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) 881-0628.
For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" beginning on page 17.
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 GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
====================================================================================================================================
Minimum Midpoint Maximum Maximum, as
Adjusted(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 the maximum, as adjusted,
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 November 12, 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 offerings 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 Public Shares of Bank
Common Stock to be Exchanged................................. 972,365 shares
MHC Shares of Bank Common Stock
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 12:00
noon on December 16, 1997 ("Expiration Date") and
the public stockholders' offering and community
offering will terminate no later than January 30,
1998.
Purchase and Ownership Limitations........................... $250,000 of Conversion Stock for any one person in
the Subscription, Public Stockholders', Community
or Syndicated Community Offerings (including
Exchange Shares); $380,000 of Conversion Stock for
any person in all categories in the Offerings or 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 for Public Bank Shares.
(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 24.
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 24 to 25.
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. As part of the Conversion and Reorganization the
Mutual Holding Company will be merged into the Bank, with the Bank as the
surviving entity. See page 25.
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 certain 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
98 to 103.
Subscription Rights
Subscription rights may neither be sold nor assigned. Any transfer of
subscription rights is prohibited by law.
2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
The Exchange
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Offering Range: (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
Maximum, as adjusted........ 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 maximum, as adjusted, 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 stock order
form and certification form ("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 will 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 Offering, unless such period has been extended.
3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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 (November 7, 1997) must list on
the Order Form all accounts in which they have an ownership interest at the
applicable eligibility date, giving all names in each account and the account
numbers. In addition, shareholders of the Bank should list the number of shares
held as of November 12, 1997. Members qualifying for a stock purchase priority
who add individuals with a lower, or no, stock purchase priority as subscribers
on a Stock Order Form will have their stock purchase priority reduced or
eliminated, based on the priority, if any, of the added name(s).
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 Conversion and Reorganization, 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:
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------- --------------------------------------
| | | |
| Guaranty Federal Bancshares, M.H.C. | | Holders of Public Bank Stock |
| | | |
- ----------------------------------------- --------------------------------------
| |
| 68.88% 31.12% |
| |
--------------------------------------------------------------------
| |
| Guaranty Federal Savings Bank |
| |
--------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------- ----------------------------------------------------------
| | | |
| Purchasers of Conversion Stock | | Former Holders of Public Bank Stock |
| | | |
- --------------------------------------------------------- ----------------------------------------------------------
| |
| 70.15% 29.85% |
| |
----------------------------------------------------------------------------------
| |
| Guaranty Federal Bancshares, Inc. |
| |
----------------------------------------------------------------------------------
|
| 100%
|
----------------------------------------------------------------------------------
| |
| Guaranty Federal Savings Bank |
| |
----------------------------------------------------------------------------------
</TABLE>
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
ESOP, 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 and Reorganization,
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 Reorganization 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 pages 80 to 82.
Risks in Owning Common Stock
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages 17 to 23.
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, substantially restricted.................. 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 income divided by average total assets) (1).. 0.61% 0.96% 0.81% 0.89% 1.19%
Return on average equity (net income 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 divided by 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 shares outstanding 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
------------ -----------
Total assets..................................................... $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;
issued and outstanding 3,125,000 shares......................... 3,125,000 3,125,000
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
------------ -----------
Total shareholders' equity........................................ 27,360,155 27,490,155
----------- -----------
Total liabilities and stockholders' equity........................ $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 income divided by average total assets) (1)(2) . 1.03% (0.55)%
Return on average equity (net income divided by average equity) (1)(2) ........ 6.87 (3.74)
Net interest rate spread ...................................................... 3.01 2.91
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 divided by 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 shares outstanding 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.
Interest-bearing deposits in other financial institutions increased
$3,712,893, or 109.2% from $3,399,866 as of June 30, 1997, to $7,112,759 as of
September 30, 1997. The increase is attributable to the Bank temporarily
depositing cash until the funds could be redeployed into loans that are expected
to be funded in October. The future impact of the increase in deposits on net
interest income should be insignificant.
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, due to called securities, by $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 into 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 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.
13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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 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 certificates 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 was due to a $0.22 per share dividend payable to
stockholders of record September 12, 1997, totaling $687,500 (including $473,579
payable to the Mutual Holding Company).
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 of which $473,579 is payable to the Mutual Holding Company.
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.
14
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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.
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. The provision for loan losses increased
$33,352 for the three months ended September 30, 1997, compared to the same
period for 1996. There were no provisions for loan losses made during the three
months ended September 30, 1996. The provision was determined based on
management's evaluation of the necessary level of general loan loss reserves.
