding Company prior to approval of such application by the OTS. If
applicable, the Supplemental Eligibility Record Date shall be the last day of
the calendar quarter preceding OTS approval of the Application for Conversion
submitted by the Mutual Holding Company pursuant to this Plan of Conversion.
Syndicated Community Offering means the offering for sale by a syndicate of
broker-dealers to the general public of shares of Conversion Stock not purchased
in the Subscription Offering and the Community Offering.
Tax-Qualified Employee Stock Benefit Plan means any defined benefit plan or
defined contribution plan, such as an employee stock ownership plan, stock bonus
plan, profit-sharing plan or other plan, which is established for the benefit of
the employees of the Holding Company and the Bank and which, with its related
trust, meets the requirements to be "qualified" under Section 401 of the Code as
from time to time in effect. A "Non-Tax-Qualified Employee Stock Benefit Plan"
is any defined benefit plan or defined contribution stock benefit plan which is
not so qualified.
Voting Member means a Person who at the close of business on the Voting
Record Date is entitled to vote as a Member of the Mutual Holding Company in
accordance with its mutual charter and bylaws.
Voting Record Date means the date or dates for determining the eligibility
of Members to vote at the Special Meeting.
8
<PAGE>
3. GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION
A. After the Bank's organization of the Holding Company and the receipt of
all requisite regulatory approvals, the Holding Company will form Interim B as a
first-tier, wholly owned subsidiary of the Holding Company, and the Board of
Directors of Interim B shall adopt the Plan of Reorganization included as
Appendix B hereto by at least a two-thirds vote. In addition, the Holding
Company shall approve such Plan of Reorganization in its capacity as the sole
stockholder of Interim B.
B. An application for the Conversion and Reorganization, including the Plan
and all other requisite material (the "Application for Conversion"), shall be
submitted to the OTS for approval. The Mutual Holding Company and the Bank also
will cause notice of the adoption of the Plan by the Boards of Directors of the
Mutual Holding Company and the Bank to be given by publication in a newspaper
having general circulation in each community in which an office of the Bank is
located; and will cause copies of the Plan to be made available at each office
of the Mutual Holding Company and the Bank for inspection by Members and
Stockholders. The Mutual Holding Company and the Bank will cause to be
published, in accordance with the requirements of applicable regulations of the
OTS, a notice of the filing with the OTS of an application to convert the Mutual
Holding Company from mutual to stock form.
C. Promptly following receipt of requisite approval of the OTS, this Plan
will be submitted to the Members for their consideration and approval at the
Special Meeting. The Mutual Holding Company may, at its option, mail to all
Members as of the Voting Record Date, at their last known address appearing on
the records of the Mutual Holding Company and the Bank, a proxy statement in
either long or summary form describing the Plan which will be submitted to a
vote of the Members at the Special Meeting. The Holding Company also shall mail
to all such Members (as well as other Participants) either a Prospectus and
Order Form for the purchase of Conversion Stock or a letter informing them of
their right to receive a Prospectus and Order Form and a postage prepaid card to
request such materials, subject to the provisions herein. The Plan must be
approved by the affirmative vote of at least a majority of the total number of
votes eligible to be cast by Voting Members at the Special Meeting.
D. Subscription Rights to purchase shares of Conversion Stock will be
issued without payment therefor to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders and Other Members.
E. The Bank shall file preliminary proxy materials with the OTS in order to
seek the approval of the Plan by its Stockholders. Promptly following clearance
of such proxy materials and the receipt of any other requisite approval of the
OTS, the Bank will mail definitive proxy materials to all Stockholders as of the
Stockholder Voting Record Date, at their last known address appearing on the
records of the Bank, for their consideration and approval of this Plan at the
Stockholders' Meeting. The Plan must be approved by the holders of at least
two-thirds of the outstanding Bank Common Stock as of the Voting Record Date. In
addition, the Primary
9
<PAGE>
Parties have conditioned the consummation of the Conversion and Reorganization
on the approval of the Plan by at least a majority of the votes cast, in person
or by proxy, by the Public Stockholders as of the Stockholder Voting Record Date
at the Stockholders' Meeting.
F. The Holding Company shall submit or cause to be submitted an Application
H-(e)1 or H-(e)1-S to the OTS for approval of the acquisition of the Bank. Such
application also shall include applications to form Interim A and Interim B. In
addition, an application to merge Interim A and the Bank and an application to
merge Interim B and the Bank shall be filed with the OTS, either as an exhibit
to the Application H-(e)1 or H-(e)1-S or separately. All notices required to be
published in connection with such applications shall be published at the times
required.
G. The Holding Company shall file a Registration Statement with the SEC to
register the Holding Company Common Stock to be issued in the Conversion and
Reorganization under the Securities Act of 1933, as amended, and shall register
such Holding Company Common Stock under any applicable state securities laws.
Upon registration and after the receipt of all required regulatory approvals,
the Conversion Stock shall be first offered for sale in a Subscription Offering
to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
Supplemental Eligible Account Holders and Other Members. It is anticipated that
any shares of Conversion Stock remaining unsold after the Subscription Offering
will be sold first through the Public Stockholders' Offering and then through a
Community Offering and/or a Syndicated Community Offering. The purchase price
per share for the Conversion Stock shall be a uniform price determined in
accordance with the provisions herein. The Holding Company shall contribute to
the Bank an amount of the net proceeds received by the Holding Company from the
sale of Conversion Stock as shall be determined by the Boards of Directors of
the Holding Company and the Bank and as shall be approved by the OTS.
H. The Effective Date of the Conversion and Reorganization shall be the
date set forth in Section 27 hereof. Upon the effective date, the following
transactions shall occur:
(i) The Mutual Holding Company shall convert into an interim federal
stock savings bank, Interim A, and Interim A shall simultaneously merge
with and into the Bank in the MHC Merger, with the Bank being the surviving
institution. As a result of the MHC Merger, (a) the shares of Bank Common
Stock currently held by the Mutual Holding Company shall be extinguished
and (b) Members of the Mutual Holding Company will be granted interests in
the liquidation account to be established by the Bank pursuant to Section
16 hereof.
(ii) Interim B shall merge with and into the Bank pursuant to the Bank
Merger, with the Bank being the surviving institution. As a result of the
Bank Merger, (a) the shares of Holding Company Common Stock held by the
Bank shall be extinguished; (b) the shares of the Bank Common Stock held by
the Public Stockholders shall be converted into the right to receive shares
of Holding Company Common Stock based upon the Exchange Ratio, plus cash in
lieu of any fractional share interest based upon the Actual
10
<PAGE>
Purchase Price; and (c) the shares of common stock of Interim B held by the
Holding Company shall be converted into shares of Bank Common Stock on a
one-for-one basis, with the result that the Bank shall become a wholly
owned subsidiary of the Holding Company.
(iii) The Holding Company shall sell the Conversion Stock in the
Offerings, as provided herein.
I. The Primary parties may retain and pay for the services of financial and
other advisors and investment bankers to assist in connection with any or all
aspects of the Conversion and Reorganization, including in connection with the
Offerings, the payment of fees to brokers and investment bankers for assisting
Persons in completing and/or submitting Order Forms. All fees, expenses,
retainers and similar items shall be reasonable.
4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION
STOCK
A. The aggregate price at which shares of Conversion Stock shall be sold in
the Offerings shall be based on a pro forma valuation of the aggregate market
value of the Conversion Stock prepared by the Independent Appraiser. The
valuation shall be based on financial information relating to the Primary
Parties, market, financial and economic conditions, a comparison of the Primary
Parties with selected publicly held financial institutions and holding companies
such other factors as the Independent Appraiser may deem to be important. The
valuation shall be stated in terms of an Estimated Price Range, the maximum of
which shall generally be no more than 15% above the average of the minimum and
maximum of such price range and the minimum of which shall generally be no more
than 15% below such average. The valuation shall be updated during the
Conversion and Reorganization as market and financial conditions warrant and as
may be required by the OTS.
B. Based upon the independent valuation, the Boards of Directors of the
Primary Parties shall fix the Initial Purchase Price and the number (or range)
of shares of Conversion Stock ("Offering Range") to be offered in the Offerings.
The Actual Purchase Price and the total number of shares of Conversion Stock to
be issued in the Offerings shall be determined by the Boards of Directors of the
Primary Parties upon conclusion of the Offerings in consultation with the
Independent Appraiser and any financial advisor or investment banker retained by
the Primary Parties in connection therewith.
C. Subject to the approval of the OTS, the Estimated Price Range may be
increased or decreased prior to completion of the Conversion and Reorganization
to reflect changes in market, financial and economic conditions since the
commencement of the Offerings, and under such circumstances the Primary Parties
may correspondingly increase or decrease the total number of shares of
Conversion Stock to be issued in the Conversion and Reorganization to reflect
any such change. Notwithstanding anything to the contrary contained in this
Plan, no resolicitation
11
<PAGE>
of subscribers shall be required and subscribers shall not be permitted to
modify or cancel their subscriptions unless the aggregate funds received from
the offer of the Conversion Stock in the Conversion and Reorganization are less
than the minimum or (excluding purchases, if any, by the Holding Company's and
the Bank's Tax-Qualified Employee Stock Benefit Plans) more than 15% above the
maximum of the Estimated Price Range set forth in the Prospectus. In the event
of an increase in the total number of shares offered in the Conversion and
Reorganization due to an increase in the Estimated Price Range, the priority of
share allocation shall be as set forth in this Plan, provided, however, that
such priority will have no effect whatsoever on the ability of the Tax-Qualified
Employee Stock Benefit Plans to purchase additional shares pursuant to Section
4.D.
D. (i) In the event that Tax-Qualified Employee Stock Benefit Plans are
unable to purchase the number of shares subscribed for by such Tax-Qualified
Employee Stock Benefit Plans due to an oversubscription for shares of Conversion
Stock pursuant to Section 5 hereof, Tax- Qualified Employee Stock Benefit Plans
may purchase from the Holding Company, and the Holding Company may sell to the
Tax-Qualified Employee Stock Benefit Plans, such additional shares ("Additional
Shares") of Holding Company Common Stock necessary to fill the subscriptions of
the Tax-Qualified Employee Stock Benefit Plans, provided that such Additional
Shares may not exceed 8% of the total number of shares of Conversion Stock sold
in the Conversion and Reorganization. The sale of Additional Shares, if
necessary, will occur contemporaneously with the sale of the Conversion Stock.
The sale of Additional Shares to Tax- Qualified Employee Stock Benefit Plans by
the Holding Company is conditioned upon receipt by the Holding Company of a
letter from the Independent Appraiser to the effect that such sale would not
have a material effect on the Conversion and Reorganization or the Actual
Purchase Price and the approval of the OTS. The ability of the Tax-Qualified
Employee Stock Benefit Plans to purchase up to an additional 8% of the total
number of shares of Conversion Stock sold in the Conversion and Reorganization
shall not be affected or limited in any manner by the priorities or purchase
limitations otherwise set forth in this Plan of Conversion.
(ii) Notwithstanding anything to the contrary contained in this Plan, if
the final valuation of the Conversion Stock exceeds the maximum of the Estimated
Price Range, up to 8% of the total number of shares of Conversion Stock sold in
the Conversion and Reorganization may be sold to Tax-Qualified Stock Benefit
Plans prior to filling any other orders for Conversion Stock from such shares in
excess of the maximum of the Estimated Price Range.
5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS
(FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable Subscription Rights to purchase, subject to the further
limitations of Section 11 hereof, up to the greater of (i) the maximum purchase
limitation set forth in Section 11 hereof, (ii) one-tenth of 1% of the total
offering of shares of Conversion Stock in the Subscription Offering, and (iii)
15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of
12
<PAGE>
which the numerator is the amount of the Qualifying Deposit of the Eligible
Account Holder and the denominator is the total amount of all Qualifying
Deposits of all Eligible Account Holders, subject to Section 14 hereof.
B. In the event of an oversubscription for shares of Conversion Stock
pursuant to the provisions herein, available shares shall be allocated among
subscribing Eligible Account Holders so as to permit each such Eligible Account
Holder, to the extent possible, to purchase a number of shares which will make
his or her total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Any available shares remaining after each such
subscribing Eligible Account Holder has been allocated the lesser of the number
of shares subscribed for or 100 shares shall be allocated among the subscribing
Eligible Account Holders in the proportion which the Qualifying Deposit of each
such subscribing Eligible Account Holder bears to the total Qualifying Deposits
of all such subscribing Eligible Account Holders whose orders are unfilled,
provided that no fractional shares shall be issued. Subscription Rights of
Eligible Account Holders who are also Directors or Officers and their Associates
shall be subordinated to those of other Eligible Account Holders to the extent
that they are attributable to increased deposits during the one-year period
preceding the Eligibility Record Date.
6. SUBSCRIPTION RIGHTS OF THE TAX-QUALIFIED EMPLOYEE STOCK
BENEFIT PLANS (SECOND PRIORITY)
Notwithstanding the purchase limitations discussed below, Tax-Qualified
Employee Stock Benefit Plans of the Holding Company and the Bank shall receive,
without payment, Subscription Rights to purchase in the aggregate up to 10% of
the Conversion Stock, including first priority to purchase any shares of
Conversion Stock to be issued in the Conversion and Reorganization as a result
of an increase in the Estimated Price Range after commencement of the
Subscription Offering and prior to completion of the Conversion and
Reorganization. Consistent with applicable laws, regulations, policies and
practices of the OTS, Tax-Qualified Employee Stock Benefit Plans may use funds
contributed by the Holding Company or the Bank and/or borrowed from an
independent third party to exercise such Subscription Rights, and the Holding
Company and the Bank may make scheduled discretionary contributions thereto,
provided that such contributions do not cause the Holding Company or the Bank to
fail to meet any applicable regulatory capital requirement.
7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS (THIRD PRIORITY)
A. In the event that the Eligibility Record Date is more than 15 months
prior to the date of the latest amendment to the Application for Conversion
filed prior to OTS approval, then, and only in that event, a Supplemental
Eligibility Record Date shall be set and each Supplemental Eligible Account
Holder shall, subject to the further limitations of Section 11 hereof, receive,
without payment, Subscription Rights to purchase up to the greater of (i) the
maximum purchase limitation set forth in Section 11 hereof, (ii) one-tenth of 1%
of the total offering of shares of Conversion Stock in the Subscription
Offering, and (iii) 15 times the product (rounded down to
13
<PAGE>
the next whole number) obtained by multiplying the total number of shares of
Conversion Stock offered in the Subscription Offering by a fraction, of which
the numerator is the amount of the Qualifying Deposits of the Supplemental
Eligible Account Holder and the denominator is the total amount of all
Qualifying Deposits of all Supplemental Eligible Account Holders, subject to
Section 14 hereof and the availability of shares of Conversion Stock for
purchase after taking into account the shares of Conversion Stock purchased by
Eligible Account Holders and Tax- Qualified Employee Stock Benefit Plans though
the exercise of Subscription Rights under Sections 5 and 6 hereof.
B. In the event of an oversubscription for shares of Conversion Stock,
available shares shall be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each such Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his
total allocation (including the number of shares, if any, allocated in
accordance with Section 5.A) equal to the lesser of the number of shares
subscribed for or 100 shares. Any remaining available shares shall be allocated
among subscribing Supplemental Eligible Account Holders in the proportion that
the Qualifying Deposits of each bears to the total amount of the Qualifying
Deposits of all such subscribing Supplemental Eligible Account Holders whose
orders are unfilled, provided that no fractional shares shall be issued.
8. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall, subject to the further limitations of Section
11 hereof, receive, without payment, Subscription Rights to purchase up to the
greater of (i) the maximum purchase limitation set forth in Section 11 hereof
and (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in
the Subscription Offering, in each case subject to Section 14 hereof and the
availability of shares of Conversion Stock for purchase after taking into
account the shares of Conversion Stock purchased by Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, and Supplemental Eligible Account
Holders, if any, through the exercise of Subscription Rights under Sections 5, 6
and 7 hereof.
B. If, pursuant to this Section, Other Members subscribe for a number of
shares of Conversion Stock in excess of the total number of shares of Conversion
Stock remaining, available shares shall be allocated among subscribing Other
Members so as to permit each such Other Members, to the extent possible, to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of the number of shares subscribed or 100 shares. Any remaining available
shares shall be allocated among subscribing Other Members on a pro rata basis in
the same proportion as each such Other Member's subscription bears to the total
subscriptions of all such subscribing Other Members whose orders are unfilled,
provided that no fractional shares shall be issued.
14
<PAGE>
9. PUBLIC STOCKHOLDERS' OFFERING
A. If less than the total number of shares of Conversion Stock are sold in
the Subscription Offering, all remaining shares of Conversion Stock shall,
subject to the further limitations of Section 11 hereof, be sold to Public
Stockholders as of the Stockholder Voting Record Date in an amount up to the
greater of (i) the maximum purchase limitation established for the Community
Offering and/or Syndicated Community Offering and (ii) one tenth of 1% of the
total offering of shares of Conversion Stock in the Subscription Offering, in
each case subject to Section 14 hereof and the availability of shares of
Conversion Stock for purchase after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders, Tax- Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders and Other Members. The
Public Stockholders' Offering may commence concurrently with, at any time
during, or as soon as practicable after the end of the Subscription Offering.
The Public Stockholders' Offering must be completed within 45 days after the
completion of the Subscription Offering, unless extended by the Primary Parties
with any required regulatory approval. The ability of Public Stockholders to
purchase stock in the Public Stockholders' Offering is subject to the right of
the Primary Parties in their absolute discretion to accept or reject in whole or
in part all orders in the Public Stockholders' Offering.
B. If, pursuant to this Section, Public Stockholders as of the Stockholder
Voting Record Date subscribe for a number of shares of Conversion Stock in
excess of the total number of shares of Conversion Stock remaining, available
shares shall be allocated among subscribing Public Stockholders as of the
Stockholder Voting Record Date in an equitable manner as determined by the Board
of Directors, provided that no fractional shares shall be issued.
10. COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING AND
OTHER OFFERINGS
A. If less than the total number of shares of Conversion Stock are sold in
the Subscription Offering and Public Stockholders' Offering, it is anticipated
that all remaining shares of Conversion Stock shall, if practicable, be sold in
a Community Offering and/or a Syndicated Community Offering. Subject to the
requirements set forth herein, the manner in which the Conversion Stock is sold
in the Community Offering and/or the Syndicated Community Offering shall have as
the objective the achievement of a wide distribution of such stock, subject to
the right of the Primary Parties, in their absolute discretion, to accept or
reject in whole or in part all orders in the Community Offering and/or
Syndicated Community Offering.
B. In the event of a Community Offering, all shares of Conversion Stock
which are not subscribed for in the Subscription Offering and Public
Stockholders' Offering shall be offered for sale by means of a direct community
marketing program, which may provide for the use of brokers, dealers or
investment banking firms experienced in the sale of financial institution
securities. Any available shares in excess of those not subscribed for in the
Subscription Offering and Public Stockholders' Offering will be available for
purchase by members of the
15
<PAGE>
general public to whom a Prospectus is delivered by the Holding Company or on
its behalf, with preference given to natural persons who are Residents of the
Local Community ("Preferred Subscribers").
C. A Prospectus and Order Form shall be furnished to such Persons as the
Primary Parties may select in connection with the Community Offering, and each
order for Conversion Stock in the Community Offering shall be subject to the
absolute right of the Primary Parties to accept or reject any such order in
whole or in part either at the time of receipt of an order or as soon as
practicable following completion of the Community Offering. Available shares
will be allocated first to each Preferred Subscriber whose order is accepted in
an amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares shall be allocated among the Preferred Subscribers whose accepted orders
remain unsatisfied in an equitable manner as determined by the Board of
Directors. If there are any shares remaining after all accepted orders by
Preferred Subscribers have been satisfied, any remaining shares shall be
allocated to other members of the general public who place orders in the
Community Offering, applying the same allocation described above for Preferred
Subscribers.
D. The maximum amount of Conversion Stock that any Person may purchase in
the Community Offering shall, subject to the further limitations of Section 11
hereof, not exceed $250,000 provided, however, that this amount may be decreased
or increased to up to 5% of the total offering of shares in the Conversion and
Reorganization, subject to any required regulatory approval but without the
further approval of Members of the Mutual Holding Company or the Stockholders of
the Bank, subject to the preferences set forth in Section 10.B and 10.C of this
Plan. The Primary Parties may commence the Community Offering concurrently with,
at any time during, or as soon as practicable after the end of, the Subscription
Offering and Public Stockholders' Offering, and the Community Offering must be
completed within 45 days after the completion of the Subscription Offering and
Public Stockholders' Offering, unless extended by the Primary Parties with any
required regulatory approval.
E. Subject to such terms, conditions and procedures as may be determined by
the Primary Parties, all shares of Conversion Stock not subscribed for in the
Subscription Offering and Public Stockholders Offering or ordered in the
Community Offering may be sold by a syndicate of broker-dealers to the general
pubic in a Syndicated Community Offering. Each order for Conversion Stock in the
Syndicated Community Offering shall be subject to the absolute right of the
Primary Parties to accept or reject any such order in whole or in part either at
the time of receipt of an order or as soon as practicable after completion of
the Syndicated Community Offering. The amount of Conversion Stock that any
Person may purchase in the Syndicated Community Offering shall, subject to the
further limitations of Section 11 hereof, not exceed $250,000 provided, however,
that this amount may be decreased or increased to up to 5% of the total offering
of shares in the Conversion and Reorganization, subject to any required
regulatory approval but without the further approval of Members of the Mutual
Holding Company or the Stockholders of the Bank. The Primary Parties may
commence the Syndicated Community Offering concurrently with, at any time
during, or as soon as practicable after the
16
<PAGE>
end of, the Subscription Offering, the Public Stockholders' Offering and/or
Community Offering. The Syndicated Community Offering must be completed within
45 days after the completion of the Subscription Offering, unless extended by
the Primary Parties with any required regulatory approval.
F. If for any reason a Syndicated Community Offering of shares of
Conversion Stock not sold in the Subscription Offering and the Community
Offering cannot be effected, or in the event that any insignificant residue of
shares of Conversion Stock is not sold in the Subscription Offering, Public
Stockholders' Offering, Community Offering or Syndicated Community Offering, the
Primary Parties shall use their best efforts to obtain other purchasers for such
shares in such manner and upon such conditions as may be satisfactory to the
OTS.
11. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION
STOCK
The following limitations shall apply to all purchases of Conversion
Stock:
A. The number of shares of Conversion Stock which may be purchased by any
Person (or persons through a single account), in the First Priority, Third
Priority and Fourth Priority in the Subscription Offering shall not exceed such
number of shares of Conversion Stock that when combined with Exchange Shares
received shall equal $250,000 of Holding Company Common Stock, except for
Tax-Qualified Employee Stock Benefit Plans, which in the aggregate may subscribe
for up to 8% of the Conversion Stock.
B. The number of shares of Conversion Stock which may be purchased by any
Person in the Public Stockholders, the Community and/or the Syndicated Community
Offerings shall not exceed such number of shares of Conversion Stock that when
combined with Exchange Shares received shall equal $250,000 of Holding Company
Common Stock.
C. Except for the Tax-Qualified Employee Stock Benefit Plans, the maximum
number of shares of Conversion Stock which may be purchased in all of the
combined categories of the Conversion and Reorganization by any Person (or
persons through a single account) together with any Associate or group of
persons Acting in Concert shall not exceed such number of shares of Conversion
Stock that when combined with Exchange Shares shall equal $320,850 of Holding
Company Common Stock.
D. The number of shares of Conversion Stock which Directors and Officers
and their Associates may purchase in the aggregate in the Offering shall not
exceed 31.7% of the total number of shares of Conversion Stock sold in the
Offerings, including any shares which may be issued in the event of an increase
in the maximum of the Estimated Price Range to reflect changes in market,
financial and economic conditions after commencement of the Subscription
Offering and prior to completion of the Offerings.
E. No Person may purchase fewer than 25 shares of Conversion Stock in the
Offerings, to the extent such shares are available; provided, however, that if
the Actual Purchase Price is greater than $20.00 per share, such minimum number
of shares shall be adjusted so that the aggregate Actual Purchase Price for such
minimum shares will not exceed $500.00.
17
<PAGE>
F. For purposes of the foregoing limitations and the determination of
Subscription Rights, (i) Directors, Officers and Employees shall not be deemed
to be Associates or a group acting in concert solely as a result of their
capacities as such, (ii) shares purchased by Tax-Qualified Employee Stock
Benefit Plans shall not be attributable to the individual trustees or
beneficiaries of any such plan for purposes of determining compliance with the
limitations set forth in this Section, (iii) shares purchased by Tax-Qualified
Employee Stock Benefit Plans shall not be attributable to the individual
trustees or beneficiaries of any such plan for purposes of determining
compliance with the limitation set forth in this Section, and (iv) Exchange
Shares shall be valued at the Actual Purchase Price.
G. Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the Mutual Holding Company or the Stockholders of the Bank, the Primary Parties
may increase or decrease the individual or overall purchase limitations set
forth herein to a percentage which does not exceed 5% of the total shares of
Holding Company Common Stock issued in the Conversion and Reorganization whether
prior to, during or after the Subscription Offering, Community Offering and/or
Syndicated Community Offering. Notwithstanding the foregoing, the maximum
purchase limitation may be increased up to 9.99% provided that orders for
exceeding 5% of the shares being offered shall not exceed, in the aggregate, 10%
of the total offering. In the event that the individual or overall purchase
limitations are increased after commencement of the Subscription Offering or any
other offering, the Primary Parties shall permit any Person who subscribed for
the maximum number of shares of Conversion Stock (plus certain large subscribers
as determined in the sole discretion of the Primary Parties) to purchase an
additional number of shares, so that such Person shall be permitted to subscribe
for the then maximum number of shares permitted to be subscribed for by such
Person, subject to the rights and preferences of any Person who has priority
Subscription Rights. In the event that the individual or overall purchase
limitations are decreased after commencement of the Subscription Offering or any
other offering, the orders of any Person who subscribed for more than the new
purchase limitation shall be decreased by the minimum amount necessary so that
such Person shall be in compliance with the then maximum number of shares
permitted to be subscribed for by such Person.
H. The Primary Parties shall have the right to take all such action as they
may, in their sole discretion, deem necessary, appropriate or advisable in order
to monitor and enforce the terms, conditions, limitations and restrictions
contained in this Section and elsewhere in this Plan and the terms, conditions
and representations contained in the Order Form, including, but not limited to,
the absolute right (subject only to any necessary regulatory approvals or
concurrences) to reject, limit or revoke acceptance of any subscription or order
and to delay, terminate or refuse to consummate any sale of Conversion Stock
which they believe might violate, or is designed to, or is any part of a plan
to, evade or circumvent such terms, conditions, limitations, restrictions and
representations. Any such action shall be final, conclusive and binding on all
persons, and the Primary Parties and their respective Boards shall be free from
any liability to any Person on account of any such action.
18
<PAGE>
I. Notwithstanding anything to the contrary contained in this Plan, except
as may otherwise be required by the OTS, the Public Stockholders will not have
to sell any Bank Common Stock or be limited in receiving Exchange Shares even if
their ownership of Bank Common Stock when converted into Exchange Shares
pursuant to the Bank Merger would exceed an applicable purchase limitation;
however, they might be precluded from purchasing any Conversion Stock in the
Offerings.
12. TIMING OF SUBSCRIPTION OFFERING; MANNER OF EXERCISING
SUBSCRIPTION RIGHTS AND ORDER FORMS
A. The Subscription Offering may be commenced concurrently with or at any
time after the mailing to Voting Members of the Mutual Holding Company and
Stockholders of the Bank of the proxy statement(s) to be used in connection with
the Special Meeting and the Stockholders' Meeting. The Subscription Offering may
be closed before the Special Meeting and the Stockholders' Meeting, provided
that the offer and sale of the Conversion Stock shall be conditioned upon the
approval of the Plan by the Voting Members of the Mutual Holding Company and the
Stockholders of the Bank at the Special Meeting and the Stockholders' Meeting,
respectively.
B. The exact timing of the commencement of the Subscription Offering shall
be determined by the Primary Parties in consultation with the Independent
Appraiser and any financial or advisory or investment banking firm retained by
them in connection with the Conversion. The Primary Parties may consider a
number of factors, including, but not limited to, their current and projected
future earnings, local and national economic conditions, and the prevailing
market for stocks in general and stocks of financial institutions in particular.
The Primary Parties shall have the right to withdraw, terminate, suspend, delay,
revoke or modify any such Subscription Offering, at any time and from time to
time, as they in their sole discretion may determine, without liability to any
Person, subject to compliance with applicable securities laws and any necessary
regulatory approval or concurrence.
C. The Primary Parties shall, promptly after the SEC has declared the
Registration Statement, which includes the Prospectus, effective and all
required regulatory approvals have been obtained, distribute or make available
the Prospectus, together with Order Forms for the purchase of Conversion Stock,
to all Participants for the purpose of enabling them to exercise their
respective Subscription Rights, subject to Section 14 hereof. The Primary
Parties may elect to mail a Prospectus and Order Form only to those Participants
who request such materials by returning a postage-paid card to the Primary
Parties by a date specified in the letter informing them of their Subscription
Rights. Under such circumstances, the Subscription Offering shall not be closed
until the expiration of 30 days after the mailing by the Primary Parties of the
postage-paid card to Participants.
D. A single Order Form for all Deposit Accounts maintained with the Bank by
an Eligible Account Holder, Supplemental Eligible Account Holder and any Other
Member may be furnished, irrespective of the number of Deposit Accounts
maintained with the Bank on the
19
<PAGE>
Eligibility Record Date and Supplemental Eligibility Record Date and the Voting
Record Date, respectively.
E. The recipient of an Order Form shall have no less than 20 days and no
more than 45 days from the date of mailing of the Order Form (with the exact
termination date to be set forth on the Order Form) to properly complete and
execute the Order Form and deliver it to the Primary Parties. The Primary
Parties may extend such period by such amount of time as they determine is
appropriate. Failure of any Participant to deliver a properly executed Order
Form to the Primary Parties, along with payment (or authorization for payment by
withdrawal) for the shares of Conversion Stock subscribed for, within time
limits prescribed, shall be deemed a waiver and release by such person of any
rights to subscribe for shares of Conversion Stock. Each Participant shall be
required to confirm to the Primary Parties by executing an Order Form that such
Person has fully complied with all of the terms, conditions, limitations and
restrictions in the Plan.
F. The Primary Parties shall have the absolute right, in their sole
discretion and without liability to any Participant or other Person, to reject
any Order Form, including, but not limited to, any Order Form that is (i)
improperly completed or executed; (ii) not timely received; (iii) not
accompanied by the proper payment (or authorization of withdrawal for payment)
or, in the case of institutional investors in the Community Offering, not
accompanied by an irrevocable order together with a legally binding commitment
to pay the full amount of the purchase price prior to 48 hours before the
completion of the Offerings; or (iv) submitted by a Person whose representations
the Primary Parties believe to be false or who they otherwise believe, either
alone, or acting in concert with others, is violating, evading or circumventing,
or intends to violate, evade or circumvent, the terms and conditions of the
Plan. The Primary Parties may, but will not be required to, waive any
irregularity on any Order Form or may require the submission of corrected Order
Forms or the remittance of full payment for shares of Conversion Stock by such
date as they may specify. The interpretation of the Primary Parties of the terms
and conditions of the Order Forms shall be final and conclusive.
13. PAYMENT FOR CONVERSION STOCK
A. Payment for shares of Conversion Stock subscribed for by Participants in
the Subscription Offering and payment for shares of Conversion Stock ordered by
Persons in the Stockholders' Offering, Community Offering and Syndicated
Community Offering (if applicable) shall be equal to the Initial Purchase Price
multiplied by the number of shares which are being subscribed for or ordered,
respectively. Such payment may be made in cash, if delivered in person, or by
check or money order at the time the Order Form is delivered to the Primary
Parties. In addition, the Primary Parties may elect to provide Participants
and/or other Persons who have a Deposit Account with the Bank the opportunity to
pay for shares of Conversion Stock by authorizing the Bank to withdraw from such
Deposit Account an amount equal to the aggregate Purchase Price of such shares.
If the Actual Purchase Price is less than the Initial Purchase Price, the
Primary Parties shall refund the difference to all Participants and other
Persons, unless the Primary Parties choose to provide Participants and other
Persons the opportunity on the Order Form to elect to have such difference
applied to the purchase of additional whole shares of Conversion Stock. If the
Actual Purchase Price is more than the Initial Purchase Price, the Primary
Parties shall reduce the number of shares of Conversion
20
<PAGE>
Stock ordered by Participants and other Persons and refund any remaining amount
which is attributable to a fractional share interest, unless the Primary Parties
choose to provide Participants and other Persons the opportunity to increase the
amount of funds submitted to pay for their shares of Conversion Stock.
B. Consistent with applicable laws and regulations and policies and
practices of the OTS, payment for shares of Conversion Stock subscribed for by
Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed by
the Holding Company and/or funds obtained pursuant to a loan from an independent
third party pursuant to a loan commitment which is in force from the time that
any such plan submits an Order Form until the closing of the transactions
contemplated hereby.
C. If a Participant or other Person authorizes the Bank to withdraw the
amount of the Initial Purchase Price from his or her Deposit Account, the Bank
shall have the right to make such withdrawal or to freeze funds equal to the
aggregate Initial Purchase Price upon receipt of the Order Form. Notwithstanding
any regulatory provisions regarding penalties for early withdrawals from
certificate accounts, the Bank may allow payment by means of withdrawal from
certificate accounts without the assessment of such penalties. In the case of an
early withdrawal of only a portion of such account, the certificate evidencing
such account shall be canceled if any applicable minimum balance requirement
ceases to be met. In such case, the remaining balance will be returned to the
depositor. However, where any applicable minimum balance is maintained in such
certificate account, the rate of return on the balance of the certificate
account shall remain the same as prior to such early withdrawal. This waiver of
the early withdrawal penalty applies only to withdrawals made in connection with
the purchase of Conversion Stock and is entirely within the discretion of the
Primary Parties.
D. The Bank shall pay interest, at not less than the passbook rate, for all
amounts paid in cash, by check or money order to purchase shares of Conversion
Stock in the Subscription Offering, Public Stockholders' Offering and the
Community Offering from the date payment is received until the date the
Conversion and Reorganization is completed or terminated.
E. The Bank shall not knowingly loan funds or otherwise extend credit to
any Participant or other Person to purchase Conversion Stock.
F. Each share of Conversion Stock shall be non-assessable upon payment in
full of the Actual Purchase Price.
14. ACCOUNTHOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Primary Parties shall make reasonable efforts to comply with the
securities laws of all jurisdictions in the United States in which Participants
reside. However, no Participant will be offered or receive any Conversion Stock
under the Plan if such Participant resides in a foreign country or resides in a
jurisdiction of the United States with respect to which any of the following
apply; (a) there are few Participants otherwise eligible to subscribe for shares
under
21
<PAGE>
this Plan who reside in such jurisdiction; (b) the granting of Subscription
Rights or the offer or sale of shares of Conversion Stock to such Participants
would require any of the Primary Parties or their respective Directors and
Officers, under the laws of such jurisdiction, to register as a broker-dealer,
salesman or selling agent or to register or otherwise qualify the Conversion
Stock for sale in such jurisdiction, or any of the Primary Parties would be
required to qualify as a foreign corporation or file a consent to service of
process in such jurisdiction; and (c) such registration, qualification or filing
in the judgment of the Primary Parties would be impracticable or unduly
burdensome for reasons of cost or otherwise.
15. VOTING RIGHTS OF STOCKHOLDERS
Following consummation of the Conversion and Reorganization, voting rights
with respect to the Bank shall be held and exercised exclusively by the Holding
Company as holder of all of the Bank's outstanding voting capital stock, and
voting rights with respect to the Holding Company shall be held and exercised
exclusively by the holders of the Holding Company's voting capital stock.
