SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from to
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Commission File Number: 0-23325
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GUARANTY FEDERAL BANCSHARES, INC.
---------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 43-1792717
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1341 West Battlefield, Springfield, Missouri 65807
- -------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (417) 889-2494
--------------
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the average bid and asked prices of the Registrant's
Common Stock as quoted on the National Market of The Nasdaq Stock Market on
September 23, 1998, was $55.9 million.
As of September 8, 1998 there were outstanding 5,916,745 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1998. (Parts II and IV)
2. Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Form 10-K
TABLE OF CONTENTS
Item Page
PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
<PAGE>
PART I
GUARANTY FEDERAL BANCSHARES, INC. (THE "COMPANY") MAY FROM TIME TO TIME
MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS
CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
(INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS
REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE
MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS
RESULTING FROM THESE FACTORS.
THE COMPANY CAUTIONS THAT THE LISTED FACTORS ARE NOT EXCLUSIVE. THE
COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER
WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE
COMPANY.
<PAGE>
Item 1. Business
Business of the Company
The Company is a Delaware-chartered corporation that was created in
September 1997 at the direction of Guaranty Federal Savings Bank (the "Bank").
The Company became the holding company for the Bank on December 30, 1997, in
connection with a plan of conversion and reorganization involving the Bank and
its then existing mutual holding company. The mutual holding company structure
had been created in April 1995 (the "Conversion") at which time more than a
majority of the shares of the Bank were issued to the mutual holding company and
the remainder were sold in a public offering. In connection with the conversion
and reorganization on December 30, 1997, the shares of the Bank held by the
mutual holding company were extinguished along with the mutual holding company
and the shares of the Bank held by the public were exchanged for shares of the
Company. Additional shares of the Company were issued on December 30, 1997.
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided the Bank retains a specified amount of its
assets in housing-related investments. The Company is not an operating company
and has not engaged in any significant business to date. As such, references
herein to the Bank include the Company unless the context otherwise indicates.
Business of the Bank
The Bank is a Federally-chartered stock savings bank that obtained its
current name in April 1995 at the time it reorganized from a mutual savings
association known as "Guaranty Federal Savings and Loan Association" into a
mutual holding company structure.
The Bank's principal business has been, and continues to be, attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations, in both permanent and construction one-to
four-family residential mortgage loans, multi-family residential mortgage loans,
commercial real estate loans, and consumer and other loans. The Bank also
invests in mortgage-backed securities, U.S. Government and federal agency
securities and other marketable 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.
The Bank is regulated by the Office of Thrift Supervision ("OTS") and
its deposits are insured by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation (the "FDIC").
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. 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 receives between five and six million tourists each year, many
of whom pass through Springfield.
<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,
-----------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans (includes loans
held for sale):
One to four units $ 148,396 66.27% $ 116,441 68.11% $ 98,918 68.26% $ 92,104 71.84% $ 84,669 73.38%
Multi-family 21,536 9.62% 15,457 9.04% 13,701 9.45% 12,169 9.49% 12,306 10.67%
Construction 34,729 15.51% 25,149 14.71% 21,729 14.99% 17,887 13.95% 12,895 11.18%
Commercial real estate 12,721 5.68% 8,323 4.87% 8,739 6.03% 5,162 4.03% 4,746 4.11%
--------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans 217,382 97.08% 165,370 96.73% 143,087 98.73% 127,322 99.30% 114,616 99.34%
--------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Commercial business loans 646 0.29% 383 0.22% 255 0.18% 219 0.17% 99 0.09%
Share loans 623 0.28% 720 0.42% 530 0.37% 522 0.41% 421 0.36%
Automobile 2,018 0.90% 1,765 1.03% 1,005 0.69% 106 0.08% 86 0.07%
Other 3,251 1.45% 2,727 1.60% 48 0.03% 45 0.04% 158 0.14%
--------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Total consumer and other loans 6,538 2.92% 5,595 3.27% 1,838 1.27% 892 0.70% 764 0.66%
--------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Total loans 223,920 100.00% 170,965 100.00% 144,925 100.00% 128,214 100.00% 115,380 100.00%
====== ====== ====== ====== ======
Less:
Loans in process 15,235 10,476 7,572 6,537 8,498
Deferred loan fees/costs, net 84 (39) (22) (116) (87)
Unearned discounts 190 216 238 233 1
Allowance for loan losses 2,191 2,177 2,108 1,718 1,703
--------- --------- --------- --------- ---------
Total Loans, Net $ 206,220 $ 158,135 $ 135,029 $ 119,842 $ 105,265
========= ========= ========= ========= =========
</TABLE>
<PAGE>
The following table sets forth the dollar amount, before deductions for
unearned discounts, deferred loan fees/costs and allowance for loan losses, at
June 30, 1998 of all loans due after June 30, 1999, which have pre-determined
interest rates and which have adjustable interest rates.
Fixed and Adjustable Rate Loans by Type
Adjustable
Fixed Rates Rates Total
----------- ----- -------
(Dollars in Thousands)
One-to four-family ................ $37,450 106,334 143,784
Multi-family ...................... 5,942 14,769 20,711
Construction ...................... 678 953 1,631
Commercial real estate ............ 4,275 5,864 10,139
Consumer & other loans ............ 1,683 2,750 4,433
------- ------- -------
Total loans (1) ................... $50,028 130,670 180,698
======= ======= =======
(1) Before deductions for unearned discounts, deferred loan fees/costs, net and
allowances for loan losses.
<PAGE>
The following table sets forth the Bank's loan originations and loan
purchases, sales and principal repayments.
Origination, Purchase and Sale of Loans
Year ended June 30,
-------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Total gross loans receivable at
beginning of period $ 170,965 144,925 127,981
--------- ------- -------
Loans originated:
One- to- four-family 66,385 47,942 32,448
Multi-family 19 2,259 2,903
Construction 35,800 28,863 26,680
Commercial real estate 7,793 3,398 7,053
Consumer and other 6,008 4,499 3,521
--------- ------- -------
Total loans originated 116,005 86,961 72,605
Loans purchased:
Total loans purchased - - -
Loans sold:
Whole loans (6,364) (4,134) (5,319)
Loan principal repayments (53,684) (45,924) (41,867)
other items, net (1) (3,002) (10,863) (8,475)
--------- ------- -------
Net loan activity 52,955 26,040 16,944
Total gross loans receivable at
end of period $ 223,920 170,965 144,925
========= ======= =======
(1) Includes non-cash portion of loan originations.