The evaluation includes, among other factors, type of loans, age of loans and
historical loss factors. The increase was due primarily to the continued growth
of the loan portfolio, including a $3,294,000 increase in nonresidential real
estate loans for which the Bank provided heavier reserves in the general loan
loss reserve evaluation. Nonresidential real estate loans are considered to have
more risk than residential real estate loans. 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.
15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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.
Capital Position. The table below presents the Bank's capital position
relative to its various regulatory capital requirements as well as the Bank's
actual capital amounts and ratios at September 30, 1997. 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>
Stockholders' equity, and ratio
to total assets.......................... $27,360 13.0%
Unrealized appreciation on
available-for-sale securities............ (2,073)
-----
Tangible capital, and ratio
to adjusted total assets................. $25,287 12.2% $3,103 1.5%
====== ==== ===== ===
Tier 1 (core) capital, and ratio
to adjusted total assets................. $25,287 12.2% $6,205 3.0% $10,342 5.0%
====== ==== ===== === ====== ===
Tier 1 (core) capital, and ratio
to risk-weighted assets.................. $25,287 20.1% $ 7,566 6.0%
====== ===
Allowance for loan losses - Tier 2 capital. 1,576
------
Total risk-based capital, and ratio
to risk-weighted assets.................. $26,863 21.3% $10,088 8.0% $12,611 10.0%
====== ==== ====== === ====== ====
Total assets............................... $210,139
=======
Adjusted total assets...................... $206,849
=======
Risk-weighted assets....................... $126,105
=======
</TABLE>
16
- --------------------------------------------------------------------------------
<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 nine
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
17
<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
18
<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
19
<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
20
<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."
21
<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 December 16, 1997 and complete
the Conversion and Reorganization before December 31, 1997. 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 January 30, 1998, completion of the Conversion and
Reorganization will be delayed. See "The Conversion - Required Approvals." The
Offerings may not extend beyond January 30, 1998 without the approval of the OTS
and the OTS may require a resolicitation of subscribers if the Conversion and
Reorganization cannot be completed before January 30, 1998. 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
22
<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 a letter stating the belief of RP
Financial that subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members have no value. However,
this letter 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.
23
<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, and (iii) 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 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, U.S. government and agency obligations
and other permissible securities.
24
<PAGE>
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 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
25
<PAGE>
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. For at least one year following the completion
of the Conversion and Reorganization, the Company will not pay any dividends
that would be treated for tax purposes as a return of capital or take any
actions to pursue such dividends. 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."
26
<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."
27
<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.
<TABLE>
<CAPTION>
High Low Dividends(1)
---- --- ------------
<S> <C> <C> <C>
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 --
</TABLE>
- ------------------
(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
$24.00 on November 12, 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.
28
<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 Shares at a
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 withdrawals.
(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 the 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.
(footnotes continued on following page)
29
<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."
30
<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 as 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 of 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.
31
<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."
32
<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)
33
<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 Exchange Shares that will be exchanged for Public
Bank Shares. 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 Exchange Shares that will be exchanged for Public
Bank Shares. 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."
34
<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
35
<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.
36
<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.
37
<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"
38
<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>
39
<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
(In Thousands)
<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 loans 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
40
<PAGE>
in assets and decrease in deposits, the Bank borrowed additional funds from the
FHLB. The average 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 $308,398 (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.
41
<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.
42
<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 Mutual Holding Company.
Interest Rate Risk Management Activities
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.
Quantitative 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, quantitatively, 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.
43
<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,
44
<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.
45
<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.
46
<PAGE>
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 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.
47
<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.
48
<PAGE>
The following table sets forth the Bank's loan originations and loan
purchases, sales and principal repayments.
Origination, Purchase and Sale of Loans
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1997 1996 1995
------ ------ -----
(In Thousands)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
- --------------------
(1) Includes non-cash portion of loan originations.
49
<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
50
<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
51
<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.
52
<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 which were 90 days or more past due and 16
loans with total principal balances of $1.2 million which were 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.
53
<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 1,384 -- -- --
--- ----- ----- ----- -----
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>
54
<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.
55
<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.
56
<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.
57
<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>
58
<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.
59
<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>
60
<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
Association ("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
----- ----- -----
Total..................... $ 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>
61
<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>
62
<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>
63
<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.
64
<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
------------------------------------------------------------------------------------------------------------
After One After Five
One Year or Less to Five Years 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>
65
<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.
66
<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>
67
<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
<TABLE>
<CAPTION>
Certificates
of Deposits
-----------
(In thousands)
<S> <C>
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
=====
</TABLE>
68
<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>
69
<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.