16. LIQUIDATION ACCOUNT
A. At the time of the MHC Merger, the Bank shall establish a liquidation
account in an amount equal to the amount of the dividends from Bank Common Stock
waived by the Mutual Holding Company plus the greater of (i) the retained
earnings of the Bank as of the date of the latest statement of financial
condition contained in the final offering circular utilized in the Bank's
initial public offering, or (ii) the Bank's total stockholders' equity as
reflected in its latest statement of financial condition contained in the final
Prospectus utilized in the Conversion and Reorganization. The function of the
liquidation account will be to preserve the rights of certain holders of Deposit
Accounts in the association who maintain such accounts in the Bank following the
Conversion and Reorganization to priority to distributions in the unlikely event
of a liquidation of the Bank subsequent to the Conversion and Reorganization.
B. The liquidation account shall be maintained for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders, if any, who maintain
their Deposit Accounts in the Bank after the Conversion and Reorganization. Each
such account holder will, with respect to each Deposit Account held, have a
related inchoate interest in a portion of the liquidation account balance, which
interest will be referred to in this Section 16 as the "subaccount balance." All
Deposit Accounts having the same social security number will be aggregated for
purposes of determining the initial subaccount balance with respect to such
Deposit Accounts, except as provided in this Section.
C. In the event of a complete liquidation of the Bank subsequent to the
Conversion and Reorganization (and only in such event), each Eligible Account
Holder and Supplemental Eligible Account Holder, if any, shall be entitled to
receive a liquidation distribution from the liquidation account in the amount of
the then current subaccount balances for Deposit Accounts then held (adjusted as
described below) before any liquidation distribution may be made with
22
<PAGE>
respect to the capital stock of the Bank. No merger, consolidation, sale of bulk
assets or similar combination transaction with another FDIC-insured institution
in which the Bank is not the surviving entity shall be considered a complete
liquidation for this purpose. In any merger or consolidation transaction, the
liquidation account shall be assumed by the surviving entity.
D. The initial subaccount balance for a Deposit Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder, if any, shall be
determined by multiplying the opening balance in the liquidation account by a
fraction, of which the numerator is the amount of the Qualifying Deposits of
such account holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders, if any. For Deposit Accounts in existence at both the Eligibility
Record Date and the Supplemental Eligibility Record Date, if any, separate
initial subaccount balances shall be determined on the basis of the Qualifying
Deposits in such Deposit Accounts on each such record date. Initial subaccount
balances shall not be increased, and shall be subject to downward adjustment as
provided below.
E. If the aggregate deposit balance in the Deposit Account(s) of any
Eligible Account Holder or Supplemental Eligible Account Holder, if any, at the
close of business on any June 30 annual closing date is less than the lesser of
(a) the aggregate deposit balance in such Deposit Account(s) at the close of
business on any other annual closing date subsequent to such record dates or (b)
the aggregate deposit balance in such Deposit Account(s) as of the Eligibility
Record Date or the Supplemental Eligibility Record Date, the subaccount balance
for such Deposit Accounts(s) shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of such a downward adjustment, the subaccount balance shall not be
subsequently increased, notwithstanding any subsequent increase in the deposit
balance of the related Deposit Account(s). The subaccount balance of an Eligible
Account Holder or Supplemental Eligible Account Holder, if any, will be reduced
to zero if the Account Holder ceases to maintain a Deposit Account at the Bank
that has the same social security number as appeared on his Deposit Account(s)
at the Eligibility Record Date or, if applicable, the Supplemental Eligibility
Record Date.
F. Subsequent to the Conversion and Reorganization, the Bank may not pay
cash dividends generally on deposit accounts and/or capital stock of the Bank,
if such dividend or repurchase would reduce the Bank's regulatory capital below
the aggregate amount of the then current subaccount balances for Deposit
Accounts then held; otherwise, the existence of the liquidation account shall
not operate to restrict the use or application of any of the net worth accounts
of the Bank.
G. For purposes of this Section, a Deposit Account includes a predecessor
or successor account which is held by an Account Holder with the same social
security number.
23
<PAGE>
17. TRANSFER OF DEPOSIT ACCOUNTS
Each Deposit Account in the Bank at the time of the consummation of the
Conversion and Reorganization shall become, without further action by the
holder, a Deposit Account in the Bank equivalent in withdrawable amount to the
withdrawal value (as adjusted to give effect to any withdrawal made for the
purchase of Conversion Stock), and subject to the same terms and conditions
(except as to voting and liquidation rights) as such Deposit Account in the Bank
immediately preceding consummation of the Conversion and Reorganization. Holders
of Deposit Accounts in the Bank shall not, as such holders, have any voting
rights.
18. REQUIREMENTS FOLLOWING CONVERSION AND REORGANIZATION FOR
REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING
In connection with the Conversion and Reorganization, the Holding Company
shall register the Holding Company Common Stock pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister such stock for a period of three years thereafter. The Holding
Company also shall use its best efforts to (i) encourage and assist a market
maker to establish and maintain a market for the Holding Company Common Stock
and (ii) list the Holding Company Common Stock on a national or regional
securities exchange or to have quotations for such stock disseminated on the
National Association of Securities Dealers Automated Quotation System.
19. DIRECTORS AND OFFICERS OF THE BANK
Each person serving as a Director or Officer of the Bank at the time of the
Conversion and Reorganization shall continue to serve as a Director or Officer
of the Bank for the balance of the term for which the person was elected prior
to the Conversion and Reorganization, and until a successor is elected and
qualified.
20. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS
FOLLOWING THE CONVERSION AND REORGANIZATION
For a period of three years following the Conversion and Reorganization,
the Directors and Officers of the Holding Company and the Bank and their
Associates may not purchase, without the prior written approval of the OTS,
Holding Company Common Stock except from a broker-dealer registered with the
SEC. This prohibition shall not apply, however, to (i) a negotiated transaction
arrived at by direct negotiation between buyer and seller and involving more
than 1% of the outstanding Holding Company Common Stock and (ii) purchases of
stock made by and held by any Tax-Qualified Employee Stock Benefit Plan (and
purchases of stock made by and held by any Non-Tax-Qualified Employee Stock
Benefit Plan following the receipt of stockholder approval of such plan) which
may be attributable to individual officers or directors.
The foregoing restriction on purchases of Holding Company Common Stock
shall be in addition to any restrictions that may be imposed by federal and
state securities laws.
24
<PAGE>
21. RESTRICTIONS ON TRANSFER OF STOCK
All shares of the Conversion Stock which are purchased by Persons other
than Directors and Officers shall be transferable without restriction, except in
connection with a transaction proscribed by Section 22 of this Plan. Shares of
Conversion Stock purchased by Directors and Officers of the Holding Company and
the Bank on original issue from the Holding Company (by subscription or
otherwise) shall be subject to the restriction that such shares shall not be
sold or otherwise disposed of for value for a period of one year following the
date of purchase, except for any disposition of such shares following the death
of the original purchaser or pursuant to any merger or similar transaction
approved by the OTS. The shares of Conversion Stock issued by the Holding
Company to Directors and Officers shall bear the following legend giving
appropriate notice of such one-year restriction.
The shares of stock evidenced by this Certificate are restricted as to transfer
for a period of one year from the date of this Certificate pursuant to Part 563b
of the Rules and Regulations of the Office of Thrift Supervision. These shares
may not be transferred during such one-year period without a legal opinion of
counsel for the Company that said transfer is permissible under the provisions
of applicable law and regulation. This restrictive legend shall be deemed null
and void after one year from the date of this Certificate.
In addition, the Holding Company shall give appropriate instructions to the
transfer agent for the Holding Company Common Stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any shares
issued at a later date as a stock dividend, stock split or otherwise with
respect to any such restricted stock shall be subject to the same holding period
restrictions as may then be applicable to such restricted stock.
The foregoing restriction on transfer shall be in addition to any
restrictions on transfer that may be imposed by federal and state securities
laws.
22. RESTRICTIONS ON ACQUISITION OF STOCK OF THE HOLDING COMPANY
The articles of incorporation of the Holding Company shall prohibit any
Person together with Associates or groups of Persons acting in concert from
offering to acquire or acquiring, directly or indirectly, beneficial ownership
of more than 10% of any class of equity securities of the Holding Company, or of
securities convertible into more than 10% of any such class, for five years
following completion of the Conversion and Reorganization. The articles of
incorporation of the Holding Company also shall provide that all equity
securities beneficially owned by any Person in excess of 10% of any class of
equity securities during such five-year period shall be considered "excess
shares," and that excess shares shall not be counted as shares entitled to vote
and shall not be voted by any Person or counted as voting shares in connection
with any matters submitted to the stockholders for a vote. The foregoing
restrictions shall not apply to (i) any offer with a view toward public resale
made exclusively to the Holding Company by underwriters or a selling group
acting on this behalf, (ii) the purchase of shares by a Tax-
25
<PAGE>
Qualified Employee Stock Benefit Plan established for the benefit of the
employees of the Holding Company and its subsidiaries which is exempt from
approval requirements under 12 C.F.R. ss.574.3(c)(1)(vi) or any successor
thereto, and (iii) any offer or acquisition approved in advance by the
affirmative vote of two-thirds of the entire Board of Directors of the Holding
Company. Directors, Officers or Employees of the Holding Company or the Bank or
any subsidiary thereof shall not be deemed to be Associates or a group acting in
concert with respect to their individual acquisition of any class of equity
securities of the Holding Company solely as a result of their capacities as
such.
23. TAX RULINGS OR OPINIONS
Consummation of the conversion and Reorganization is conditioned upon prior
receipt by the Primary Parties of either a ruling or an opinion of counsel with
respect to federal tax laws, and either a ruling or an opinion of counsel with
respect to Missouri tax laws, to the effect that consummation of the
transactions contemplated hereby will not result in a taxable reorganization
under the provisions of the applicable codes or otherwise result in any material
adverse tax consequences to the Primary Parties or to account holders receiving
Subscription Rights before or after the Conversion and Reorganization, except in
each case to the extent, if any, that Subscription Rights are deemed to have
fair market value on the date such rights are issued.
24. STOCK COMPENSATION PLANS
A. The Holding Company and the Bank are authorized to adopt Tax-Qualified
Employee Stock Benefit Plans in connection with the Conversion and
Reorganization, including without limitation an employee stock ownership plan.
B. The Holding Company and the Bank also are authorized to adopt stock
option plans, restricted stock grant plans and other Non-Tax-Qualified Employee
Stock Benefit Plans, provided that no stock options shall be granted, and no
shares of Conversion Stock shall be purchased, pursuant to any of such plans
prior to the earlier of (i) the one-year anniversary of the consummation of the
Conversion and Reorganization or (ii) the receipt of stockholder approval of
such plans at either the annual or special meeting of stockholders of the
Holding Company to be held not earlier than six months after the completion of
the Conversion and Reorganization.
C. Existing as well as any newly created Tax-Qualified Employee Stock
Benefit Plans may purchase shares of Conversion Stock in the Offerings, to the
extent permitted by the terms of such benefit plans and this Plan.
25. DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK
A. Except as may otherwise may be permitted by the OTS, the Holding Company
may not repurchase any shares of its capital stock during the first year
following consummation of the Conversion and Reorganization. During the second
and third years following consummation of the Conversion and Reorganization, the
Holding Company may not repurchase any of its capital
26
<PAGE>
stock from any person, other than pursuant to (i) an offer to repurchase made by
the Holding Company on a pro rata basis to all of its stockholders and which is
approved by the OTS, (ii) the repurchase of qualifying shares of a director, if
any, (iii) purchases in the open market by a Tax-Qualified or Non-Tax-Qualified
Employee Stock Benefit Plan in an amount reasonable and appropriate to fund the
plan, or (iv) a repurchase program approved by the OTS.
B. The Bank may not declare or pay a cash dividend on, or repurchase any
of, its capital stock if the effect thereof would cause the regulatory capital
of the Bank to be reduced below the amount required for the liquidation account.
Any dividend declared or paid on, or repurchase of, the Bank's capital stock
also shall be in compliance with Section 563.134 of the Regulations Applicable
to All Savings Associations, or any successor thereto.
C. Notwithstanding anything to the contrary set forth herein, the Holding
Company may repurchase its capital stock to the extent and subject to the
requirements set forth in Section 563b.3(g)(3) of the Regulations Applicable to
All Savings Associations, or any successor thereto, or as otherwise may be
approved by the OTS.
26. PAYMENT OF FEES TO BROKERS
The Primary Parties may elect to offer to pay fees on a per share basis to
securities brokers who assist purchasers of Conversion Stock in the Offerings.
27. EFFECTIVE DATE
The Effective Date of the Conversion and Reorganization shall be the date
upon which the last of the following actions occurs: (i) the filing of Articles
of Combination with the OTS with respect to the MHC Merger, (ii) the filing of
Articles of Combination with the OTS with respect to the Bank Merger and (iii)
the closing of the issuance of the shares of Conversion Stock in the Offerings.
The filing of Articles of Combination relating to the MHC Merger and the Bank
Merger and the closing of the issuance of shares of Conversion Stock in the
Offerings shall not occur until all requisite regulatory, Member and Stockholder
approvals have been obtained, all applicable waiting periods have expired and
sufficient subscriptions and orders for the Conversion Stock have been received.
It is intended that the closing of the MHC Merger, the Bank Merger and the sale
of shares of Conversion Stock in the Offerings shall occur consecutively and
substantially simultaneously.
28. AMENDMENT OR TERMINATION OF THE PLAN
If deemed necessary or desirable by the Boards of Directors of the Primary
Parties, this Plan may be substantively amended, as a result of comments from
regulatory authorities or otherwise, at any time prior to the solicitation of
proxies from members and Stockholders to vote on the Plan and at any time
thereafter with the concurrence of the OTS. Any amendment to this Plan made
after approval by the Members and Stockholders with the concurrence of the OTS
shall not necessitate further approval by the Members or Stockholders unless
otherwise required by
27
<PAGE>
the OTS. This Plan shall terminate if the sale of all shares of Conversion Stock
is not completed within 24 months from the date of the Special Meeting. Prior to
the earlier of the Special Meeting and the Stockholders' Meeting, this Plan may
be terminated by the Boards of Directors of the Primary Parties without approval
of the OTS; after the Special Meeting or the Stockholder's Meeting, the Boards
of Directors may terminate this Plan only with the approval of the OTS.
29. INTERPRETATION OF THE PLAN
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of each of the Boards of Directors of the
Primary Parties shall be final, subject to the authority of the OTS.
28
<PAGE>
APPENDIX A
PLAN OF MERGER
PLAN OF MERGER, dated as of __________ __, 199__ ("Plan of Merger") by and
between Guaranty Federal Savings Bank (the "Bank") and Guaranty Federal
Bancshares, M.H.C. ("Mutual Holding Company"). Unless otherwise noted, defined
terms shall have the same meaning as those set forth in the Plan of Conversion
of the Mutual Holding Company and the Agreement and Plan of Reorganization
between Guaranty Federal Bancshares, Inc. (the "Holding Company") and the Bank
("Plan") (of which this Plan of Merger is Appendix A thereto).
WITNESSETH:
WHEREAS, in April 1995, Guaranty Federal Savings Bank, a federally
chartered mutual savings bank (the "Savings Bank"), reorganized into the mutual
holding company form of organization whereby (i) the Savings Bank organized the
Bank, a federally chartered stock savings bank, as a wholly owned subsidiary;
(ii) the Savings Bank then transferred substantially all of its assets and
liabilities to the Bank in exchange for 2,152,635 or 68.9% of the shares of Bank
Common Stock, and reorganized itself into a federally chartered mutual holding
company known as Guaranty Federal Bancshares, M.H.C.;
WHEREAS, the Board of Directors of the Mutual Holding Company has
determined that it is in the best interests of the Mutual Holding Company and
its members to convert from the mutual to stock form of organization;
WHEREAS, the Bank is currently a majority owned subsidiary of the Mutual
Holding Company;
WHEREAS, the conversion of the Mutual Holding Company to stock form will be
facilitated by causing the Mutual Holding Company to convert from the mutual
form to a federal interim stock savings bank to be known as "Guaranty Federal
Interim Bancshares" ("Interim A") and simultaneously merge with the Bank
("Conversion"); and
WHEREAS, immediately upon completion of the Conversion, the Bank will form
a Delaware corporation (the Holding Company), which will in turn form a second
interim savings association ("Interim B"); Interim B will merge with and into
the Bank; and the Bank will become a wholly owned subsidiary of the Holding
Company ("Reorganization"). The existing minority stockholders of the Bank will
exchange their shares of Bank Common Stock for shares of common stock of the
Holding Company based upon an Exchange Ratio established in accordance with the
independent appraisal of the Bank upon merger with Interim A, and the remaining
shares will be sold in subscription and community offerings, giving priority
subscription rights as set forth in the Plan in accordance with OTS conversion
regulations.
A - 1
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, and in accordance with federal law, the Bank and
the Mutual Holding Company hereby agree that, subject to the conditions
hereinafter set forth, the Mutual Holding Company shall convert from the mutual
form to a federal interim stock savings bank, and Interim B shall then be merged
with and into the Bank with the Bank as the surviving entity. The terms and
conditions of such merger shall be as follows:
1. Regulatory Approvals. The merger shall not become effective until
receipt of approval of the OTS and any other agency having jurisdiction over the
merger, if any.
2. Identity and Name of Resulting Bank. The resulting savings bank in the
Reorganization shall be the Bank.
3. Offices of Resulting Bank. The home office of the Bank, as the resulting
savings bank, shall be the Bank's office located at 1341 W. Battlefield,
Springfield, Missouri. The locations of the branch offices of the resulting
savings bank shall be those of the Bank in existence on the date of this Plan of
Merger. In addition, the resulting savings bank shall operate branch offices at
such additional locations as may be approved by the OTS.
4. The Bank's Federal Charter and Bylaws. The federal stock charter and
bylaws of the Bank as in effect immediately prior to the effectiveness of the
Reorganization shall be amended as necessary to accomplish the Reorganization.
5. Effective Date. The effective date of the Conversion ("Effective Date")
shall be the date as soon as practicable after the issuance and/or execution by
the OTS and any other federal or state regulatory agencies, of all approvals,
certificates and documents as may be required in order to cause the Conversion
and the Reorganization to become effective.