<PAGE>
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 1998. 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 $53.7 million for the year ended
June 30, 1998.
Loan Maturities
<TABLE>
<CAPTION>
Due After
Due One Year One Through Due After
or Less Five Years Five Years Total
------- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One to four family $ 4,612 15,847 127,937 148,396
Multi family 825 3,949 16,762 21,536
Construction 18,187 483 1,148 19,818
Commercial real estate 2,258 5,247 4,892 12,397
Consumer and other loans 2,105 4,398 35 6,538
-------- ------ ------- -------
Total loans (1) $ 27,987 29,924 150,774 208,685
-------- ------ ------- -------
Less:
Deferred loan fees/costs 84
Unearned discounts 190
Allowance for loan losses 2,191
-------
Loans receivable net 206,220
=======
</TABLE>
(1) Includes mortgage loans held for sale.
<PAGE>
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, 1998, 66.3% of loans receivable consisted of one- to
four-family residential loans, of which 73.2% were ARM loans. The Bank currently
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 2.5% to 2.75% margin. Interest rates charged on
fixed-rate loans are 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. However, mortgage loans secured by
non-owner occupied, one- to four-family residential properties typically do not
exceed 75% of the appraised value or the selling price of the mortgaged
property, whichever is lower. The Bank may on occasion make loans up to 95% of
appraised value or the selling price of the mortgage property, whichever is
lower, however, the Bank typically requires private mortgage insurance for the
excess percentage over 80% for mortgage loans with loan to value percentages
over 80%.
Multi-Family Mortgage Loans. The Bank originates multi-family mortgage
loans in its primary lending area. As of June 30, 1998, $21.5 million or 9.6% 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, $8.1
million as of June 30, 1998, is the maximum the Bank will lend on a multi-family
real estate loan. Loans above $500,000 require Board of Director approval on a
case-by-case basis.
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.
<PAGE>
Construction Loans. As of June 30, 1998, construction loans totaled
$34.7 million or 15.5% 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 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, typically have
loan to value ratios of up to 85%. Construction loans for speculative purposes,
models, and commercial properties typically have 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, 1998, the Bank had commercial
real estate loans totaling $12.7 million or 5.7% 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, motels, churches and other non-residential buildings.
Less than $4 million in commercial real estate loans are located outside 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
$8.1 million as of June 30, 1998, as its maximum commercial real estate loan
amount. Commercial loans above $500,000 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 careful
underwriting, requiring personal guaranty, 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, 1998, the Bank also included approximately $2.6 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
<PAGE>
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.
Consumer and Other Lending. The Bank also offers other loans, primarily
loans secured by certificates of deposit, commercial business assets, consumer
loans, home equity and automobile loans. As of June 30, 1998, $6.5 million or
2.9%, 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 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, 1998, the Bank had no loans 90 days or
more past due and nine loans with total principal balances of $389,000 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.
<PAGE>
The following table sets forth the Bank's loans that are 90 days or
more delinquent.
Delinquency Summary
<TABLE>
<CAPTION>
At June 30,
-----------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans contractually past due 90 days or more
accounted for on a non-accrual basis:
Mortgage Loans:
One- to four-family $ - 279 - - -
Multi-family - 286 - - -
Construction - 190 273 - -
Commercial real estate - - - 1,882 2,013
--------- ------- ------- ------ ------
Total mortgage loans - 755 273 1,882 2,013
--------- ------- ------- ------ ------
Non-mortgage loans:
Commercial loans - - 120 - -
Consumer and other loans - - - - 6
--------- ------- ------- ------ ------
Total non-mortgage loans - - 120 - 6
--------- ------- ------- ------ ------
Total 90 days or more past due non-accrual loans - 755 393 1,882 2,019
--------- ------- ------- ------ ------
Accruing loans which are 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 loans - - - - -
Consumer and other loans - - - - -
--------- ------- ------- ------ ------
Total non-mortgage loans - - - - -
--------- ------- ------- ------ ------
Total 90 days or more past due accruing loans - 113 1,384 - -
--------- ------- ------- ------ ------
Total 90 days or more past due loans $ - 868 1,777 1,882 2,019
========= ======= ======= ====== ======
Total 90 days or more past due loans as a percentage
of net loans - 0.55% 1.32% 1.57% 1.92%
========= ======= ======= ====== ======
Total 90 days or more past due loans as a percentage
of total assets - 0.44% 0.96% 1.10% 1.27%
========= ======= ======= ====== ======
</TABLE>
<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. At June 30, 1998, management has classified four mortgage loans and six
consumer loans as nonaccrual although the loans are not contractually past due
90 days or more. 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). In accordance with the 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.
<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,
--------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to four-family $ 213 279 -- -- --
Multi family 775 286 -- -- --
Construction -- 190 273 -- --
Commercial real estate -- 502 -- 1,882 2,013
------ ------ ------ ------ ------
Total mortgage loans 988 1,257 273 1,882 2,013
------ ------ ------ ------ ------
Non-mortgage loans:
Commercial loans -- -- 120 -- --
Consumer and other loans 24 -- -- -- 6
------ ------ ------ ------ ------
Total non-mortgage loans 24 -- 120 -- 6
------ ------ ------ ------ ------
Total non-performing loans 1,012 1,257 393 1,882 2,019
Real estate acquired in settlement of loans 286 210 2 4 6
Non-performing loans classified as in-substance
foreclosures -- -- -- 698 846
------ ------ ------ ------ ------
Total non-performing assets $1,298 1,467 395 2,584 2,871
====== ====== ====== ====== ======
Total non-performing loans as a percentage of
net loans 0.63% 0.93% 0.29% 1.57% 1.92%
Total non-performing assets as a percentage of
total assets 0.50% 0.74% 0.21% 1.51% 2.02%
Impact on interest income for the period
Interest income that would have been recorded on
non-accruing loans $ 4 $ 31 $ 15 $ -- $ --
</TABLE>
<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 possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
As of June 30, 1998, the Bank had total classified assets of $2.2
million of which $1.4 million were considered substandard and $152,000 were
classified as loss. Special mention assets totaled $693,000 as of June 30, 1998.