70
<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, the Bank's primary competition
consists of five thrift institutions, 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.
71
<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
72
<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."
73
<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."
74
<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
75
<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.
76
<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
77
<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.
78
<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.
79
<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.
80
<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
81
<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.
82
<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.
83
<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.
84
<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
85
<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,
$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.
(footnotes continued on following page)
86
<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.
87
<PAGE>
<TABLE>
<CAPTION>
Years 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.
<TABLE>
<CAPTION>
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
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.
88
<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
89
<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.
90
<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."
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner or Beneficial Ownership as of Percent of
Number of Persons in Group June 30, 1997 (1)(2) Bank Common 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
All directors and executive officers as a group
(14 persons) plus Guaranty Federal Bancshares,
M.H.C. 2,249,941 (6) 71.8
</TABLE>
- ------------
(1) For purposes of this table, 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.
(footnotes continued on following page)
91
<PAGE>
(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.
<TABLE>
<CAPTION>
Proposed Purchases of Total Common
Number of Conversion Stock Stock to be Held
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>
(footnotes on following page)
92
<PAGE>
- ----------------------
(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%.
93
<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 December 19, 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,
94
<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
95
<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
96
<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."
97
<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, 88.7%
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
98
<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 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.
99
<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 December 16, 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 beyond January
30, 1998, without the approval of the OTS. 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, November 12, 1997,
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, and Other Members 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 Stockholder Voting Record Date whose orders
are accepted on a pro rata basis in
100
<PAGE>
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 from 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.
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
101
<PAGE>
may pay for his shares with funds held by or deposited 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 segregated 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 segregated 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 $380,000 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.
102
<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 but have
not yet vested 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 November 7, 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.
103
<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.
104
<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.
105
<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 of
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, new Subscription, Public Stockholders,
Community and/or Syndicated Community Offerings 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 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:
106
<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
107
<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
108
<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
approximately $19.19 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
109
<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. As discussed below, RP Financial has opined that the
subscription rights have no value.
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.
RP Financial has provided a letter stating its belief, which belief is
not binding on the IRS, that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase 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
110
<PAGE>
on such 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 or statement of belief 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
111
<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 certificates
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
112
<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.
113
<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.
114
<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
115
<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.
116
<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
the acquisition of the Bank by the Company, 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
117
<PAGE>
owner and the denominator of which 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 until
April 1998 with respect to any offer to acquire or acquisition of more than 10%
of the Bank Common Stock. 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%.
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
118
<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.
119
<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 the acquisition of the Bank by the
Company, 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.
120
<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 provides
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
121
<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
122
<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,
123
<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.
124
<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.
125
<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.
126
<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
relied upon as having been authorized by the Bank, the Company
or the Selling Agent. This Prospectus does not constitute an offer Up to 5,410,019 Shares
to sell, or the solicitation of an offer to buy, any of the securities (Anticipated Maximum)
offered hereby to any person in any jurisdiction in which such Common Stock
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
in the affairs of the Bank or the Company since any of the dates [Logo]
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. 7
Recent Developments............................ 10 (Proposed Holding Company for
Management's Discussion and Analysis of Guaranty Federal Savings Bank)
Recent Developments.......................... 13
Risk Factors................................... 17
Guaranty Federal Bancshares, Inc............... 24 Common Stock
The Bank ...................................... 24 par value $0.10 per share
Guaranty Federal Bancshares, M.H.C............. 25
Use of Proceeds................................ 25
Dividend Policy................................ 27
Market for Common Stock........................ 28 ------------------
Capitalization................................. 29
Historical and Pro Forma Capital Compliance.... 31 PROSPECTUS
Pro Forma Data................................. 32
Management's Discussion and Analysis of Financial ------------------
Condition and Results of Operations.......... 36
Business of the Bank........................... 47
Regulation..................................... 72
Federal and State Taxation..................... 77
Management of the Company...................... 79
Management of the Bank......................... 82
Beneficial Ownership of Bank Common Stock...... 91
The Conversion and Reorganization.............. 94
Comparison of Stockholders' Rights............. 113 FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Certain Restrictions on Acquisition of
the Company.................................. 120
Description of Capital Stock of the Company.... 124
Legal Opinions................................. 125
Tax Opinions................................... 125
Experts........................................ 126
Registration Requirements...................... 126 Dated November 12, 1997
Additional Information......................... 126
Index to Consolidated Financial Statements..... F-1
Glossary....................................... A-1
Until the later of December 16, 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>