6. Bank Stockholder Approval. The affirmative vote of the holders of
two-thirds of the outstanding Bank Common Stock and at least a majority of such
Bank Common Stock not held by the Mutual Holding Company voting at a meeting of
the stockholders shall be required to approve this Plan of Merger.
7. Mutual Holding Company Approval. The approval of a majority of the
members of the Mutual Holding Company, as of a specified date shall be required
to approve this Plan of Merger.
A - 2
<PAGE>
8. Cancellation of Savings Bank Common Stock held by the Mutual Holding
Company and Member Interests; Liquidation Account.
(a) On the Effective Date, (i) each share of Bank Common Stock issued
and outstanding immediately prior to the Effective Date and held by the Mutual
Holding Company shall, by virtue of the Reorganization and without any action on
the part of the holder thereof, be canceled, (ii) the interests in the Mutual
Holding Company of any person, firm or entity who or which qualified as a member
of the Mutual Holding Company in accordance with its mutual charter and bylaws
and the laws of the United States prior to the Mutual Holding Company's
conversion from mutual to stock form (the "Members") shall, by virtue of the
Reorganization and without any action on the part of the holder thereof, be
canceled, and (iii) the Bank shall establish a liquidation account on behalf of
each depositor member of the Mutual Holding Company, as defined in the Plan, in
accordance with Section 16 of the Plan.
(b) At or after the Effective Date and prior to the Merger, each
certificate or certificates theretofore evidencing issued and outstanding shares
of Bank Common Stock, other than any such certificate or certificates held by
the Mutual Holding Company, which shall be canceled, shall continue to represent
issued and outstanding shares of Bank Common Stock.
9. Dissenting Shares. No Member of the Mutual Holding Company or
stockholder of the Bank shall have any dissenter or appraisal rights in
connection with the Conversion.
10. Deposits of the Bank. All deposit accounts of the Bank shall be and
will become deposits in the resulting savings bank without change in their
respective terms, interest rates, maturities, minimum required balances or
withdrawal values. After the Effective Date, the resulting savings bank will
continue to issue deposit accounts on the same basis as immediately prior to the
Effective Date.
11. Effect of Conversion. Upon the Effective Date of the Conversion and the
Reorganization, all assets and property (real, personal and mixed, tangible and
intangible, chooses in action, rights and credits) then owned by the Bank or the
Mutual Holding Company or which would inure to either of them, shall immediately
by operation of law and without any conveyance, transfer or further action,
become the property of the resulting savings bank, which shall have, hold and
enjoy them in its own right as fully and to the same extent as they were
possessed, held and enjoyed by the Bank and the Mutual Holding Company
immediately prior to the Effective Date of the Conversion. The resulting savings
bank shall be deemed to be a continuation of the entity of both the Bank and the
Mutual Holding Company and all of the rights and obligations of the Bank and the
Mutual Holding Company shall remain unimpaired; and the resulting savings bank,
upon the Effective Date of the Conversion, shall succeed to all those rights and
obligations and the duties and liabilities connected therewith.
12. Directors and Executive Officers. The persons who are the current
officers and directors of the Bank will be the directors and officers of the
resulting savings bank and such terms or positions will be unchanged.
A - 3
<PAGE>
13. Abandonment of Plan of Merger. This Plan of Merger may be abandoned by
either the Bank or the Mutual Holding Company at any time before the Effective
Date in the manner set forth in Section 28 of the Plan.
14. Amendment of this Plan of Merger. This Plan of Merger may be amended or
modified at any time by mutual agreement of the Boards of Directors of the Bank
and the Mutual Holding Company in the manner set forth in Section 28 of the
Plan.
15. Governing Law. This Plan of Merger is made pursuant to, and shall be
construed and be governed by, the laws of the United States, and the rules and
regulations promulgated thereunder, including without limitation, the rules and
regulations of the OTS.
16. All Terms Included. This Plan of Merger sets forth all terms,
conditions, agreements and understandings of the Bank and the Mutual Holding
Company with respect to the Conversion.
17. Counterparts. This Plan of Merger may be executed in several identical
counterparts, each of which when executed by the Parties and delivered shall be
an original, but all of which together shall constitute a single instrument. In
making proof of this Plan of Merger, it shall not be necessary to produce or
account for more than one such counterpart.
A - 4
<PAGE>
APPENDIX B
PLAN OF REORGANIZATION
PLAN OF REORGANIZATION, dated as of __________ __, 199__ ("Agreement"), by
and among Guaranty Federal Savings Bank, a federally chartered savings bank (the
"Bank"), Guaranty Federal Interim Savings Bank ("Interim B"), a to-be-formed
interim federal savings bank which will be organized for the sole purpose of
consummating the reorganization provided for herein, and Guaranty Federal
Bancshares, Inc. ("Holding Company"), a Delaware corporation wholly owned by the
Bank (such entities collectively referred to herein as the "Parties" or
individually as "Party"). Unless otherwise noted, defined terms shall have the
same meaning as those set forth in the Plan of Conversion of Guaranty Federal
Bancshares, M.H.C. (the "Mutual Holding Company") and the Agreement and Plan of
Reorganization between the Holding Company and the Bank (the "Plan") (of which
this Plan of Reorganization is an Appendix thereto).
W I T N E S S E T H:
_ _ _ _ _ _ _ _ _ _
WHEREAS, the Board of Directors of the Bank has determined that it is in
the best interests of the Bank and its stockholders for the Bank to be
reorganized into the holding company form of ownership;
WHEREAS, the Bank has caused the Holding Company to be organized under
Delaware law as a wholly owned subsidiary for the purpose of becoming the
holding company of the Bank;
WHEREAS, Interim B is being organized by the officers of the Bank as a
federally chartered interim stock savings bank with the Holding Company as its
sole stockholder in order to effect the Reorganization; and
WHEREAS, the formation of a holding company by the Bank will be effected by
causing the Holding Company to become the sole stockholder of Interim B, and
then merging Interim B with and into the Bank, so that as part of the merger all
of the outstanding shares of common stock of the Bank will be converted
automatically into and become shares of common stock of the Holding Company,
which will as a result thereof become the sole stockholder of the Bank (such
transactions collectively referred to as the "Reorganization");
WHEREAS, in connection with the Reorganization, the existing minority
stockholders of the Bank will exchange their shares of the Bank Common Stock for
shares of common of the Holding Company based upon an Exchange Ratio established
in accordance with the independent appraisal of the Bank upon merger with
Interim A, and the remaining shares will be sold in subscription and community
offerings, giving priority subscription rights as set forth in the Plan in
accordance with OTS conversion regulations; and
WHEREAS, the Bank and Interim B (the Bank and Interim B may be referred to
together the "Constituent Banks") and the Holding Company desire to provide
herein for the terms and conditions of the Reorganization.
B - 1
<PAGE>
NOW, THEREFORE, the Bank, Interim B and the Holding Company do hereby agree
as follows:
1. Effective Date. The Reorganization shall become effective only upon the
effectiveness of the Conversion and the Reorganization on the date specified in
the endorsement of the articles of combination relating to the Reorganization by
the Secretary of the OTS pursuant to 12 C.F.R.
ss. 552.13(k), or any successor thereto (the "Effective Date").
2. The Merger and Effect Thereof. Subject to the terms and conditions set
forth herein, including, without limitation, the prior approval of the OTS and
the expiration of all applicable waiting periods, Interim B shall merge with and
into the Bank, which shall be the surviving bank (the "Surviving Bank"). Upon
consummation of the Reorganization, the Surviving Bank shall be considered the
same business and corporate entity as each of the Constituent Banks and
thereupon and thereafter all the property, rights, powers and franchises of each
of the Constituent Banks shall vest in the Surviving Bank and the Surviving Bank
shall be subject to and be deemed to have assumed all of the debts, liabilities,
obligations and duties of each of the Constituent Banks and shall have succeeded
to all of each of their relationships, fiduciary or otherwise, as fully and to
the same extent as if such property, rights, privileges, powers, franchises,
debts, obligations, duties and relationships had been originally acquired,
incurred or entered into by the Surviving Bank. In addition, any reference to
either of the Constituent Banks in any contract, will or document, whether
executed or taking effect before or after the Effective Date, shall be
considered a reference to the Surviving Bank if not inconsistent with the other
provisions of the contract, will or document; and any pending action or other
judicial proceeding to which either of the Constituent Banks is a party shall
not be deemed to have abated or to have been discontinued by reason of the
Reorganization, but may be prosecuted to final judgment, order or decree in the
same manner as if the Reorganization had not occurred or the Surviving Bank may
be substituted as a party to such action or proceeding, and any judgment, order
or decree may be rendered for or against it that might have been rendered for or
against either of the Constituent Banks if the Reorganization had not occurred.
3. Conversion of Stock.
(a) On the Effective Date, (i) each share of common stock, par value
$1.00 per share, of the Bank ("the Bank Common Stock") issued and outstanding
immediately prior to the Effective Date shall, by virtue of the Reorganization
and without any action on the part of the holder thereof, be converted, pursuant
to the Exchange Ratio, into a fixed number of shares of common stock, par value
$.10 per share, of the Company ("Holding Company Common Stock"), (ii) each share
of common stock, par value $1.00 per share, of Interim B ("Interim B Common
Stock") issued and outstanding immediately prior to the Effective Date shall, by
virtue of the Reorganization and without any action on the part of the holder
thereof, be converted into one share of the Savings Bank Common Stock, and (iii)
each share of Holding Company Common Stock issued and outstanding immediately
prior to the Effective Date shall, by virtue of the Reorganization and without
any action on the part of the holder thereof, be canceled. The Company, as the
sole stockholder of Interim B, shall (i) issue shares of Company Common
B - 2
<PAGE>
Stock in accordance with the terms hereof and (ii) cancel all previously issued
and outstanding shares of Holding Company Common Stock upon the effectiveness of
the Reorganization.
(b) On and after the Effective Date, there shall be no registration of
any transfers on the stock transfer books of Interim B or the Bank of shares of
Interim B Common Stock or the Bank Common Stock which were outstanding
immediately prior to the Effective Date.
4. Exchange of Shares.
(a) At or after the Effective Date, each holder of a certificate or
certificates theretofore evidencing issued and outstanding shares of the Bank
Common Stock, upon surrender of the same to an agent, duly appointed by the
Holding Company ("Exchange Agent"), shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of full shares of
Holding Company Common Stock determined in accordance with the Exchange Ratio
provided in Section 3 hereof. The Exchange Agent will mail to each holder of
record of an outstanding certificate which immediately prior to the Effective
Date evidenced shares of the Bank Common Stock, and which is to be exchanged for
Holding Company Common Stock as provided in Section 3 hereof, a form of letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to such certificate shall pass, only upon delivery of such
certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Reorganization and of the procedure for surrendering to
the Exchange Agent such certificate in exchange for a certificate or
certificates evidencing Holding Company Common Stock.
(b) No holder of a certificate thereto representing shares of Bank
Common Stock shall be entitled to receive any dividends in respect of the
Holding Company Common Stock into which such shares shall have been converted by
virtue of the Conversion and Reorganization until the certificate representing
such shares of Bank Common Stock is surrendered in exchange for certificates
representing shares of Holding Company Common Stock. In the event that dividends
are declared and paid by the Holding Company in respect of Holding Company
Common Stock after the consummation of the Conversion and Reorganization but
prior to surrender of certificates representing shares of Bank Common Stock,
dividends payable in respect of shares of Bank Common Stock not then issued
shall accrue (without interest). Any such dividends shall be paid (without
interest) upon surrender of the certificates representing such shares of Bank
Common Stock. The Holding Company shall be entitled, after the consummation of
the Conversion and Reorganization, to treat certificates representing shares of
Bank Common Stock as evidencing ownership of the number of full shares of
Holding Company Common Stock into which the shares of Bank Common Stock
represented by such certificates shall have been converted, notwithstanding the
failure on the part of the holder thereof to surrender such certificates.
B - 3
<PAGE>
(c) If any certificate evidencing shares of Company Common Stock is to
be issued in a name other than that in which the certificate evidencing the Bank
Common Stock surrendered in exchange therefor is registered, it shall be a
condition of the issuance thereof that the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Holding
Company Common Stock in any name other than that of the registered holder of the
certificate surrendered or otherwise establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
(d) If, between the date hereof and the Effective Date, the shares of
Bank Common Stock shall be changed into a different number or class of shares by
reason of any reclassifica- tion, recapitalization, split-up, combination,
exchange of shares or readjustment, or a stock dividend thereon shall be
declared with a record date within said period, the Exchange Ratio specified in
Section 3(a) hereof shall be adjusted accordingly.
5. Dissenting Shares. Holders of shares of the Bank Common Stock shall not
be entitled to exercise dissenters' or appraisal rights in connection with the
Reorganization in accordance with 12 C.F.R. ss. 552.14, or any successor
thereto.
6. Name of Surviving Bank. The name of the Surviving Bank shall be
"Guaranty Federal Savings Bank."
7. Directors and Officers of the Surviving Bank. The persons who are the
current officers and directors of the Bank will be the directors and officers of
the Surviving Bank and their terms and positions will remain unchanged.
8. Offices. As of the Effective Date, the main office of the Surviving Bank
shall remain at 1341 W. Battlefield, Springfield, Missouri 65807 and the
location of the other offices of the Surviving Bank shall be those of the Bank
in existence on the date of this Plan of Reorganization. In addition, the
Surviving Bank shall operated branch offices at such additional locations as may
be approved by the OTS.
9. Charter and Bylaws. On and after the Effective Date, the Charter and
Bylaws of the Bank as in effect immediately prior to the Effective Date shall be
the Charter and Bylaws of the Surviving Bank until amended in accordance with
the terms thereof and applicable law. The Bank shall amend its Charter to
establish a liquidation account on behalf of each depositor member of the Mutual
Holding Company, as defined in the Plan, in accordance with Section 16 of the
Plan.
10. Savings Accounts. Upon the Effective Date, all savings accounts of the
Bank, without reissue, shall be and become savings accounts of the Surviving
Bank without change in their respective terms, including, without limitation,
maturity, minimum required balances or withdrawal value.
B - 4
<PAGE>
11. Stock Compensation Programs. By voting in favor of this Agreement, the
Company shall have approved adoption of the Bank's existing stock compensation
programs, including the 1995 Stock Option Plan ("Option Plan"), and the
Recognition and Retention Plan and Trust ("RRP") as plans of the Company and
shall have agreed to issue Company Common Stock in lieu of Bank Common Stock
pursuant to the terms of such plans, subject to the Exchange Ratio set forth in
section 3 hereof. As of the Effective Date of the Reorganization, rights
outstanding under the Option Plan and RRP shall be assumed by the Company and
thereafter shall be rights only for shares of Company Common Stock, with each
such right being for a number of shares of Company Common Stock equal to the
number of shares of Bank Common Stock that were available thereunder immediately
prior to the Effective Date of the Reorganization, adjusted pursuant to the
Exchange Ratio, and with no change in any other term or condition of such right,
other then as needed to adjust the price or number of shares pursuant to the
Exchange Ratio. The Company shall make appropriate amendments to the Option Plan
and RRP to reflect their adoption by the Company without adverse effect upon the
options outstanding or rights thereunder.
12. Other Employment Agreements and Benefit Plans. At the Effective Date
and except as otherwise provided in Section 11 above, all rights to purchase,
sell or receive the Bank Common Stock and all rights to elect to make payment in
the Bank Common Stock under any agreement between the Bank and any director,
officer or employee thereof or under any plan or program of the Bank, shall
automatically, by operation of law, be converted into and shall become an
identical right to purchase, sell or receive Holding Company Common Stock and an
identical right to make payment in Holding Company Common Stock under any such
agreement between the Bank and any director, officer or employee thereof or
under such plan or program of the Bank, subject to the Exchange Ratio set forth
in Section 3 hereof.
13. Stockholder Approval. The affirmative vote of the holders of two-thirds
of the issued and outstanding the Bank Common Stock held by persons other than
the Mutual Holding Company shall be required to approve this Agreement on behalf
of the Bank. The approval of the Bank, as the sole holder of Holding Company
Common Stock, shall be required to approve this Plan of Reorganization on behalf
of the Holding Company and the approval of the Holding Company, as the sole
holder of Interim B Common Stock, shall be required to approve this Plan of
Reorganization on behalf of Interim B.
14. Registration; Other Approvals. In addition to the approvals set forth
in Sections 1 and 13 hereof, the Parties' obligations to consummate the
Reorganization shall be subject to the Holding Company Common Stock to be issued
hereunder in exchange for the Bank Common Stock being registered under the
Securities Act of 1933, as amended, and registered or qualified under applicable
state securities laws, as well as the receipt of all other approvals, consents
or waivers as the Parties may deem necessary or advisable.
15. Income Tax Matters. The Parties hereto shall have received an opinion
of counsel, or a private letter ruling from the Internal Revenue Service,
satisfactory to them in form and
B - 5
<PAGE>
substance, with respect to the federal income tax consequences of this Plan of
Reorganization, including the formation of a holding company, as contemplated
herein.
16. Abandonment of Plan of Reorganization. This Plan of Reorganization may
be abandoned by the Bank, Interim B or the Holding Company at any time before
the Effective Date in the event that (a) any action, suit, proceeding or claim
has been instituted, made or threatened relating to the Plan of Reorganization
which shall make consummation of the transactions contemplated hereby
inadvisable in the opinion of the Bank, Interim B or the Holding Company, (b)
the Bank Common Stock, as the case may be, is no longer quoted on the National
Association of Securities Dealers Automated Quotations System, or (c) for any
other reason consummation of the transactions contemplated hereby is inadvisable
in the opinion of the Bank, Interim B or the Holding Company. Such abandonment
shall be effected by written notice by the Bank, Interim B or the Holding
Company to the other Parties hereto, authorized or approved by the Board of
Directors of the Party giving such notice. Upon the giving of such notice, this
Agreement shall be terminated and there shall be no liability hereunder or on
account of such termination on the part of the Bank, Interim B or the Holding
Company or the directors, officers, employees, agents or stockholders of any of
them. In the event of abandonment of this Plan of Reorganization, the Savings
Bank, if in existence, shall pay the fees and expenses incurred by itself, the
Bank, Interim B and the Holding Company in connection with this Plan of
Reorganization and the Reorganization.