One borrower had 11 loans past due less than 30 days that were
classified as special mention as of June 30, 1998. These loans, aggregating
approximately $545,000, 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 $305,000 at June 30, 1998 and current at that date. This same
borrower also owes the Bank approximately $469,000 through a first deed of trust
on a multi-family dwelling. This loan was also current at June 30, 1998. The
Bank considers the loans secured by the condominium units and apartments as
impaired. Based on the information provided by the borrower, these properties
did not generate sufficient cash flow to service the debt during 1998.
As of June 30, 1998, the Bank had $286,000 in real estate obtained
through foreclosure. Subsequently the property has been sold with no further
loss.
<PAGE>
The following table shows the aggregate amounts of the Bank's
classified assets as of June 30, 1998.
Classification of Assets
<TABLE>
<CAPTION>
As of June 30, 1998
-------------------
Substandard Doubtful Loss Special Mention
----------- -------- ---- ---------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
One- to four-family 11 $ 392 - - - - 13 693
Multi-family 2 628 - - 3 146 - -
Commercial real estate - - - - - - - -
Construction and land 1 - - - - - - -
Other loans 9 75 - - 5 6 - -
----- ------- ----- ----- ----- ----- ----- ---
Total loans 23 $ 1,095 - - 8 152 13 693
===== ======= ===== ===== ===== ===== ===== ====
Foreclosed assets held-for-sale:
One- to four-family 2 $ 286 - - - - - -
Commercial real estate - - - - - - - -
Land and other loans - - - - - - - -
----- ------- ----- ----- ----- ----- ----- ---
Total foreclosed assets 2 286 - - - - - -
----- ------- ----- ----- ----- ----- ----- ---
Total 25 $ 1,381 - - 8 152 13 693
===== ======= ===== ===== ===== ===== ===== ====
</TABLE>
<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, 1998, the Bank's total allowance for loan losses was
$2.2 million which amounted to 0.98% 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. During fiscal year 1998, the Bank experienced loan
charge-offs in excess of recoveries of $108,804, and based on a review discussed
above, elected to add $123,352 to the allowance. Management anticipates the need
to continue adding to loss reserves through charges to provision for loan losses
if growth in the loan portfolio continues as anticipated.
<PAGE>
The following tables set forth certain information concerning the
Bank's allowance for loan losses at the dates indicated.
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Beginning balance $ 2,177 2,108 1,718 1,703 1,687
------- ----- ----- ----- -----
Gross loan charge offs
(non-residential commercial
residential one to four-family) (151) (63) (4) (5) (2)
Recoveries
(residential one to four-family) 42 132 1,407 4 4
------- ----- ----- ----- -----
Net loans recoveries (charge-offs) (109) 69 1,403 (1) 2
Provision (credit) for loan losses
(charged to expense) 123 - (1,212) 16 14
Allowance reclassified to loans which were previously
classified as insubstance foreclosures - - 199 - -
------- ----- ----- ----- -----
Ending balance $ 2,191 2,177 2,108 1,718 1,703
======= ===== ===== ===== =====
Net charge-offs as a percentage
of average loans, net -0.06% 0.05% 1.10% 0.00% 0.00%
Allowance for loan losses as a
percentage of average loans, net 1.24% 1.49% 1.66% 1.52% 1.62%
Allowance for loan losses as a
percentage to total non-performing loans 216.50% 173.19% 536.39% 91.29% 84.35%
</TABLE>
Allocation of Allowance for Loan Losses
The following table shows the amount of the allowance allocated to each
loan category and the percent of loans in that loan category to total loans.
<TABLE>
<CAPTION>
At June 30,
-----------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans $ 2,185 99.08% 2,099 96.73% 2,071 98.73% 1,700 99.30% - 99.34%
Consumer and other loans 6 2.92% 78 3.27% 37 1.27% 18 0.70% - 0.66%
------- ------ ----- ------ ----- ------ ----- ------ ------ ------
Total $ 2,191 100.00% 2,177 100.00% 2,108 100.00% 1,718 100.00% - 100.00%
======= ====== ===== ====== ===== ====== ===== ====== ====== ======
</TABLE>
<PAGE>
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, 1998, the Bank held mortgage-backed securities
totaling $21.0 million or 8.1%, of total assets. The estimated fair value of
such securities totaled $21.5 million as of June 30, 1998. All of the Bank's
mortgage-backed securities are insured and are guaranteed by the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Bank
("GNMA"), or the Federal National Mortgage Association ("FNMA").
The following table sets forth the Bank's mortgage-backed portfolio by
the amount of such securities backed by fixed-rate and adjustable-rate
mortgages.
Fixed and Adjustable Mortgage-Backed Securities by Type
At June 30,1998
---------------
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(Dollars in Thousands)
Held-to-maturity:
GNMA $ 3,106 1,644 4,750
FNMA 600 487 1,087
FHLMC 2,446 3,665 6,111
------- ------ ------
6,152 5,796 11,948
------- ------ ------
Available-for-sale:
FNMA - 9,056 9,056
------- ------ ------
Total $ 6,152 14,852 21,004
======= ====== ======
At June 30,1997
---------------
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(Dollars in Thousands)
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
======= ===== ======
At June 30,1996
---------------
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(Dollars in Thousands)
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
======= ===== ======
<PAGE>
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
At June 30, 1998
----------------
Percent Estimated
Amortized of Fair
Cost Portfolio Value
---- --------- -----
Held-to-maturity: (Dollars in Thousands)
GNMA $ 4,750 22.62% 5,083
FNMA 1,087 5.18% 1,136
FHLMC 6,111 29.11% 6,230
-------- ------ ------
11,948 56.91 12,449
-------- ------ ------
Available-for-sale:
FNMA 9,048 43.09% 9,056
-------- ------ ------
Total $ 20,996 100.00% 21,505
======== ====== ======
At June 30, 1997
----------------
Percent Estimated
Amortized of Fair
Cost Portfolio Value
---- --------- -----
Held-to-maturity: (Dollars in Thousands)
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
======== ====== ======
At June 30, 1996
----------------
Percent Estimated
Amortized of Fair
Cost Portfolio Value
---- --------- -----
Held-to-maturity: (Dollars in Thousands)
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
======== ====== ======
<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, 1998.