17. Amendments. To the extent permitted by law, this Plan of Reorganization
may be amended by a subsequent writing signed by the Parties hereto upon the
approval of the Board of Directors of each of the Parties hereto and subject to
Section 28 of the Plan; provided, however, that the provisions of Section 3
hereof relating to the consideration to be exchanged for shares of the Bank
Common Stock shall not be amended after the meeting of stockholders of the Bank
at which this Agreement is considered so as to decrease the amount or change the
form of such consideration without the approval of such stockholders.
18. Successors. This Plan of Reorganization shall be binding on the
successors of the Bank, Interim B and the Holding Company.
19. Counterparts. This Plan of Reorganization may be executed in one or
more counterparts.
20. Governing Law. This Plan of Reorganization shall be governed by and
construed in accordance with the laws of the United States of America and, to
the extent not governed by such laws, the laws of the State of Delaware.
21. Execution by Interim B. The Bank and the Holding Company acknowledge
that as of the date hereof, Interim B is in organization and has not received
its charter from the OTS. Therefore, Interim B does not have the legal capacity
to execute this Plan of Reorganization as of the date hereof. The Holding
Company agrees to cause Interim B to execute this Plan of Reorganization
promptly following the organization of Interim B upon receipt of OTS approval
B - 6
<PAGE>
for Interim B to be organized. The Bank and the Holding Company agree to be
bound by this Plan of Reorganization prior to and following such execution by
Interim B.
B - 7
EXHIBIT 3.(i)
<PAGE>
CERTIFICATE OF INCORPORATION
OF
GUARANTY FEDERAL BANCSHARES, INC.
ARTICLE I
Name
The name of the corporation is Guaranty Federal Bancshares, Inc.
(herein the "Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Corporation Trust Center, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a
savings and loan holding company and to transact all other lawful business for
which corporations may be incorporated pursuant to the laws of the State of
Delaware. The Corporation shall have all the powers of a corporation organized
under said laws.
ARTICLE IV
Term
The Corporation is to have perpetual existence.
ARTICLE V
Incorporators
The name and mailing address of the incorporator is as follows:
Name Mailing Address
James E. Haseltine 1341 W. Battlefield
Springfield, Missouri 65807
<PAGE>
ARTICLE VI
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 12,000,000, of which 10,000,000 are to
be shares of common stock, $.10 par value per share, and of which 2,000,000 are
to be shares of serial preferred stock, $.01 par value per share. The shares may
be issued by the Corporation without the approval of stockholders except as
otherwise provided in this Article VI or the rules of a national securities
exchange, if applicable. The consideration for the issuance of the shares shall
be paid to or received by the Corporation in full before their issuance and
shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the board of directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate the holders of
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holders.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock, and on any class
or series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when as declared
by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any event, the full preferential amounts to which they
are respectively entitled, the holders of the common stock and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation.
B. Serial Preferred Stock. Except as provided in this Certificate the
board of directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and
2
<PAGE>
relative, participating, optional or other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, including,
but not limited to determination of any of the following:
1. the distinctive serial designation and the number of shares
constituting such series; and
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends; and
3. the voting powers, full or limited, if any, of the shares of such
series; and
4. whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon which such
shares may be redeemed; and
5. the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
6. whether the shares of such series shall be entitled to the benefits
of a sinking or retirement fund to be applied to the purchase or redemption of
such shares, and, if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such funds; and
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange; and
8. the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
ARTICLE VII
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or
3
<PAGE>
series; but any such unissued stock, bonds, certificates of indebtedness,
debentures or other securities convertible into or exchangeable for stock or
carrying any right to purchase stock may be issued pursuant to resolution of the
board of directors of the Corporation to such persons, firms, corporations or
associations, whether or not holders thereof, and upon such terms as may be
deemed advisable by the board of directors in the exercise of its sole
discretion.
ARTICLE VIII
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law or regulation.
ARTICLE IX
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the
Bylaws of the Corporation, no action required to be taken or which may be taken
at any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the board of directors of the
Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board of directors or in the Bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of the Corporation may provide.
ARTICLE X
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the board of directors of the
4
<PAGE>
Corporation or by any stockholder of the Corporation entitled to vote generally
in the election of directors. In order for a stockholder of the Corporation to
make any such nominations and/or proposals, he or she shall give notice thereof
in writing, delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation not less than thirty days nor more
than sixty days prior to any such meeting; provided, however, that if less than
thirty-one days' notice of the meeting is given to stockholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary of the
Corporation not later than the close of the tenth day following the day on which
notice of the meeting was mailed to stockholders. Each such notice given by a
stockholder with respect to nominations for election of directors shall set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice, (ii) the principal occupation or
employment of each such nominees, (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee, (iv) such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended, including, without limitation,
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected, and (v) as to the stockholder giving
such notice (a) his name and address as they appear on the Corporation's books,
and (b) the class and number of shares of the Corporation which are beneficially
owned by such stockholder. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation.
B. Each such notice given by a stockholder to the Secretary with
respect to business proposals to bring before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may,
if the facts warrant, determine and declare to the meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding adjourned, special or annual meeting of the stockholders taking place
thirty days or more thereafter. This provision shall not require the holding of
any adjourned or special meeting of stockholders for the purpose of considering
such defective nomination or proposal.
ARTICLE XI
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
be such number, not less than three nor more than 15 (exclusive of directors, if
any, to be elected by holders of preferred stock of the Corporation, voting
separately as a class), as shall be provided from time to time in or in
accordance with the Bylaws of the Corporation, provided that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director, and provided further that no action shall be taken to
decrease or increase the number of directors from time to time unless at least
two-thirds of the directors then in office shall concur in said action.
Vacancies in the board of directors of the
5
<PAGE>
Corporation, however caused, and newly created directorships shall be filled by
a vote of two-thirds of the directors then in office, whether or not a quorum,
and any director so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which the director has
been chosen expires and when the director's successor is elected and qualified.
B. Classified Board. The board of directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. Such classes shall
be as nearly equal in number as the then total number of directors constituting
the entire board of directors shall permit, with the terms of office of all
members of one class expiring each year. At the first annual meeting of
stockholders, directors in Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding meeting thereafter. At the third
annual meeting of stockholders, directors of Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each succeeding annual meeting, directors whose term shall expire
at any annual meeting shall continue to serve until such time as his successor
shall have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting. The initial board of directors
shall consist of Jack L. Barham and James E. Haseltine in Class 1, Wayne V.
Barnes and Ivy L. Rogers in Class 2, and George L. Hall and Gary Lipscomb in
Class 3.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the board of directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided above in this Article XI. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
ARTICLE XII
Removal of Directors
Notwithstanding any other provision of this Certificate or the Bylaws
of the Corporation, no member of the board of directors of the Corporation may
be removed except for cause, and then only by the affirmative vote of at least
80% of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this purpose as one
class) cast at a
6
<PAGE>
meeting of the stockholders called for that purpose. Notwithstanding the
foregoing, whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the preceding provisions of this Article
XII shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XIII
Certain Limitations on Voting Rights
Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 10% of the then-outstanding shares of
Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of
the shares held in excess of the Limit. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
which are both beneficially owned by such person and owned of record by such
record owner and the denominator of which is the total number of shares of
Common Stock beneficially owned by such person owning shares in excess of the
Limit.
Further, for a period of five years from April 7, 1995, no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of any equity security of the Corporation.
B. The following definitions shall apply to this Article XIII.
1. "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
in effect on the date of filing of this Certificate of Incorporation.
2. "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of
the General Rules and Regulations under the Securities Exchange Act of 1934 (or
any successor rule or statutory provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or provision thereto, pursuant to
said Rule 13d-3 as in effect on the date of filing of this Certificate of
Incorporation; provided, however, that a person shall, in any event, also be
deemed the "beneficial owner" of any Common Stock:
(1) which such person or any of its affiliates beneficially owns,
directly or indirectly; or
(2) which such person or any of its affiliates has (i) the right
to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be
the beneficial owner of any voting shares solely by reason of
an agreement, contract, or other arrangement with this
Corporation to effect any transaction which is described in
any one or more of Sections 1 through 5 of Section A of
Article XIV) or upon the exercise of conversion rights,
exchange rights, warrants, or options or otherwise, or (ii)
sole or shared voting or
7
<PAGE>
investment power with respect thereto pursuant to any
agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial owner
of any voting shares solely by reason of a revocable proxy
granted for a particular meeting of stockholders, pursuant to
a public solicitation of proxies for such meeting, with
respect to shares of which neither such person nor any such
affiliate is otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of
its affiliates acts as a partnership, limited partnership,
syndicate or other group pursuant to any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of
this Corporation;
and provided further, however, that (1) no Director or Officer of this
Corporation (or any affiliate of any such Director or Officer) shall, solely by
reason of any or all of such Directors or Officers acting in their capacities as
such, be deemed, for any purposes hereof, to beneficially own any Common Stock
beneficially owned by any other such Director or Officer (or any affiliate
thereof), and (2) neither any employee stock ownership or similar plan of this
Corporation or any subsidiary of this Corporation, nor any trustee with respect
thereto or any affiliate of such trustee (solely by reason of such capacity of
such trustee), shall be deemed, for any purposes hereof, to beneficially own any
Common Stock held under any such plan. For purposes of computing the percentage
beneficial ownership of Common Stock of a person, the outstanding Common Stock
shall include shares deemed owned by such person through application of this
subsection but shall not include any other Common Stock which may be issuable by
this Corporation pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise. For all other purposes, the
outstanding Common Stock shall include only Common Stock then outstanding and
shall not include any Common Stock which may be issuable by this Corporation
pursuant to any agreement, or upon the exercise of conversion rights, warrants
or options, or otherwise.
3. A "person" shall mean any individual, firm, corporation, or other
entity.
C. The Board of Directors shall have the power to construe and apply
the provisions of this Article XIII and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (i) the number of shares of Common Stock beneficially owned by
any person, (ii) whether a person is an affiliate of another, (iii) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership, (iv) the
application of any other definition or operative provision of the section to the
given facts, or (v) any other matter relating to the applicability or effect of
this Article XIII.
D. The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit (or holders of record of Common Stock beneficially owned by any person
in excess of the Limit) supply the Corporation with complete information as to
(i) the record owner(s) of all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit, (ii) any other factual
matter relating to the applicability or effect of this Article XIII as may
reasonably be requested of such person.
E. Except as otherwise provided by law or expressly provided in this
Article XIII, the presence in person or by proxy, of the holders of record of
shares of capital stock of the Corporation
8
<PAGE>
entitling the holders thereof to cast a majority of the votes (after giving
effect, if required, to the provisions of this Article XIII) entitled to be cast
by the holders of shares of capital stock of the Corporation entitled to vote
shall constitute a quorum at all meetings of the stockholders, and every
reference in this Certificate of Incorporation to a majority or other proportion
of capital stock (or the holders thereof) for purposes of determining any quorum
requirement or any requirement for stockholder consent or approval shall be
deemed to refer to such majority or other proportion of the votes (or the
holders thereof) then entitled to be cast in respect of such capital stock.
F. The provisions of this Article XIII shall not be applicable to the
acquisition of more than 10% of any class of equity security of the Corporation
if such acquisition has been approved by a majority of the Continuing Directors,
as defined in Article XIV of this Certificate; provided, however, that such
approval shall only be effective if such continuing directors shall have the
power to construe and apply the provisions of this Article XIII and to make all
determinations necessary or desirable to implement such provisions, including
but not limited to matters with respect to (a) the number of shares beneficially
owned by any person, (b) whether a person has an agreement, arrangement, or
understanding with another as to the matters referred to in the definition of
beneficial ownership, (c) the application of any other material fact relating to
the applicability or effect of this Article XIII. Any constructions,
applications, or determinations made by the Continuing Directors pursuant to
this Article XIII in good faith and on the basis of such information and
assistance as was then reasonably available for such purpose shall be conclusive
and binding upon the Corporation and its stockholders.
G. In the event any provision (or portion thereof) of this Article XIII
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Article XIII shall remain in
full force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken here from or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
each such remaining provision (or portion thereof) of this Article XIII remain,
to the fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
ARTICLE XIV
Approval of Business Combinations
A. Standards of Board of Directors' Evaluation of an Offer. The Board
of Directors of the Corporation, when evaluating any offer of another Person to
effect a Business Combination shall, in connection with the exercise of its
judgment in determining what is in the best interests of the Corporation and its
shareholders, give due consideration to all relevant factors, including, without
limitation: (i) the social and economic effects of acceptance of such offer on
its depositors, borrowers, other customers, employees, and creditors of the
Corporation and its Subsidiaries, and on the communities in which the
Corporation and its Subsidiaries operate or are located; (ii) the ability of the
Corporation and its Subsidiaries to fulfill the objectives of a bank and/or
savings bank and/or savings and loan association holding company, as applicable,
and of commercial banking and/or savings bank and/or savings and loan entities,
as applicable, under applicable federal and state statutes and regulations;
(iii) the business and financial condition and prospects and earnings prospects
of the Person or Persons proposing the Business Combination, including, but not
limited to, debt service and other existing financial obligations, financial
obligations to be incurred in connection with the Business Combination, and
other likely financial
9
<PAGE>
obligations of such Person or Persons, and the possible effect of such
conditions and prospects upon the Corporation and its Subsidiaries and the
communities in which the Corporation and its Subsidiaries are located; (iv) the
competence, experience, and integrity of the Person or Persons proposing the
Business Combination and its or their management; and (v) the prospects for
successful conclusion of the proposed Business Combination. The provisions of
this Article XIV shall be deemed solely to grant discretionary authority to the
Board of Directors and shall not be deemed to provide any constituency the right
to be considered or to compel the consideration of its interests.
B. General Requirement. The affirmative vote of the holders of not less
than eighty percent (80%) of the outstanding shares of "Voting Stock" (as
hereinafter defined) shall be required for the approval or authorization of any
"Business Combination", as defined and set forth below:
1. Any merger, reorganization, or consolidation of the
Corporation or any of its Affiliates (as defined in Article XIII of this
Certificate) with or into any Principal Shareholder (as hereinafter defined);
2. Any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition (in one transaction or in a series of related transactions) of
all or a "Substantial Part" (as hereinafter defined) of the assets of the
Corporation or any of its Affiliates to any Principal Shareholder;
3. Any sale, lease, exchange, or other transfer (in one
transaction or in a series of related transactions) by any Principal Shareholder
to the Corporation or any of the Corporation's Affiliates of any assets, cash,
or securities in exchange for shares of Voting Stock (or of shares of stock of
any of the Corporation's Affiliates entitled to vote in the election of
directors of such Affiliate or securities convertible into or exchangeable for
shares of Voting Stock or such stock of an Affiliate, or options, warrants, or
rights to purchase shares of Voting Stock or such stock of an Affiliate);
4. The adoption at any time when there exists any Principal
Shareholder of any plan or proposal for the liquidation or dissolution of the
Corporation; and
5. Any reclassification of securities (including any reverse
stock split), recapitalization, or other transaction at any time when there
exists any Principal Shareholder if such reclassification, recapitalization, or
other transaction would result in a decrease in the number of holders of the
outstanding shares of Voting Stock.
The affirmative vote required by this Article XIV shall be in addition
to the vote of the holders of any class or series of stock of the Corporation
otherwise required by law, by any other Article of this Certificate, as amended,
by any resolution of the Board of Directors providing for the issuance of a
class or series of stock, or by any agreement between the Corporation and any
national securities exchange.
C. Certain Definitions. For the purposes of this Article XIV:
1. The term "Principal Shareholder" shall mean and include any
individual, Corporation, partnership, or other person or entity which, together
with its "Affiliates" and "Associates" (as defined in Article XIII of this
Certificate), "beneficially owns" (as defined in Article XIII of this
Certificate) in the aggregate ten percent (10%) or more of the outstanding
shares of Voting Stock, and any Affiliate or Associate of any such individual,
corporation, partnership, or other person or entity.
10
<PAGE>
2. The term "Substantial Part" shall mean more than
twenty-five percent (25%) of the fair market value of the total assets of the
Corporation, as of the end of its most recent fiscal quarter ending prior to the
time the determination is being made.
3. The term "Voting Stock" shall mean the stock of the
Corporation entitled to vote in the election of directors.
4. Any corporation, partnership, person, or entity will be
deemed to be a "beneficial owner" of or to own beneficially any share or shares
of stock of the Corporation: (a) which it owns directly, whether or not of
record; or (b) which it has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement or arrangement or understanding or upon exercise of conversion rights,
exchange rights, warrants or options, or otherwise, or which it has the right to
vote pursuant to any agreement, arrangement, or understanding; or (c) which are
beneficially owned, directly or indirectly (including shares deemed to be owned
through application of clause (b) above) by any Affiliate or Associate; or (d)
which are beneficially owned, directly or indirectly (including shares deemed to
be owned through application of clause (b) above) by any other corporation,
person, or entity with which it or any of its Affiliates or Associates have any
agreement or arrangement or understanding for the purpose of acquiring, holding,
voting, or disposing of Voting Stock.
For the purpose only of determining the percentage of the outstanding
shares of Voting Stock which any corporation, partnership, person, or other
entity beneficially owns, directly or indirectly, the outstanding shares of
Voting Stock will be deemed to include any shares of Voting Stock which such
corporation, partnership, person or other entity beneficially owns pursuant to
the foregoing provisions of this subsection (whether or not such shares of
Voting Stock are in fact issued or outstanding), but shall not include any other
shares of Voting Stock which may be issuable either immediately or at some
future date pursuant to any agreement, arrangement, or understanding or upon
exercise of conversion rights, exchange rights, warrants, options, or otherwise.