Maturities and Average Weighted Yields of Mortgage-Backed Securities
<TABLE>
<CAPTION>
One After One Year After Five Years to After
Year or Less to Five Years Ten Years Ten Years Total Amounts
------------ ------------- --------- --------- -------------
Carrying Carrying Carrying Carrying Carrying
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 $ - 0.00% - 0.00% - 0.00% 4,750 8.75% 4,750 8.75%
FNMA - 0.00% - 0.00% - 0.00% 1,087 6.50% 1,087 6.50%
FHLMC - 0.00% 1,552 6.00% 4 8.10% 4,555 7.75% 6,111 7.31%
Available-for-sale:
FNMA - 0.00% - 0.00% -- 0.00% 9,056 6.46% 9,056 6.46%
---- ---- ----- ---- --- ---- ------ ---- ------ ----
Total $ - 0.00% 1,552 6.00% 4 8.10% 19,448 7.32% 21,004 7.23%
==== ==== ===== ==== == ==== ====== ==== ====== ====
</TABLE>
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
purchases, sales and principal repayments.
Mortgage-Backed Securities Activity
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $ 15,814 20,067 13,855
Purchases 9,063 - 10,834
Sales - - -
Principal payments (3,881) (4,300) (4,628)
Unrealized appreciation on
available for sale mortgage backed securities 8
Amortization and accretion, net - 47 6
-------- ------ ------
Ending balance $ 21,004 15,814 20,067
======== ====== ======
</TABLE>
<PAGE>
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, 1998, the investment policy of the Company is
not as restrictive and allows for the purchase and retention of equity
securities. At June 30, 1998 the investment securities portfolio of the Company,
on an unaggregated basis, consisted of $247,000 of securities classified as
available-for-sale. On an aggregate basis (the Company and the Bank), the
Company had investment securities with an estimated fair value of $13.6 million
and a carrying value of $13.7 million. Of those securities $4.8 million were
classified as 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 Company's
investment securities portfolio.
Composition of Investment Securities
<TABLE>
<CAPTION>
At June 30,
-----------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Investment Securities:
U. S. Treasury and government securities $ 8,922 8,586 15,656
Obligations of state and political subdivisions - - -
Corporate notes and bonds - - -
Other securities (1) 4,765 3,360 2,052
-------- ------ ------
Total Investment Securities 13,687 11,946 17,708
Interest Bearing Deposits 6,458 3,400 2,373
FHLB Stock 2,254 1,734 1,734
-------- ------ ------
Total Investments $ 22,399 17,080 41,882
======== ====== ======
</TABLE>
(1) Consists of FHLMC stock and various other equities.
<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, 1998.
Investment Portfolio Maturities and Average Weighted Yields
<TABLE>
<CAPTION>
As of June 30, 1998
-------------------
One year or less After One to Five Years After Five to Ten Years After Ten Years Total Investment Securities
---------------- ----------------------- ----------------------- --------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury and
government agencies $ - - $ 7,784 6.12% $ - - $ 1,138 6.50% $ 8,922 6.17% $ 8,861
-- --- ------- ---- --- --- ------- ---- ------- ---- -------
Total $ - - $ 7,784 6.12% $ - --- $ 1,138 6.50% $ 8,922 6.17% $ 8,861
=== === ======= ==== === ==== ======= ==== ======= ==== =======
</TABLE>
<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.
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts.
Deposit Account Types
<TABLE>
<CAPTION>
As of June 30,
------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Average Percentage Average Percentage Average Percentage
Interest of Total Interest of Total Interest of Total
Category Term Rate Amount Deposits Rate Amount Deposits Rate Amount Deposits
- -------- ---- ---- ------ -------- ---- ------ -------- ---- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts None 2.24% $ 14,468 10.26% 2.05% $ 9,386 6.21% 2.05% 6,625 4.22%
Savings accounts None 2.68% 8,658 6.14% 2.80% 8,621 5.70% 2.80% 10,262 6.54%
Money Market accounts None 3.64% 10,587 7.51% 2.98% 8,288 5.48% 2.98% 5,264 3.35%
Non-interest bearing
demand accounts None 0.00% 3,142 2.23% 0.00% 2,334 1.54% 0.00% 1,534 0.98%
--------- ------ ------- ------ ------- ------
Total 36,855 26.14% 28,629 18.93% 23,685 15.09%
--------- ------ ------- ------ ------- ------
Certificate of Deposit:
Fixed-rate, fixed-term 1-11 months 5.00% 14,169 10.05% 4.96% 16,846 11.14% 4.96% 33,300 21.21%
Fixed-rate, fixed-term 12-23 months 5.19% 38,059 27.00% 5.29% 47,682 31.53% 5.29% 44,699 28.47%
Fixed-rate, fixed-term 24-35 months 5.64% 26,415 18.74% 5.63% 28,485 18.83% 5.63% 24,684 15.72%
Fixed-rate, fixed-term 36-47 months 5.71% 10,147 7.20% 5.77% 12,013 7.94% 5.77% 12,474 7.94%
Fixed-rate, fixed-term 48-59 months 5.98% 1,789 1.27% 5.87% 1,718 1.14% 5.87% 1,818 1.16%
Fixed-rate, fixed-term 60-71 months 6.04% 8,354 5.93% 5.92% 10,615 7.02% 5.92% 11,205 7.14%
Fixed-rate, fixed-term 72-95 months 6.28% 5,187 3.68% 5.92% 5,258 3.48% 5.92% 5,143 3.28%
--------- ------ ------- ------ ------- ------
Total 104,120 73.86% 122,617 81.07% 133,323 84.91%
--------- ------ ------- ------ ------- ------
Total Deposits (2) $ 140,975 100.00% 151,246 100.00% 157,008 100.00%
========= ====== ======= ====== ======= ======
</TABLE>
<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, 1998.
Maturities of Certificates of Deposit of $100,000 or More
At June 30, 1998
----------------
Maturity Period (Dollars in Thousands)
Three months or less $ 1,491,286
Over three through six months 1,103,188
Over six through twelve months 1,562,404
Over twelve months 1,715,256
-----------
Total $ 5,872,134
===========
<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, 1998, 1997 and 1996 there were $45.1, $18.2 million and
$0 outstanding advances from the FHLB, respectively. The weighted average
interest rate on such advances at June 30, 1998 and 1997 was 6.08% and 6.12%,
respectively. The average balance of outstanding advances during 1998, 1997 and
1996, was $27.6 million, $13.8 million and $690,000, respectively, and the
approximate average interest rate was 6.13%, 6.09% and 5.65%, respectively.
During 1998, 1997 and 1996, the maximum outstanding at any month end was $45.1,
$21.2 million and $3.0 million, respectively.
Subsidiary Activity
The Bank is a subsidiary of the Company. The Bank has one service
corporation, Guaranty Financial Services of Springfield, Inc. The Bank had an
investment of $55,000 in its service corporation as of June 30, 1998. 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.
Employees
Substantially, all of the activities of the Company are conducted
through the Bank. At June 30, 1998, the Company had no salaried employees.
As of June 30, 1998, the Bank had 71 full-time employees and 12
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.
Competition
The Bank experiences substantial competition both in attracting and
retaining deposit accounts and in the making of mortgage and other loans.
<PAGE>
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, insurance companies and retail stores. The primary
factors in competing for loans are interest rates and loan origination fees and
the range of services offered by various financial institutions. Competition for
origination of real estate loans normally comes from other savings institutions,
commercial banks, mortgage bankers, mortgage brokers and insurance companies.
The Bank's primary competition comprises the financial institutions
near each of the Bank's branch offices. In Springfield, where the Bank's main
office and three branch offices are located, primary competition consists of
one thrift institution, 20 commercial banks and 13 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.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or a somewhat
similar test for domestic building and loan associations. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualifies as a QTL or domestic building and loan association and were acquired
in a supervisory acquisition. See "- Regulation of the Bank - Qualified Thrift
Lender Test."
<PAGE>
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Board of
Governors of the 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 are found 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 the Bank's 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 savings 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 loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
Insurance of Deposit Accounts. The deposit accounts held by 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.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
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. Beginning January 1, 1997, the deposit
insurance assessment for most SAIF members was reduced to .064% of deposits on
an annual basis through the end of 1999. During this same period, BIF members
will be assessed approximately .013% of deposits. After 1999, assessments for
BIF and SAIF members should be the same. 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 declined by
approximately 70%.
<PAGE>
Regulatory Capital Requirements. OTS capital regulations require
savings associations to meet three capital standards: (1) a tangible capital
requirement of 1.5% of total adjusted assets, (2) a leverage ratio (core
capital) requirement of 3% of total adjusted assets and (3) a risk-based capital
requirement equal to 8% of total risk-weighted assets.
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 to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account established in connection
with the conversion from mutual to stock form.
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 shareholders 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 approval. As of
June 30, 1998, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. 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.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
undercapitalized (not meet any one of its minimum regulatory capital
requirements). In contrast, the Company has fewer restrictions on dividends.
Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS regulations or the definition of a domestic building
and loan association in section 7701 of the Internal Revenue Code (the "Code").
If the Bank maintains an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL or a domestic
building and loan association, it will continue to enjoy full borrowing
privileges from the FHLB of Des Moines. The required percentage of investments
under the QTL test is 65% of assets while the Code requires investments of 60%
of assets. A bank must be in compliance with the QTL test or definition of
domestic building and loan association on a monthly basis in nine out of every
12 months.
<PAGE>
Federal Reserve System. The Board of Governors of 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.
Executive Officers of the Registrant
Set forth below is information concerning the three executive officers
of the Company.
James E. Haseltine joined the Bank in 1983, and has served as Director,
president and Chief Executive Officer since 1990. Mr. Haseltine has held the
same positions with the Company since its formation in September 1997. After
graduating Drury College in 1968, he entered military service with the U.S. 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.
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.
William B. Williams joined the Bank in 1995 as Executive Vice President
and Chief Operating Officer. Mr. Williams has held the same positions with the
Company since its formation in September 1997. 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 U.S.
Navy, he received a MBA degree from Tulane University in 1974. He is a CPA.
Bruce Winston is Vice President and Chief Financial Officer of the
Bank. He joined the Bank in 1992. Mr. Winston has held the same positions with
the Company since its formation in September 1997. 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.
At June 30, 1998, the years of age of these individuals was 51 for Mr.
Haseltine, 51 for Mr. Williams and 50 for Mr. Winston.
Item 2. Properties
The offices of the Company are located in the main office of the Bank.
The Bank's office facilities currently consist of the main office in
Springfield, Greene County, Missouri and four full-service branch offices in
Springfield. The Bank constructed a new main office building, which provides the
Bank with a modern office for customer services and projects a favorable image
for the Bank in the local marketplace. Guaranty has also recently completed
additional investment in certain of the branch offices to upgrade and improve
the facilities.
<PAGE>
Item 3. Legal Proceedings
The Company and the Bank, from time to time, may be parties to ordinary
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 Company and the
Bank. At June 30, 1998, there were no claims or lawsuits pending or known to be
contemplated against the Company or the Bank that would have had a material
effect on the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information on page 2 of the Annual Report to Stockholders of the
Registrant for the fiscal year ended June 30, 1998 (the "1998 Annual Report") is
incorporated herein by reference.