D. Exceptions. The provisions of this Article XIV shall not apply to a
Business Combination which is approved by two-thirds of those members of the
Board of Directors who were directors prior to the time when the Principal
Shareholder became a Principal Shareholder (the "Continuing Directors"). The
provisions of this Article XIV also shall not apply to a Business Combination
which (a) does not change any shareholder's percentage ownership in the shares
of stock entitled to vote in the election of directors of any successor of the
Corporation from the percentage of the shares of Voting Stock owned by such
shareholder; (b) provides for the provisions of this Article XIV, without any
amendment, change, alteration, or deletion, to apply to any successor to the
Corporation; and (c) does not transfer all or a Substantial Part of the
Corporation's assets other than to a wholly-owned subsidiary of the Corporation.
E. Additional Provisions. Nothing contained in this Article XIV, shall
be construed to relieve a Principal Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in this Article XIV shall prevent
any shareholders of the Corporation from objecting to any Business Combination
and from demanding any appraisal rights which may be available to such
Shareholder.
F. Notwithstanding Article XX or any provisions of this Certificate or
the Bylaws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, this Certificate or the Bylaws of the
Corporation), the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote thereon (and, if any class or series is
entitled to vote thereon
11
<PAGE>
separately, the affirmative vote of the holders of at least 80% of the
outstanding shares of each such class or series) shall be required to amend or
repeal this Article XIV or adopt any provisions inconsistent with this Article
XIV.
ARTICLE XV
Fair Price Requirements
A. General Requirement. No "Business Combination" (as defined in
Article XIV) shall be effected unless all of the following conditions, to the
extent applicable, are fulfilled.
1. The ratio of (a) the aggregate amount of the cash and the
fair market value of the other consideration to be received per share by the
holders of the common stock of the Corporation in the Business Combination to
(b) the "Market Price" (as hereinafter defined) of the common stock of the
Corporation immediately prior to the announcement of the Business Combination or
the solicitation of the holders of the common stock of the Corporation regarding
the Business Combination, whichever is first, shall be at least as great as the
ratio of (x) the highest price per share previously paid by the "Principal
Shareholder" (as hereinafter defined) (whether before or after it became a
Principal Shareholder) for any of the shares of common stock of the Corporation
at any time beneficially owned, directly, or indirectly, by the Principal
Shareholder to (y) the Market Price of the common stock of the Corporation on
the trading date immediately prior to the earliest date on which the Principal
Shareholder (whether before or after it became a Principal Shareholder)
purchased any shares of common stock of the Corporation during the two year
period prior to the date on which the Principal Shareholder acquired the shares
of common stock of the Corporation at any time owned by it for which it paid the
highest price per share (or, if the Principal Shareholder did not purchase any
shares of common stock of the Corporation during the two year period, the Market
Price of the common stock of the Corporation on the date of two years prior to
the date on which the Principal Shareholder acquired the shares of common stock
of the Corporation at any time owned by it for which it paid the highest price
per share).
2. The aggregate amount of the cash and the fair market value
of the other consideration to be received per share by the holders of the common
stock of the Corporation in the Business Combination shall be not less than the
highest price per share previously paid by the Principal Shareholder (whether
before or after it became a Principal Shareholder) for any of the shares of
common stock of the Corporation at any time beneficially owned, directly or
indirectly, by the Principal Shareholder.
3. The consideration to be received by the holders of the
common stock of the Corporation in the Business Combination shall be in the same
form and of the same kind as the consideration paid by the Principal Shareholder
in acquiring the majority of the shares of common stock of the Corporation
already beneficially owned, directly or indirectly, by the Principal
Shareholder.
The conditions imposed by this Article XV shall be in addition to all
other conditions (including, without limitation, the vote of the holders of any
class or series of stock of the Corporation) otherwise imposed by law, by any
other Article of this Certificate, by any resolution of the Board of Directors
providing for the issuance of a class or series of stock, or by any agreement
between the Corporation and any national securities exchange.
12
<PAGE>
B. Certain Definitions. For the purpose of this Article XV, the
definitions of "Business Combination," "Principal Shareholder", "Substantial
Part", "Voting Stock," and "Beneficial Owner" set forth in Article XIV will
apply to this Article XV.
The "Market Price" of the common stock of the Corporation shall be the
mean between the high "bid" and the low "asked" prices of the common stock in
the over-the-counter market on the day on which such value is to be determined
or, if no shares were traded on such date, on the next preceding day on which
such shares were traded, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or other national quotation
service. If the common stock of the Corporation is not regularly traded in the
over-the-counter market but is registered on a national securities exchange or
traded in the national over-the-counter market, the market value of the common
stock shall mean the closing price of the common stock on such national
securities exchange or market on the day on which such value is to be determined
or, if no shares were traded on such day, on the next preceding day on which
shares were traded, as reported by the National Quotation Bureau, Incorporated
or other national quotation service. If no such quotations are available, the
fair market value of the date in question of a share of such stock as determined
by the Board of Directors in good faith; and in the case of property other than
cash or stock, the fair market value of such property other than cash or stock,
the fair market value of such property on the date in question as determined by
the Board of Directors in good faith.
C. Exceptions. The provisions of this Article XV shall not apply to a
Business Combination which was approved by two-thirds of those members of the
Board of Directors of the Corporation who were directors prior to the time when
the Principal Shareholder became a Principal Shareholder. The provisions of
which this Article XV also shall not apply to a Business Combination which (a)
does not change any shareholder's percentage ownership in the shares of stock
entitled to vote in the election of directors of any successor of the
Corporation from the percentage of the shares of Voting Stock beneficially owned
by such shareholder; (b) provides for the provisions of this Article XV, without
any amendment, change alteration, or deletion, to apply to any successor to the
Corporation; and (c) does not transfer all or a Substantial Part of the
Corporation's assets other than to a wholly-owned subsidiary of the Corporation;
provided, however, that nothing contained in this Article XV shall permit the
Corporation to issue any of its shares of Voting Stock or to transfer any of its
assets to a wholly-owned subsidiary of the Corporation if such issuance of
shares of Voting Stock or transfer of assets is part of a plan to transfer such
shares of Voting Stock or assets to a Principal Shareholder.
D. Additional Provisions. Nothing contained in this Article XV shall be
construed to relieve a Principal Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in this Article XV shall prevent
any shareholders of the Corporation from objecting to any Business Combination
and from demanding any appraisal rights which may be available to such
shareholders.
E. Notwithstanding Article XX or any other provisions of this
Certificate or the Bylaws of the Corporation (and notwithstanding the fact that
a lesser percentage may be specified by law, this Certificate or the Bylaws of
the Corporation), the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote thereon (and, if any class or series is
entitled to vote thereon separately, the affirmative vote of the holders of at
least 80% of the outstanding shares of each such class or series) shall be
required to amend or repeal or adopt any provisions inconsistent with this
Article XV.
13
<PAGE>
ARTICLE XVI
Evaluation of Offers
The Board of Directors of the Corporation, when evaluating any offer to
(A) make a tender or exchange offer for any equity security of the Corporation,
(B) merge or consolidate the Corporation with another corporation or entity or
(C) purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer: on the
Corporation's present and future customers and employees and those of its
subsidiaries; on the communities in which the Corporation and its subsidiaries
operate or are located; on the ability of the Corporation to fulfill its
corporate objective as a savings and loan holding company under applicable
statutes and regulations; and on the ability of its subsidiary savings bank to
fulfill the objectives of a stock form savings bank under applicable statutes
and regulations.
ARTICLE XVII
Elimination of Directors' Liability
Directors of the Corporation shall have no liability to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XVII shall not eliminate liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not made in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which a director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after the effective date of this Certificate
to further eliminate or limit the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE XVIII
Indemnification
A. Persons. The Corporation shall indemnify, to the extent provided in
paragraphs B, D or F:
1. any person who is or was a director, officer, employee, of the
Corporation; and
2. any person who serves or served at the Corporation's
request as a director, officer, employee, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
14
<PAGE>
B. Extent -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
1. he is successful on the merits or otherwise; or
2. he acted in good faith in the transaction which is the
subject of the suit or action, and in a manner he reasonably believed to be in,
or not opposed to, the best interest of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article XIV of this
Certificate) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has been
adjudged liable to the Corporation unless (and only to the extent that) the
Court of Chancery or the court in which the suit was brought shall determine,
upon application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
person named in paragraph A shall be indemnified only if:
1. he is successful on the merits or otherwise; or
2. he acted in good faith in the transaction which is the
subject of the nonderivative suit and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article XIV of this
Certificate) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his conduct
was unlawful. The termination of a nonderivative suit by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, in itself, create a presumption that the person failed to satisfy the
standard of this paragraph E.2.
F. Determination That Standard Has Been Met. A determination that the
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in paragraph C.2 (second sentence), the determination may be
made by:
15
<PAGE>
1. the board of directors by a majority vote of a quorum consisting of
directors of the Corporation who were not parties to the action, suit or
proceeding; or
2. independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
3. the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation may pay in advance any expenses
(including attorneys' fees) which may become subject to indemnification under
paragraphs A-G if the person receiving the payment undertakes in writing to
repay the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A-G.
I. Nonexclusive. The indemnification and advancement of expenses
provided by paragraphs A-H or otherwise granted pursuant to Delaware law shall
not be exclusive of any other rights to which a person may be entitled by law,
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
J. Continuation. The indemnification and advance payment provided by
paragraphs A-H shall continue as to a person who has ceased to hold a position
named in paragraph A and shall inure to his heirs, executors and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in paragraph
A, against any liability asserted against him and incurred by him in any such
position, or arising out of his status as such, whether or not the Corporation
would have power to indemnify him against such liability under paragraphs A-H of
this Article XVIII.
L. Savings Clause. If this Article XVIII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVIII that shall
not have been invalidated and to the full extent permitted by applicable law.
If Delaware law is amended to permit further indemnification of the
directors, officers, employees and agents of the Corporation, then the
Corporation shall indemnify such persons to the fullest extent permitted by
Delaware law, as so amended. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director, officer, employee or agent existing at the time of
such repeal or modification.
16
<PAGE>
ARTICLE XIX
Amendment of Bylaws of the Corporation
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, repeal, alter, amend and rescind the Bylaws of the Corporation.
Notwithstanding any other provision of this Certificate or the Bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law), the Bylaws of the Corporation shall not be made, repealed,
altered, amended or rescinded by the stockholders of the Corporation except by
the vote of the holders of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the notice
of such meeting), or, as set forth above, by the board of directors.
ARTICLE XX
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles IX, X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX, and this
Article XX of this Certificate may not be repealed, altered, amended or
rescinded in any respect unless the same is approved by the affirmative vote of
the holders of not less than 80% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as a single class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the notice
of such meeting).
17
EXHIBIT 8.1
<PAGE>
November 4, 1997
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
1341 West Battlefield
Springfield, Missouri 65807
Dear Board Members:
In accordance with your request, set forth herein is the opinion of
this firm relating to certain federal income tax consequences of the two
integrated transactions described below.
We have examined such corporate records, certificates and other
documents as we have considered necessary or appropriate for this opinion. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies. In rendering our opinion, we have relied upon certain
written representations and covenants of Guaranty Federal Savings Bank (the
"Savings Bank") and Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding
Company") which are annexed hereto (collectively referred to herein as the
"Officer Affidavits").
STATEMENT OF FACTS
------------------
Based solely upon our review of the documents described herein, and in
reliance upon such documents, we understand that the relevant facts are as
follows. The Savings Bank and the Mutual Holding Company were created in a
reorganization of the Savings Bank from its prior mutual form (the "Mutual
Institution") in April of 1995 (the "1995 Reorganization"). In April of 1995,
the Mutual Holding Company and the Savings Bank received a federal tax opinion
from the law firm of Arndt & Associates stating that the 1995 Reorganization
constituted a tax-free transaction under Section 351 of the Internal Revenue
Code of 1986, as amended (the "Code"). In the 1995 Reorganization, the Mutual
Institution transferred substantially all of its assets and liabilities to the
newly created Savings Bank in exchange for all of the outstanding stock of the
Savings Bank ("Savings Bank Stock"), and converted its charter from that of a
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 2
federally-chartered mutual savings bank to that of a federally-chartered mutual
holding company. As part of the 1995 Reorganization, the Savings Bank sold a
portion of its stock to the public whereby immediately after the 1995
Reorganization the public owned less than 50.1% of the outstanding shares of
Savings Bank Stock and the Mutual Holding Company owned the remaining shares.
The principal business of the Savings Bank is the acceptance of savings
deposits from the general public and the origination and purchase of mortgage
loans for the purpose of constructing, financing or refinancing one-to-four
family residences and other improved residential and commercial real estate. The
Savings Bank's income is derived largely from interest and fees in connection
with its lending activities. Its principal expenses are interest paid on savings
deposits and operating expenses.
Currently, the management of the Savings Bank and the Mutual Holding
Company believe it would be in their best interest, as well as the best interest
of their stockholders and members (respectively) to operate in the corporate
structure specified below. The proposed transactions will result in the Savings
Bank being wholly owned by a stock holding company (the "Holding Company"),
which is a more common structure and form of ownership than a mutual holding
company. The new corporate structure would also provide greater organizational
flexibility, and enable the resulting institutions to increase their equity
capital base available for expansion of services, facilities, possible future
acquisitions of other financial institutions, possible diversification into
other related financial services activities, and enhance their ability to render
services to the public in a competitive manner. In addition, the proposed
transactions will result in the raising of additional capital for the Savings
Bank and the Holding Company and should result in a more active and liquid
market for the common stock of the Holding Company ("Holding Company Stock")
than currently exists for the Savings Bank Stock, although there can be no
assurances that this will be the case. Finally, the proposed transactions have
been structured to re-unite the accumulated earnings and profits tax attribute
retained by the Mutual Holding Company with the retained earnings of the Savings
Bank through a tax-free reorganization. This would increase the Savings Bank's
ability to pay dividends in the future.
The Savings Bank and the Mutual Holding Company have adopted a Plan of
Conversion and a related Plan of Merger (collectively referred to herein as the
"Plan of Conversion"). The Mutual Holding Company and the Savings Bank represent
that the Plan of Conversion complies with the provisions of Subpart A of 12
C.F.R. Part 563b which sets forth the Office of Thrift Supervision (the "OTS")
regulations for conversions of mutual institutions to stock form and that the
Plan of Conversion also complies with the provisions of 12 C.F.R. ss. 575.12(a),
which is the OTS regulation governing the conversion of mutual savings and loan
holding companies to stock form. The Mutual Holding Company and the Savings Bank
also represent that the Plan
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 3
of Conversion includes language that complies with 12 C.F.R. ss. 552.13, the OTS
regulation governing mergers involving federal stock associations.
For valid business reasons, as described above and in the prospectus to
be used in the public offerings of Holding Company Stock described herein
("Prospectus"), the present corporate structure of the Mutual Holding Company
and the Savings Bank will be changed pursuant to the following proposed
transactions:
(i) The Savings Bank will form "Guaranty Federal Bancshares, Inc."
(i.e., the Holding Company) as a new, wholly owned, first tier subsidiary, which
will become a new holding company. The Holding Company will receive approval
from the OTS to acquire control (as defined by the OTS) of the Savings Bank.
(ii) The Holding Company will form an interim corporation ("Interim B")
as a new, wholly owned first tier subsidiary that is a federally-chartered stock
savings bank.
(iii) Pursuant to the Plan of Conversion, the Mutual Holding Company
will convert from the mutual form to a federal interim stock savings bank
("Interim A") and simultaneously merge with and into the Savings Bank, with the
Savings Bank being the surviving corporation ("Merger 1"). The Savings Bank
Stock which was previously held by the Mutual Holding Company will be
extinguished. Eligible members of the Mutual Holding Company as of certain
specified dates set forth in the Plan of Conversion will be granted interests in
a liquidation account to be established by the Savings Bank (referred to herein
as "Savings Bank Liquidation Interests").
The initial balance of the liquidation account will equal the greater
of: (i) 100% of the retained earnings of the Mutual Institution as of the date
of the latest statement of financial condition contained in the final offering
circular utilized in the 1995 Reorganization, or (ii) a certain percentage of
the Savings Bank's total shareholder equity as reflected in its latest statement
of financial condition contained in the Prospectus to be utilized in the Mutual
Holding Company's mutual-to-stock conversion (the "Conversion").
(iv) Immediately following Merger 1, Interim B will merge with and into
the Savings Bank, with the Savings Bank surviving ("Merger 2"). Merger 2 will be
completed in accordance with applicable federal and state laws, and will be
pursuant to an Agreement and Plan of Reorganization between the Holding Company
and the Savings Bank (the "Plan of Reorganization"). The Savings Bank Stock held
by the public stockholders will automatically be converted into Holding Company
Stock based upon an exchange ratio which ensures that the public stockholders
will own, in the aggregate, approximately the same percentage of Holding Company
Stock outstanding upon completion of the Conversion as the percentage of Savings
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 4
Bank Stock owned by them in the aggregate immediately prior to the consummation
of the Conversion, before giving effect to: (a) cash paid in lieu of fractional
shares, (b) any shares of Holding Company Stock purchased by public stockholders
in the offering described below; in addition, the shares of Interim B will be
converted into 100 shares of Savings Bank Stock. Thereupon, the Holding Company
will become a savings and loan holding company within the meaning of Section
10(a) of the Home Owners' Loan Act ("HOLA"), 12 U.S.C. Section 1467a, as
amended, and Part 583 of Subchapter F of Title 12 of the Code of Federal
Regulations.
(v) Simultaneously with the consummation of Merger 2, the Holding
Company will sell additional shares of Holding Company Stock, with priority
subscription rights granted to certain members of the Mutual Holding Company at
specified dates, and to tax qualified employee benefit plans, directors, and
employees of the Savings Bank.
With respect to the Plan of Conversion and the Plan of Reorganization,
the following three issues are not adequately addressed by a statute,
regulation, decision of the Supreme Court, tax treaty, revenue ruling, revenue
procedure, notice, or other authority published in the Internal Revenue
Bulletin. Further, in accordance with Rev. Proc. 97-3, 1997-1 I.R.B. 85, the
Internal Revenue Service (the "Service") will not provide the Savings Bank or
the Mutual Holding Company letter rulings that address such issues.
1. Whether the exchange of the members' equity interests in the Mutual
Holding Company for interests in a liquidation account established at the
Savings Bank in Merger 1 will satisfy the continuity of interest requirement of
Section 1.368-1(b) of the Treasury Regulations (cf. Rev. Rul. 69-646, 1969-1
C.B. 54)?