Item 6. Selected Financial Data
The information contained on page 4 of the 1998 Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
The information contained on pages 5 through 16 of the 1998 Annual
Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained on pages 11 and 12 under the headings "ASSET/
LIABILITY MANAGEMENT" and "INTEREST RATE SENSITIVITY ANALYSIS" of the 1998
Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements set forth on pages 17 to 46 of the 1998 Annual
Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "First Proposal,
Election of Directors" in the proxy statement for the Annual Meeting of
Stockholders to be held October 28, 1998 (the "Proxy Statement") is incorporated
herein by reference.
Additional information concerning executive officers is included in the
Proxy Statement in the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" and under "Executive Officers of the Registrant" in Item 1
of this report.
Item 11. Executive Compensation
The information contained on pages 6-8 and page 10 of the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the second chart in the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(c) Not applicable.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Transactions with Certain Related Persons"
in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of
independent accountants included in the 1998 Annual Report are incorporated
herein by reference and also in Item 8 of this report.
<PAGE>
Independent Accountants' Report
Consolidated Balance Sheets as of June 30, 1998 and 1997.
Consolidated Statements of Income for the Years Ended June 30, 1998,
1997, and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the Years Ended June 30,
1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules for which provision is made
in the applicable accounting regulations of the SEC are not required under the
related instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
<TABLE>
<CAPTION>
<S> <C>
(a) List of Exhibits:
3(i) Certificate of Incorporation of Guaranty Federal Bancshares, Inc.
3(ii) Bylaws of Guaranty Federal Bancshares, Inc.
10.1 1994 Stock Option Plan*
10.2 Recognition and Retention Plan**
10.3 1998 Stock Option Plan**
10.4 Restricted Stock Plan**
13 Annual Report to Stockholders for the fiscal year ended June 30, 1998
21 Subsidiaries of the Registrant
23 Consent of Baird Kurtz & Dobson
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
- ---------------------
* Incorporated by reference to the identically numbered Exhibit of the
Registration Statement on Form S-1 filed by the Registrant on September 22,
1997 (SEC file number 333-36141).
** Incorporated by reference to the exhibits to the proxy statement filed by
the Registrant on June 15, 1998 (SEC file number 0-23325).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GUARANTY FEDERAL BANCSHARES, INC.
Dated: September 24, 1998 By: /s/James E. Haseltine
James E. Haseltine
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/James E. Haseltine By: /s/Ivy L. Rogers
James E. Haseltine Ivy L. Rogers
President and Chief Executive Officer Director
(Principal Executive Officer)
Date: September 24, 1998 Date: September 24, 1998
By: /s/Bruce Winston By: ____________________
Bruce Winston Gary Lipscomb
Vice President and Chief Financial Officer Director
(Principal Accounting and
Financial Officer)
Date: September 24, 1998 Date: September 24, 1998
By: /s/Wayne V. Barnes By: /s/Jack L. Barham
Wayne V. Barnes Jack L. Barham
Director Chairman of the Board and Director
Date: September 24, 1998 Date: September 24, 1998
By: /s/George L. Hall
George L. Hall
Director
Date: September 24, 1998
</TABLE>
EXHIBIT 3(i)
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
GUARANTY FEDERAL BANCSHARES, INC.
The Corporation's original Certificate of Incorporation was filed with
the Delaware Secretary of State on September 15, 1997. This Restated Certificate
of Incorporation has been duly amended and adopted in accordance with Sections
241 and 245 of the Delaware General Corporation Law as follows and, at this
time, the Corporation has not received any payment for any of its stock:
ARTICLE I
Name
The name of the corporation is Guaranty Federal Bancshares, Inc.
(herein the "Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Corporation Trust Center, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a
savings and loan holding company and to transact all other lawful business for
which corporations may be incorporated pursuant to the laws of the State of
Delaware. The Corporation shall have all the powers of a corporation organized
under said laws.
ARTICLE IV
Term
The Corporation is to have perpetual existence.
ARTICLE V
Incorporators
The name and mailing address of the incorporator is as follows:
Name Mailing Address
---- ---------------
James E. Haseltine 1341 W. Battlefield
Springfield, Missouri 65807
<PAGE>
ARTICLE VI
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 12,000,000, of which 10,000,000 are to
be shares of common stock, $.10 par value per share, and of which 2,000,000 are
to be shares of serial preferred stock, $.01 par value per share. The shares may
be issued by the Corporation without the approval of stockholders except as
otherwise provided in this Article VI or the rules of a national securities
exchange, if applicable. The consideration for the issuance of the shares shall
be paid to or received by the Corporation in full before their issuance and
shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the board of directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate the holders of
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holders.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock, and on any class
or series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when as declared
by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any event, the full preferential amounts to which they
are respectively entitled, the holders of the common stock and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation.
B. Serial Preferred Stock. Except as provided in this Certificate the
board of directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and
2
<PAGE>
relative, participating, optional or other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, including,
but not limited to determination of any of the following:
1. the distinctive serial designation and the number of shares
constituting such series; and
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends; and
3. the voting powers, full or limited, if any, of the shares of such
series; and
4. whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon which such
shares may be redeemed; and
5. the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
6. whether the shares of such series shall be entitled to the benefits
of a sinking or retirement fund to be applied to the purchase or redemption of
such shares, and, if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such funds; and
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange; and
8. the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
ARTICLE VII
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or
3
<PAGE>
series; but any such unissued stock, bonds, certificates of indebtedness,
debentures or other securities convertible into or exchangeable for stock or
carrying any right to purchase stock may be issued pursuant to resolution of the
board of directors of the Corporation to such persons, firms, corporations or
associations, whether or not holders thereof, and upon such terms as may be
deemed advisable by the board of directors in the exercise of its sole
discretion.
ARTICLE VIII
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law or regulation.
ARTICLE IX
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the
Bylaws of the Corporation, no action required to be taken or which may be taken
at any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the board of directors of the
Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board of directors or in the Bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of the Corporation may provide.