2. Whether the interests in the liquidation account established at the
Savings Bank (i.e., the Savings Bank Liquidation Interests), and the shares of
Savings Bank Stock held by the Mutual Holding Company prior to the consummation
of Merger 1, will be disregarded for the purpose of determining that an amount
of Savings Bank Stock which constitutes "control" of such corporation was
acquired by the Holding Company in exchange for shares of Holding Company Stock
pursuant to Merger 2 (Section 368(c) of the Code)?
3. Whether the exchange of Savings Bank Stock for shares of Holding
Company Stock in Merger 2, following the consummation of Merger 1, will satisfy
the continuity of interest requirement of Section 1.368-1(b) of the Treasury
Regulations with regard to Merger 2?
Pursuant to Rev. Proc. 97-3, the proposed transaction constitutes a
transaction that the Service will not issue related letter rulings. The
Service's current position of non-issuance of letter rulings does not affect the
tax status of the proposed transaction nor does it reflect a
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 5
change in how the Service would rule if said rulings were to be issued. The
Service's position reflects the manner in which the Service reserves the right
not to issue letter rulings as to certain transactions.
ANALYSIS
--------
Rev. Rul. 80-1051 provides that the conversion of a federal mutual
savings and loan association to a state or federal stock savings and loan
association, and the conversion of a state chartered mutual savings and loan
association to a stock savings and loan association in the same state are
reorganizations under Code Section 368(a)(1)(F) (Rev. Rul. 54-193 superseded).
Section 368(a)(1)(F) of the Code provides that a mere change in identity, form,
or place of organization, however effected, is a reorganization. If the Mutual
Holding Company converts itself from a federal mutual holding company to a
federal interim stock savings bank the changes at the corporate level, other
than its place of organization and form of organization as described above, will
be insubstantial. Throughout its brief period of existence Interim A will: (i)
continue its business in the same manner as the Mutual Holding Company, (ii)
hold the same assets previously held by the Mutual Holding Company, (iii) not
engage in any business which the Mutual Holding Company is prohibited from
engaging in, and (iv) be subject to the same regulatory agencies which regulated
the Mutual Holding Company. Therefore, the change in the form of operation of
the Mutual Holding Company from a federal mutual holding company to that of a
federal interim stock savings bank should constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code.
It is important to note that Merger 1 could alternatively be
accomplished by merging the Mutual Holding Company directly with and into the
Savings Bank without the formation of an interim stock savings bank.2 However,
solely for regulatory reasons, Merger 1 will take place immediately after the
Mutual Holding Company converts its charter to that of a federal interim stock
savings bank. It should be further noted that the formation of Interim A prior
to Merger 1 will not be for the purpose of tax avoidance. Clearly, the
transaction providing for the formation of Interim A, should be held to its
chosen form when specific business benefits are
- --------
1 1980-1 C.B. 78.
2 Prior taxpayers have accomplished a transaction similar to that of
Merger 1 with a direct merger of a mutual holding company with and into its
subsidiary stock savings institution. See Priv. Ltr. Ruls. 9449018 and 9437020.
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 6
sought (such as the avoidance of additional regulatory delay and expense) and
presumably obtained by forming Interim A prior to Merger 1.3
Section 368(a)(1)(A) of the Code defines the term "reorganization" to
include a "statutory merger or consolidation" of corporations such as Merger 1
and Merger 2. Section 368(a)(2)(E) of the Code provides that a transaction
otherwise qualifying as a merger under Section 368(a)(1)(A), such as Merger 2,
shall not be disqualified by reason of the fact that common stock of a
corporation (referred to in the Code as the "controlling corporation") (i.e.,
the Holding Company) which before the merger was in control of the merged
corporation, is used in the transaction if:
(i) after the transaction, the corporation surviving the merger [the
Savings Bank] holds substantially all of its properties and the
properties of the merged corporation [Interim B] (other than common
stock of the controlling corporation [the Holding Company] distributed
in the transaction); and
(ii) in the transaction, former stockholders of the surviving
corporation [the Savings Bank public stockholders] exchanged, for an
amount of voting common stock of the controlling corporation, an amount
of common stock in the surviving corporation which constitutes control
of such corporation.
Section 1.368-2(b)(1) of the Treasury Regulations provides that, in
order to qualify as a reorganization under Section 368(a)(1)(A), a transaction
must be a merger or consolidation effected pursuant to the corporation laws of
the United States or a state. The Plan of Conversion and Plan of Reorganization
together provide that Merger 1 and Merger 2 will be consummated in accordance
with applicable federal and state laws. The simple act of consummating the two
transactions under applicable federal and state laws should be sufficient to not
only satisfy the specifically expressed requirements of Code Section
368(a)(1)(A) but also the regulations promulgated thereunder.
- --------
3 The Service has accepted that a taxpayer may choose his form to
obtain the tax consequences desired. In Rev. Rul. 70-223, 1970-2 C.B. 79,
Corporation X acquired all of the outstanding stock of Corporation Y within a 12
month period. The assets of Y had an adjusted basis in its hands greater than
the cost of the Y stock to X. It was thus decided, for good business reasons, to
merge X into Y in order to avoid the reduction in basis of Y's assets that would
have resulted under Code Sections 332 and 334(b)(2) had Y been liquidated into X
(or merged upstream into X). In holding that the downstream merger qualified
under Code Section 368(a)(1)(A), the ruling states "[s]ince X may accomplish its
desired objective of combining the two businesses by either liquidating Y or by
merging into Y, it may choose whichever form it desires for the transaction."
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 7
The Service has previously issued Rev. Proc. 94-76, 1994-2 C.B. 825
(the language of which is reiterated in Rev. Proc. 96-3, 1996-1 I.R.B. 82),
which indicates the Service will be studying transactions "in which one
corporation owns stock in a second corporation, the first corporation is not an
80-percent distributee of the second corporation under Code Section 337(c), and
the two are combined." After two years of study, the Service has announced in
Notice 96- 6, 1996-5 I.R.B. 27, that it has concluded the study described in
Rev. Proc. 94-76. In connection with Notice 96-6, the Service issued Rev. Proc.
96-22, 1996-5 I.R.B. 27, which modified Rev. Proc. 96-3 by moving the specified
transaction of Rev. Proc. 94-76 from the "under study" section to the "no rule"
section of the revenue procedure. Consequently, Rev. Proc. 97-3 states that the
Service will not provide taxpayers letter ruling guidance with respect to
certain corporate combinations that are similar to the proposed transaction
described herein. However, the Service's decision not to issue a letter ruling
with respect to the proposed transaction does not affect the tax-free nature of
the transaction.
Treasury Regulations and case law require that, in addition to the
existence of statutory authority for a merger, certain other conditions must be
satisfied in order to qualify a proposed transaction as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code. The "business purpose test,"
which required a proposed merger to have a bona fide business purpose, must be
satisfied. See Treas. Reg. Section 1.368-1(c). We believe that Merger 1 and
Merger 2 will satisfy the business purpose test for the reasons set forth herein
and in the Prospectus which is related to the public offerings of Holding
Company Stock pursuant to Merger 2. The "continuity of business enterprise test"
requires an acquiring corporation to either continue an acquired corporation's
historic business or use a significant portion of its historic assets in a
business. See Treas. Reg. Section 1.368-1(d). We believe that the continuity of
business enterprise test is satisfied because the Prospectus provides that the
business conducted by the Savings Bank prior to Merger 1 and Merger 2 will be
unaffected by the proposed transactions.
The "continuity of interest doctrine" requires that the continuing
common stock interest of the former owners of an acquired corporation,
considered in the aggregate, represent a "substantial part" of the value of
their former interest and provide them with a "definite and substantial
interest" in the affairs of the acquiring corporation or a corporation in
control of the acquiring corporation. Paulsen v. Comm'r, 469 U.S. 131 (1985);
Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); John A. Nelson Co. v.
Helvering, 296 U.S. 374 (1935); Southwest Natural Gas Co. v. Comm'r, 189 F.2d
332 (5th Cir. 1951), cert. denied, 342 U.S. 860 (1951).
Due to the "no rule" position of the Service in Rev. Proc. 97-3, the
Savings Bank and the Mutual Holding Company are not able to seek definitive
confirmation from the Service on the following issues:
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 8
(i) whether the judicially-developed continuity of interest requirement
is satisfied when the Mutual Holding Company converts to stock form,
(ii) whether to include the Mutual Holding Company as a former
stockholder of the Savings Bank in applying the continuity of interest
requirement with respect to Merger 2, and
(iii) whether the Savings Bank Liquidation Interests (to be distributed
to certain members of the Mutual Holding Company in Merger 1) and the Savings
Bank Stock held by the Mutual Holding Company prior to Merger 1, should be
disregarded for purposes of determining if the Holding Company acquired
"control" of the Savings Bank in Merger 2.
First, as to the issue of continuity of interest with regard to Merger
1, the Mutual Holding Company, as a federally-chartered mutual holding company,
does not have stockholders and has no authority to issue capital stock. Instead,
the Mutual Holding Company (in mutual form) has a unique equity structure, in
that the Mutual Holding Company has members who are accorded a variety of
proprietary rights (pursuant to OTS regulations) such as voting rights and
certain rights in the unlikely event of liquidation. Prior to Merger 1, certain
depositors in the Savings Bank have both a deposit account in the institution
and a pro rata inchoate proprietary interest in the net worth of the Mutual
Holding Company based upon the balance in his (or her) account in the Savings
Bank, an interest which may only be realized in the event of a liquidation of
the Mutual Holding Company. However, this inchoate proprietary interest is tied
to the depositor's account and has no tangible market value separate from such
deposit account. A depositor who reduces or closes his (or her) account receives
a portion or all of the balance in the account but nothing for his (or her)
ownership interest in the net worth of the Mutual Holding Company, which is lost
to the extent that the balance in the account is reduced.
The eligible members of the Mutual Holding Company, set forth in the
Plan of Conversion (the "Members"), maintain an inchoate proprietary interest
represented by a liquidation interest in the Mutual Holding Company. In
accordance with the Plan of Conversion, the Members will receive Savings Bank
Liquidation Interests and continue their inchoate proprietary interests in the
Savings Bank following Merger 1. Although the Savings Bank Liquidation Interests
would not allow the Members the right to vote or the right to pro rata
distributions of earnings, they would be entitled to share in the distribution
of assets upon the liquidation of the Savings Bank following Merger 1. The
Members' liquidation interests in the Savings Bank is substantially similar to
their current ownership interest in the Mutual Holding Company (a liquidation
interest in the Mutual Holding Company). Because the Members are not in effect
"cashing out" their inchoate proprietary interests in the Mutual Holding
Company, they would continue to maintain an inchoate proprietary interest in the
Savings Bank upon the consummation of Merger 1. Such payments to be received as
Savings Bank Liquidation Interests are not guaranteed and can only be received
by Members who continue to maintain deposit
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 9
accounts in the Savings Bank following Merger 1. Therefore, it would seem that
the exchange of the Members' equity interests in the Mutual Holding Company for
Savings Bank Liquidation Interests should not violate the continuity of interest
requirement of Section 1.368-1(b) of the Treasury Regulations (cf. Rev. Rul.
69-646, 1969-1 C.B. 54).4
Second, as to the issue of continuity of interest with regard to Merger
2, the fact that Merger 2 may occur only after the completion of Merger 1 raises
another issue as to whether Merger 1 would be disregarded in applying the
continuity of interest requirement to Merger 2. A judicially created substance
over form concept often referred to as the "step transaction doctrine" applies
throughout tax law, including the corporate reorganization area. The step
transaction doctrine is an extremely amorphous concept. Often, application of
the doctrine hinges on whether a court finds that a particular series of
transactions runs counter to a significant tax policy. Notwithstanding years of
litigation and hundreds of cases, the exact contours of the step transaction
doctrine, and even its proper formulation, are still the subject of intense
debate. Consequently, it often will be difficult to determine with a high degree
of certainty whether a series of related transactions will be stepped together
in some fashion for tax purposes.
The courts over the years have developed three distinct verbal
formulations of the doctrine: (i) the binding commitment test, (ii) the end
result test, and (iii) the interdependence test. While the courts nominally
apply one or more of these three tests, a careful reading of the relevant cases
indicates that the courts, as a preliminary matter, in deciding whether to apply
the step transaction doctrine, tend to focus primarily on two key factors:
intent and temporal proximity. However, case law and IRS pronouncements indicate
that there are limitations on the ability to assert the step transaction
doctrine, regardless of (i) the taxpayer's intent at the time of the first
transaction to engage in the later transactions, and (ii) the short period of
time that elapses between the transactions.
Case law and IRS pronouncements indicate that if two or more
transactions carried out pursuant to an overall plan have economic significance
independent of each other, the transactions generally will not be stepped
together.5 The Service's most significant
- --------
4 In Rev. Rul. 69-646, a merger of two building and loan associations,
whereby the acquired association's shareholders exchanged their passbook
accounts and equity interests for equal passbook accounts and guaranty shares of
the acquiring association was held to have satisfied the continuity of interest
requirement and subsequently deemed to be a reorganization under Section
368(a)(1)(A) of the Code.
5 See e.g., Rev. Rul. 79-250, 1979-2 C.B. 156.
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 10
pronouncement regarding independent economic significance is Rev. Rul. 79-250.6
In that ruling, the Service asserted that:
the substance of each of a series of steps will be recognized and the
step transaction doctrine will not apply, if each such step
demonstrates independent economic significance, is not subject to
attack as a sham, and was undertaken for valid business purposes and
not mere avoidance of taxes.
The facts in Rev. Rul. 79-250 involved a situation where, pursuant to
an overall plan, (i) the target corporation merged into the parent corporation's
subsidiary, in a tax-free Code Section 368(a)(2)(D) reorganization, with the
target corporation shareholders receiving parent corporation stock in exchange
for their target corporation stock, and (ii) the parent corporation thereafter
reincorporated in a different state by merging into a newly formed corporation
in an intended "F" reorganization. If the two mergers were stepped together, the
intended "F" reorganization would not qualify as such because the Service has
taken the position that virtually 100% continuity of interest is required for an
"F" reorganization. However, the Service concluded that the two mergers should
not be stepped together because each merger was "real and substantial" and the
economic motivation supporting each merger was sufficiently meaningful to
warrant the conclusion that the mergers were independent of each other.
The parties to Merger 1 maintain a separate and distinct business
purpose for consummating Merger 1 (e.g., allowing for the conversion of the
Mutual Holding Company from mutual to stock form). Similarly, the parties to
Merger 2 maintain a separate and distinct business purpose for consummating
Merger 2 (e.g., allowing the Holding Company flexibility in future corporate
acquisitions and provides the Holding Company an opportunity to raise a
substantial amount of capital). Although Merger 1 and Merger 2 are to be
undertaken pursuant to an overall plan, the consummation of Merger 1 will result
in a permanent alteration of a previous bona fide business relationship.
Immediately after the consummation of Merger 1, the Savings Bank will no longer
be controlled by the Mutual Holding Company but will instead be controlled by
its public stockholders. The facts indicate that the initial merger of Interim A
with and into the Savings Bank will result in a real and substantial change in
the form of ownership of the Savings Bank that is sufficient to conclude that
Merger 1 comports with the underlying purposes and assumptions of a
reorganization under Section 368(a)(1)(A) of the Code (see Treas. Reg. Section
1.368-1(b)) and would not be subject to attack as a sham or illusory.
The subsequent consummation of Merger 2 in which the public
stockholders of the Savings Bank will continue their equity interests in the
Holding Company, the sole shareholder
- --------
6 1979-2 C.B. 156.
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 11
of the Savings Bank following the completion of Merger 2, is likewise real and
substantial and would not be subject to attack as a sham or illusory. Further,
although the overall plan comprehends both Merger 1 and Merger 2, the economic
motivation supporting each transaction is sufficiently meaningful (as such term
is used in Rev. Rul. 79-250) and is not dependent upon the other transaction for
its substantiation to warrant the conclusion that the overall plan presents two
separate and independent reorganizations. Given that the business reasons
supporting Merger 1 exist regardless of Merger 2, the step transaction doctrine
should not be applied under the facts and circumstances presented here.
The final issue, focuses on whether the Savings Bank Liquidation
Interests and the Savings Bank Stock held by the Mutual Holding Company prior to
Merger 1, should be disregarded for purposes of determining whether the Holding
Company acquired "control" of the Savings Bank in Merger 2. The Savings Bank has
represented in its Officer Affidavit that, following Merger 2, it will hold at
least 90% of the fair market value of its net assets and at least 70% of the
fair market value of its gross assets, and at least 90% of the fair market value
of Interim B's net assets and at least 70% of the fair market value of Interim
B's gross assets held immediately prior to Merger 2. By holding such a high
percentage of its assets and Interim B's assets following Merger 2, the Savings
Bank would clearly satisfy the first requirement of Code Section 368(a)(2)(E).
As further required by Code Section 368(a)(2)(E), the Holding Company
must acquire control of the Savings Bank in Merger 2. Control is defined as at
least 80% of the total combined voting power of all classes of stock entitled to
vote, and at least 80% of the total number of shares.7
If the Savings Bank Liquidation Interests are to be included in
determining whether the Holding Company acquired control of the Savings Bank in
Merger 2, it would be necessary to recognize such interests as another class of
Savings Bank Stock. Members of the Mutual Holding Company are entitled to
liquidation interests in the Mutual Holding Company, and such liquidation
interests resemble an equity/ownership interest in the Mutual Holding Company
because of its unique equity structure. Pursuant to federal law, the Members are
to receive Savings Bank Liquidation Interests in connection with Merger 1 which
would entitle the Members to an interest similar to the interest enjoyed as a
member of the Mutual Holding Company. However, upon receipt of Savings Bank
Liquidation Interests, the Members would not enjoy any control over the business
of the Savings Bank that would in any way resemble the control maintained by a
true stockholder of the Savings Bank, and would not be entitled to any assets of
the Savings Bank unless the Savings Bank is liquidated after Merger 2. Although
the
- --------
7 I.R.C. ss. 368(c).
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 12
Savings Bank Liquidation Interests may be compared to the equity interests held
by members of the Mutual Holding Company, which afforded members an
equity/ownership interest in the Mutual Holding Company, these interests in the
Savings Bank are too remote to qualify as a separate class of Savings Bank
Stock. Therefore, the Savings Bank Liquidation Interests should be disregarded
in determining whether the Holding Company acquires control of the Savings Bank
in Merger 2.
In addition, if the Savings Bank Stock held by the Mutual Holding
Company prior to Merger 1 is to be included in determining whether the Holding
Company acquired control of the Savings Bank in Merger 2, it would be necessary
to apply the step transaction doctrine to Merger 1 and Merger 2. As discussed
earlier, the step transaction doctrine should not apply to Merger 1 and Merger
2. Therefore, the Savings Bank Stock, held by the Mutual Holding Company prior
to Merger 1, should be disregarded in determining whether the Holding Company
acquires control of the Savings Bank in Merger 2.
The Service has previously ruled on the same three issues in Priv. Ltr.
Rul. 9510044. Although Priv. Ltr. Rul. 9510044 may not be used or cited as
precedent pursuant to Section 6110(j)(3) of the Code, it illustrates the
Service's analysis and position concerning these particular issues. As provided
in Priv. Ltr. Rul. 9510044, a mutual holding company owns approximately 57.5% of
the outstanding stock of a federally-chartered stock savings bank. The proposed
transaction in Priv. Ltr. Rul. 9510044 includes the conversion of a mutual
holding company from mutual to stock form and the simultaneous merger of the
mutual holding company with and into the federally-chartered stock savings bank
with the stock savings bank being the surviving corporation. Subsequent to such
mutual-to-stock conversion, the common stock of the stock savings bank held by
the mutual holding company was to be extinguished, and eligible members of the
mutual holding company were to be granted interests in a liquidation account to
be established by the stock savings bank. This particular transaction, which is
identical to the proposed transaction described herein as Merger 1, was held by
the Service to satisfy the continuity of interest requirement of Section
1.368-1(b) of the Treasury Regulations. The Service cited Rev. Rul. 69-646,
1969-1 C.B. 54, as authority for this ruling.8
The issue of whether to include the Mutual Holding Company as a former
stockholder of the Savings Bank in applying the continuity of interest
requirement with respect to Merger 2 was also addressed by the Service in Priv.
Ltr. Rul. 9510044. The Service found no cause to apply the step transaction
doctrine to step together the two mergers contemplated in Priv. Ltr.
- -------
8 The Service has ruled consistently regarding the exchange of members'
equity interests in a converting mutual holding company for interests in a
liquidation account established by its subsidiary stock savings institution in
other Private Letter Rulings with substantially similar facts. See Priv. Ltr.
Ruls. 9602015, 9449018, and 9437020.
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 13
Rul. 9510044. The Service ruled that the exchange of shares of common stock of
the savings and loan holding company for the shares of common stock of the stock
savings bank satisfied the continuity of interest requirement of Treasury
Regulation Section 1.368-1(b), an exchange which occurs immediately following
the conversion of the mutual holding company.
The Service also ruled in Priv. Ltr. Rul. 9510044 that liquidation
interests (comparable to the Savings Bank Liquidation Interests) and stock
previously held by a mutual holding company (comparable to the Savings Bank
Stock held by the Mutual Holding Company prior to Merger 1) were to be
disregarded in determining whether the acquiring corporation obtained control
within the meaning of Code Section 368(c). The Service cited Code Section 368(c)
as authority for this ruling.
Although Code Section 6110 precludes the parties to Merger 1 and Merger
2 from using or citing Priv. Ltr. Rul. 9510044 as precedent, there is currently
no reasonable basis to believe that the Service will take a position contrary to
recent private letter rulings encompassing substantially similar facts and
circumstances. However, should the Service take a contrary position as to these
three issues, our opinions rendered herein (regarding the tax-free status of
Merger 1 and Merger 2) may be significantly affected thereby.
Further, we believe that Merger 2 satisfies the continuity of interest
doctrine because the Savings Bank's public stockholders who do not exercise
dissenters' rights following Merger 1, will receive only Holding Company Stock
in exchange for their shares of Savings Bank Stock. In addition, we believe
other applicable requirements of the Treasury Regulations and case law which are
preconditions to the qualification of Merger 1 and Merger 2 as a reorganization,
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, are
satisfied on the basis of the information contained in the Plan of Conversion,
the Plan of Reorganization, the Officer Affidavits, and the Prospectus.
The Service has previously issued Notice 94-93, 1994-41 I.R.B., wherein
the Service warns that it is drafting regulations that will require appropriate
recognition of income or gain, or reductions of the basis of stock or the
parties to a transaction in which a parent and a subsidiary switch places -- an
inversion transaction. The specific transaction described in the notice involves
an inversion resulting in the disappearance of built-in gain inherent in the
prior subsidiary corporation's stock when the prior subsidiary corporation
becomes the new parent corporation. Further, the value of the new subsidiary
corporation's stock has been reduced, following the inversion, and may allow the
new parent corporation to obtain a loss upon the sale of its new subsidiary
corporation's stock.
Although, for a moment in time the Savings Bank will be the parent of
the Holding Company when the Savings Bank first incorporates the Holding
Company, the Holding Company
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 14
will not hold any assets of value until the Holding Company first acquires all
of the outstanding Savings Bank Stock pursuant to Merger 2. In addition, the
value of Savings Bank Stock would not likely be diluted following Merger 2.
Further, the Holding Company Stock held by the Savings Bank is held for such a
brief period of time that the possibility of built-in gain materializing is not
likely to occur, in light of the minimal capitalization (all in cash) of Interim
B. Therefore, the Service should not challenge the tax-free nature of Merger 2.
Section 354 of the Code provides that no gain or loss shall be
recognized by stockholders who exchange common stock in a corporation, such as
the Savings Bank, which is a party to a reorganization, solely for common stock
in another corporation which is a party to the reorganization, such as the
Holding Company. Section 356 of the Code provides that stockholders shall
recognize gain to the extent they receive money as part of a reorganization,
such as money received in lieu of fractional shares. Section 358 of the Code
provides that, with certain adjustments for money received in a reorganization,
a stockholder's basis in the common stock he or she receives in a reorganization
shall equal the basis of the common stock which he or she surrendered in the
transaction. Section 1223(1) states that, where a stockholder receives property
in an exchange which has the same basis as the property surrendered, he or she
shall be deemed to have held the property received for the same period as the
property exchanged, provided that the property exchanged had been held as a
capital asset.
Section 361 of the Code provides that no gain or loss shall be
recognized to a corporation such as the Savings Bank which is a party to a
reorganization on any transfer of property pursuant to a plan of reorganization.
Section 362 of the Code provides that if property is acquired by a corporation
such as the Savings Bank in connection with a reorganization, then the basis of
such property shall be the same as it would be in the hands of the transferor
immediately prior to the transfer. Section 1223(2) of the Code states that where
a corporation such as the Savings Bank will have a carryover basis in property
received from another corporation which is a party to a reorganization, the
holding period of such assets in the hands of the acquiring corporation shall
include the period for which such assets were held by the transferor, provided
that the property transferred had been held as a capital asset. Section 1032 of
the Code states that no gain or loss shall be recognized to a corporation, such
as the Holding Company, on the receipt of property in exchange for common stock.
OPINION OF COUNSEL
------------------
Provided that Merger 1 and Merger 2 are consummated as described
herein, we are of the opinion that:
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 15
1. Merger 1 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Therefore, both the Mutual Holding Company and the
Savings Bank will be a party to a "reorganization" as defined in Section 368(b)
of the Code.
2. Interim A (Mutual Holding Company) will recognize no gain or loss
upon the transfer of assets to the Savings Bank pursuant to Merger 1.
3. No gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of the Mutual Holding Company in Merger 1.
4. Merger 2 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code, Merger 2
is not disqualified from qualifying as a reorganization within the meaning of
Section 368(a)(1)(A) because Holding Company Stock will be conveyed to the
Savings Bank's public stockholders in exchange for their Savings Bank Stock.
Therefore, the Savings Bank, the Holding Company, and Interim B will each be a
party to a reorganization as defined in Section 368(b) of the Code.
5. No gain or loss will be recognized by Interim B upon the transfer of
its assets to the Savings Bank pursuant to Merger 2.
6. No gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of Interim B.
7. No gain or loss will be recognized by the Holding Company upon the
receipt of Savings Bank Stock solely in exchange for Holding Company Stock.
8. No gain or loss will be recognized by the Savings Bank's public
stockholders upon the receipt of Holding Company Stock solely in exchange for
their shares of Savings Bank Stock.
9. The basis of the Holding Company Stock to be received by the Savings
Bank's public stockholders will be the same as the basis of the Savings Bank
Stock surrendered in exchange therefor, before giving effect to any payment of
cash in lieu of fractional shares.
10. The holding period of the Holding Company Stock to be received by
the Savings Bank's public stockholders will include the holding period of the
Savings Bank Stock, provided that the Savings Bank Stock was held as a capital
asset on the date of the exchange.
11. The Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members (as such terms are defined in the Plan of Conversion)
will recognize gain upon the
<PAGE>
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
November 4, 1997
Page 16
issuance, to them, of nontransferable subscription rights to purchase Holding
Company Stock, but only to the extent of the value, if any, of the subscription
rights.
SCOPE OF OPINION
----------------
No opinion is expressed as to the tax consequences to any party,
whether federal, state, local, or foreign, of either Merger 1 or Merger 2, or
any transactions related to Merger 1 or Merger 2, or contemplated by either the
Plan of Conversion or the Plan of Reorganization, or to the tax treatment of any
conditions existing at the time of, or effects resulting from, the transactions
which are not specifically referenced above. Further, no opinion is expressed or
intended to be expressed herein as to the effect of Merger 1 or Merger 2 on the
continued existence of, the carryover or carryback of, or the limitation on, any
net operating losses of the Savings Bank, if any, under the Code. If any of the
information upon which we have relied is incorrect, or if changes in the
relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on the case law, Code, Treasury
Regulations thereunder, and the Revenue Rulings from the Service as they now
exist. These authorities are all subject to change, and such change may be made
with retroactive effect. We can give no assurance that, after such change, the
opinions set forth herein would not significantly change. We undertake no
responsibility to update or supplement our opinion. This opinion is not binding
on the Service and there can be no assurance, and none is hereby given, that the
Service will not take a position contrary to one or more of the positions
reflected in the foregoing opinion, or that our opinion will be upheld by the
courts if challenged by the Service.
CONSENT
-------
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 ("Form S-1") to be filed by the Holding
Company with the Securities and Exchange Commission, and as an exhibit to the
Mutual Holding Company's Application for Conversion on the Form AC as filed with
the OTS ("Form AC"), and to the references to our firm in the Prospectus which
is part of both the Form S-1 and the Form AC.
Very truly yours,
/s/Malizia, Spidi, Sloane, & Fisch, P.C.
Malizia, Spidi, Sloane, & Fisch, P.C.
EXHIBIT 8.2
<PAGE>
CARNAHAN, EVANS, CANTWELL & BROWN, P.C.
Four Corporate Centre, Suite 410
1949 F. Sunshine
P.O. Box 10009 G.S.S.
Springfield, Missouri 65808-0009
(417) 887-8490 FAX: (417) 887-8935
E-Mail: [email protected]
Web: http://www.cland.net/~carnahan/cecb
JOHN M. CARNAHAN III JULIE T. BROWN
WILLIAM E. EVANS DOUGLAS D. LEE
C. BRADFORD CANTWELL --------------
CLIFFORD S. BROWN JOHN M. CARNAHAN, JR.
FRANK C. CARNAHAN (Retired)
JOSEPH D. SHEPPARD III
November 4, 1997
Boards of Directors
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
1341 West Battlefield
Springfield, Missouri 65807
Dear Members:
We have been engaged by Guaranty Federal Savings Bank (herein after
referred to as "Savings Bank") in connection with certain matters pertaining to
a reorganization transaction.
Specifically, we have been engaged to render an opinion from this firm
regarding the income tax consequences of the reorganization under the laws of
the State of Missouri. We have been provided with an opinion of tax counsel,
Malizia, Spidi, Sloane & Fisch, PC ("Federal Tax Opinion"), to the Savings Bank
dated September 17, 1997, pertaining to the treatment of the reorganization for
federal income tax purposes under the Internal Revenue Code of 1986, as amended
("Code"), and stating in relevant part that:
"If Merger 1 and Merger 2 are consummated as described [t]herein, we
are of the opinion that:
1. Merger 1 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Therefore, both Mutual Holding Company and
Savings Bank will be a party to a "reorganization" as defined in
Section 368(b) of the Code.
2. Interim A (Mutual Holding Company) will recognize no gain or loss upon
the transfer of assets to the Savings Bank pursuant to Merger 1.
3. No gain or loss will be recognized by the Savings Bank upon the receipt
of the assets of the Mutual Holding Company in Merger 1.
4. Merger 2 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code,
Merger 2 is not disqualified from qualifying as a reorganization
within the meaning of Section 368(a)(1)(A) because Holding Company
Stock will be conveyed to the Savings Bank's public stockholders
<PAGE>
Letter to the Boards of Directors of
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
Page - 2
November 4, 1997
in exchange for their Savings Bank Stock. Therefore, the Savings Bank,
the Holding Company, and Interim B will each be a party to a
reorganization as defined in Section 368(b) of the Code.
5. No gain or loss will be recognized by Interim B upon the transfer of
its assets to the Savings Bank pursuant to Merger 2.
6. No gain or loss will be recognized by the Savings Bank upon the receipt
of the assets of Interim B.
7. No gain or loss will be recognized by the Holding Company upon the
receipt of Savings Bank Stock solely in exchange for Holding Company
Stock.
8. No gain or loss will be recognized by the Savings Bank's public
stockholders upon the receipt of Holding Company Stock solely in
exchange for their shares of Savings Bank Stock.
9. The basis of the Holding Company Stock to be received by the Savings
Bank's public stockholders will be the same as the basis of the Savings
Bank Stock surrendered in exchange therefore, before giving effect to
any payments of cash in lieu of fractional shares.
10. The holding period of the Holding Company Stock to be received by the
Savings Bank's public stockholders will include the holding period of
the Savings Bank Stock, provided that the Savings Bank Stock was held
as a capital asset on the date of the exchange.
11. The Eligible Account Holders, Supplemental Eligible Account Holders,
and Other Members (as such terms are defined in the Plan of Conversion)
will recognize gain upon the issuance to them, of nontransferable
subscription rights to purchase Holding Company Stock, but only to the
extent of the value, if any, of the subscription right."
In rendering the opinion set forth below, we have assumed, without
independent verification or investigation, that the facts and circumstances
attendant to the reorganization as described in the Federal Tax Opinion are
true, accurate and complete. Based upon your specific instructions, we
<PAGE>
Letter to the Boards of Directors of
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
Page - 3
November 4, 1997
have specifically relied upon the conclusions of law stated in the
Federal Tax Opinion as to the treatment of the Reorganization for
federal income tax purposes, and our opinions as set forth herein
assume the accuracy and correctness of such conclusions of law.
Further, our opinion is subject to the qualifications set forth in the
Federal Tax Opinion, and is limited to the law of the State of
Missouri. Defined terms shall have the same meanings set forth in the
Federal Tax Opinion.
Based upon the foregoing, we are of the opinion that:
1. For Missouri income tax purposes the State of Missouri will treat the
reorganization in an identical manner as it is treated by the Code for
federal income tax purposes.
2. No gain or loss will be recognized which would result in Missouri
taxable income of the Savings Bank upon the receipt of the assets of
the Mutual Holding Company in Merger 1.
3. No gain or loss will be recognized which would result in Missouri
taxable income of the Savings Bank upon its receipt of the assets of
Interim B.
4. The Eligible Account Holders, Supplemental Eligible Account Holders,
and Other Members (as such terms are defined in the Plan of Conversion
) will recognize gain which would result in Missouri taxable income
upon the issuance to them, of nontransferable subscription rights to
purchase Holding Company Stock, but only to the extent of the value, if
any, of the subscription right.
The opinion herein expressed specifically does not include, without
limitation by the specification hereof: (1) any opinion with respect to any
franchise tax, capital stock tax, transfer tax, bank and or credit institutions
tax, or similar tax which might result from the implementation of the Plan or
Conversion; or (2) any opinion as to the effect, if any, of the reorganization
transaction on the continued existence of, carry back or carry forward of, or
the limitation on, any net operating losses of the Savings Bank.
This opinion is solely for your information in connection with the
transaction described above and should not be quoted or otherwise referred to in
whole or in part, in any financial statement or other document, or furnished to
any other person or agency without prior written consent. Other than the
addressee hereof and the Shareholders, no one is entitled to use or rely
<PAGE>
Letter to the Boards of Directors of
Guaranty Federal Bancshares, M.H.C.
Guaranty Federal Savings Bank
Page - 4
November 4, 1997
on this opinion letter.
We hereby consent to the filing of this opinion as an opinion as an
exhibit to the Registration Statement on Form S-1 ("Form S-1") to be filed by
the holding Company with the Securities and Exchange Commission, and as an
exhibit to the Mutual Holding Company's Application for Conversion on the Form
AC as filed with the OTS ("Form AC"), and to the references to our firm in the
Prospectus which is part of both the Form S-1 and the Form AC.
We expressly undertake no responsibility or duty to inform any party
whether addressees hereof or not, as to any change in fact, circumstance or law
occurring after the date hereof which may affect or alter any of the opinions
set forth above.
Very Truly yours,
/s/Carnahan, Evans, Cantwell and Brown, P.C.
Carnahan, Evans, Cantwell and Brown, P.C.
EXHIBIT 23.2
<PAGE>
[Baird, Kurtz & Dobson Letterhead]
Consent of Independent Auditors
We hereby consent to the reference to our firm under the caption "Experts"
included in Amendment One to the Registration Statement on Form S-1 filed by
Guaranty Federal Bancshares, Inc. and to the use therein of our report dated
July 31, 1997, concerning the consolidated financial statements of Guaranty
Federal Savings Bank and its subsidiary.
/s/ Baird, Kurtz & Dobson
Springfield, Missouri
November 5, 1997