ARTICLE X
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the board of directors of the
4
<PAGE>
Corporation or by any stockholder of the Corporation entitled to vote generally
in the election of directors. In order for a stockholder of the Corporation to
make any such nominations and/or proposals, he or she shall give notice thereof
in writing, delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation not less than thirty days nor more
than sixty days prior to any such meeting; provided, however, that if less than
thirty-one days' notice of the meeting is given to stockholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary of the
Corporation not later than the close of the tenth day following the day on which
notice of the meeting was mailed to stockholders. Each such notice given by a
stockholder with respect to nominations for election of directors shall set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice, (ii) the principal occupation or
employment of each such nominees, (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee, (iv) such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended, including, without limitation,
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected, and (v) as to the stockholder giving
such notice (a) his name and address as they appear on the Corporation's books,
and (b) the class and number of shares of the Corporation which are beneficially
owned by such stockholder. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation.
B. Each such notice given by a stockholder to the Secretary with
respect to business proposals to bring before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may,
if the facts warrant, determine and declare to the meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding adjourned, special or annual meeting of the stockholders taking place
thirty days or more thereafter. This provision shall not require the holding of
any adjourned or special meeting of stockholders for the purpose of considering
such defective nomination or proposal.
ARTICLE XI
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
be such number, not less than three nor more than 15 (exclusive of directors, if
any, to be elected by holders of preferred stock of the Corporation, voting
separately as a class), as shall be provided from time to time in or in
accordance with the Bylaws of the Corporation, provided that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director, and provided further that no action shall be taken to
decrease or increase the number of directors from time to time unless at least
two-thirds of the directors then in office shall concur in said action.
Vacancies in the board of directors of the
5
<PAGE>
Corporation, however caused, and newly created directorships shall be filled by
a vote of two-thirds of the directors then in office, whether or not a quorum,
and any director so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which the director has
been chosen expires and when the director's successor is elected and qualified.
B. Classified Board. The board of directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. Such classes shall
be as nearly equal in number as the then total number of directors constituting
the entire board of directors shall permit, with the terms of office of all
members of one class expiring each year. At the first annual meeting of
stockholders, directors in Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding meeting thereafter. At the third
annual meeting of stockholders, directors of Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each succeeding annual meeting, directors whose term shall expire
at any annual meeting shall continue to serve until such time as his successor
shall have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting. The initial board of directors
shall consist of Jack L. Barham and James E. Haseltine in Class 1, Wayne V.
Barnes and Ivy L. Rogers in Class 2, and George L. Hall and Gary Lipscomb in
Class 3.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the board of directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided above in this Article XI. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
ARTICLE XII
Removal of Directors
Notwithstanding any other provision of this Certificate or the Bylaws
of the Corporation, no member of the board of directors of the Corporation may
be removed except for cause, and then only by the affirmative vote of at least
80% of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this purpose as one
class) cast at a
6
<PAGE>
meeting of the stockholders called for that purpose. Notwithstanding the
foregoing, whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the preceding provisions of this Article
XII shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XIII
Certain Limitations on Voting Rights
Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 10% of the then-outstanding shares of
Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of
the shares held in excess of the Limit. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
which are both beneficially owned by such person and owned of record by such
record owner and the denominator of which is the total number of shares of
Common Stock beneficially owned by such person owning shares in excess of the
Limit.
Further, for a period of five years from the date of acquisition of
Guaranty Federal Savings Bank by the Corporation, no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of any equity security of the Corporation.
B. The following definitions shall apply to this Article XIII.
1. "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
in effect on the date of filing of this Certificate of Incorporation.
2. "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of
the General Rules and Regulations under the Securities Exchange Act of 1934 (or
any successor rule or statutory provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or provision thereto, pursuant to
said Rule 13d-3 as in effect on the date of filing of this Certificate of
Incorporation; provided, however, that a person shall, in any event, also be
deemed the "beneficial owner" of any Common Stock:
(1) which such person or any of its affiliates beneficially owns,
directly or indirectly; or
(2) which such person or any of its affiliates has (i) the right
to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be
the beneficial owner of any voting shares solely by reason of
an agreement, contract, or other arrangement with this
Corporation to effect any transaction which is described in
any one or more of Sections 1 through 5 of Section A of
Article XIV) or upon the exercise of conversion rights,
exchange rights, warrants, or options or otherwise, or (ii)
sole or shared voting or
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investment power with respect thereto pursuant to any
agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial owner
of any voting shares solely by reason of a revocable proxy
granted for a particular meeting of stockholders, pursuant to
a public solicitation of proxies for such meeting, with
respect to shares of which neither such person nor any such
affiliate is otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of
its affiliates acts as a partnership, limited partnership,
syndicate or other group pursuant to any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of
this Corporation;
and provided further, however, that (1) no Director or Officer of this
Corporation (or any affiliate of any such Director or Officer) shall, solely by
reason of any or all of such Directors or Officers acting in their capacities as
such, be deemed, for any purposes hereof, to beneficially own any Common Stock
beneficially owned by any other such Director or Officer (or any affiliate
thereof), and (2) neither any employee stock ownership or similar plan of this
Corporation or any subsidiary of this Corporation, nor any trustee with respect
thereto or any affiliate of such trustee (solely by reason of such capacity of
such trustee), shall be deemed, for any purposes hereof, to beneficially own any
Common Stock held under any such plan. For purposes of computing the percentage
beneficial ownership of Common Stock of a person, the outstanding Common Stock
shall include shares deemed owned by such person through application of this
subsection but shall not include any other Common Stock which may be issuable by
this Corporation pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise. For all other purposes, the
outstanding Common Stock shall include only Common Stock then outstanding and
shall not include any Common Stock which may be issuable by this Corporation
pursuant to any agreement, or upon the exercise of conversion rights, warrants
or options, or otherwise.
3. A "person" shall mean any individual, firm, corporation, or other
entity.
C. The Board of Directors shall have the power to construe and apply
the provisions of this Article XIII and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (i) the number of shares of Common Stock beneficially owned by
any person, (ii) whether a person is an affiliate of another, (iii) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership, (iv) the
application of any other definition or operative provision of the section to the
given facts, or (v) any other matter relating to the applicability or effect of
this Article XIII.
D. The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit (or holders of record of Common Stock beneficially owned by any person
in excess of the Limit) supply the Corporation with complete information as to
(i) the record owner(s) of all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit, (ii) any other factual
matter relating to the applicability or effect of this Article XIII as may
reasonably be requested of such person.
E. Except as otherwise provided by law or expressly provided in this
Article XIII, the presence in person or by proxy, of the holders of record of
shares of capital stock of the Corporation
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entitling the holders thereof to cast a majority of the votes (after giving
effect, if required, to the provisions of this Article XIII) entitled to be cast
by the holders of shares of capital stock of the Corporation entitled to vote
shall constitute a quorum at all meetings of the stockholders, and every
reference in this Certificate of Incorporation to a majority or other proportion
of capital stock (or the holders thereof) for purposes of determining any quorum
requirement or any requirement for stockholder consent or approval shall be
deemed to refer to such majority or other proportion of the votes (or the
holders thereof) then entitled to be cast in respect of such capital stock.
F. The provisions of this Article XIII shall not be applicable to the
acquisition of more than 10% of any class of equity security of the Corporation
if such acquisition has been approved by a majority of the Continuing Directors,
as defined in Article XIV of this Certificate; provided, however, that such
approval shall only be effective if such continuing directors shall have the
power to construe and apply the provisions of this Article XIII and to make all
determinations necessary or desirable to implement such provisions, including
but not limited to matters with respect to (a) the number of shares beneficially
owned by any person, (b) whether a person has an agreement, arrangement, or
understanding with another as to the matters referred to in the definition of
beneficial ownership, (c) the application of any other material fact relating to
the applicability or effect of this Article XIII. Any constructions,
applications, or determinations made by the Continuing Directors pursuant to
this Article XIII in good faith and on the basis of such information and
assistance as was then reasonably available for such purpose shall be conclusive
and binding upon the Corporation and its stockholders.
G. In the event any provision (or portion thereof) of this Article XIII
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Article XIII shall remain in
full force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken here from or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
each such remaining provision (or portion thereof) of this Article XIII remain,
to the fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
ARTICLE XIV
Approval of Business Combinations
A. Standards of Board of Directors' Evaluation of an Offer. The Board
of Directors of the Corporation, when evaluating any offer of another Person to
effect a Business Combination shall, in connection with the exercise of its
judgment in determining what is in the best interests of the Corporation and its
shareholders, give due consideration to all relevant factors, including, without
limitation: (i) the social and economic effects of acceptance of such offer on
its depositors, borrowers, other customers, employees, and creditors of the
Corporation and its Subsidiaries, and on the communities in which the
Corporation and its Subsidiaries operate or are located; (ii) the ability of the
Corporation and its Subsidiaries to fulfill the objectives of a bank and/or
savings bank and/or savings and loan association holding company, as applicable,
and of commercial banking and/or savings bank and/or savings and loan entities,
as applicable, under applicable federal and state statutes and regulations;
(iii) the business and financial condition and prospects and earnings prospects
of the Person or Persons proposing the Business Combination, including, but not
limited to, debt service and other existing financial obligations, financial
obligations to be incurred in connection with the Business Combination, and
other likely financial
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obligations of such Person or Persons, and the possible effect of such
conditions and prospects upon the Corporation and its Subsidiaries and the
communities in which the Corporation and its Subsidiaries are located; (iv) the
competence, experience, and integrity of the Person or Persons proposing the
Business Combination and its or their management; and (v) the prospects for
successful conclusion of the proposed Business Combination. The provisions of
this Article XIV shall be deemed solely to grant discretionary authority to the
Board of Directors and shall not be deemed to provide any constituency the right
to be considered or to compel the consideration of its interests.
B. General Requirement. The affirmative vote of the holders of not less
than eighty percent (80%) of the outstanding shares of "Voting Stock" (as
hereinafter defined) shall be required for the approval or authorization of any
"Business Combination", as defined and set forth below:
1. Any merger, reorganization, or consolidation of the
Corporation or any of its Affiliates (as defined in Article XIII of this
Certificate) with or into any Principal Shareholder (as hereinafter defined);
2. Any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition (in one transaction or in a series of related transactions) of
all or a "Substantial Part" (as hereinafter defined) of the assets of the
Corporation or any of its Affiliates to any Principal Shareholder;
3. Any sale, lease, exchange, or other transfer (in one
transaction or in a series of related transactions) by any Principal Shareholder
to the Corporation or any of the Corporation's Affiliates of any assets, cash,
or securities in exchange for shares of Voting Stock (or of shares of stock of
any of the Corporation's Affiliates entitled to vote in the election of
directors of such Affiliate or securities convertible into or exchangeable for
shares of Voting Stock or such stock of an Affiliate, or options, warrants, or
rights to purchase shares of Voting Stock or such stock of an Affiliate);
4. The adoption at any time when there exists any Principal
Shareholder of any plan or proposal for the liquidation or dissolution of the
Corporation; and
5. Any reclassification of securities (including any reverse
stock split), recapitalization, or other transaction at any time when there
exists any Principal Shareholder if such reclassification, recapitalization, or
other transaction would result in a decrease in the number of holders of the
outstanding shares of Voting Stock.
The affirmative vote required by this Article XIV shall be in addition
to the vote of the holders of any class or series of stock of the Corporation
otherwise required by law, by any other Article of this Certificate, as amended,
by any resolution of the Board of Directors providing for the issuance of a
class or series of stock, or by any agreement between the Corporation and any
national securities exchange.
C. Certain Definitions. For the purposes of this Article XIV:
1. The term "Principal Shareholder" shall mean and include any
individual, Corporation, partnership, or other person or entity which, together
with its "Affiliates" and "Associates" (as defined in Article XIII of this
Certificate), "beneficially owns" (as defined in Article XIII of this
Certificate) in the aggregate ten percent (10%) or more of the outstanding
shares of Voting Stock, and any Affiliate or Associate of any such individual,
corporation, partnership, or other person or entity.
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2. The term "Substantial Part" shall mean more than
twenty-five percent (25%) of the fair market value of the total assets of the
Corporation, as of the end of its most recent fiscal quarter ending prior to the
time the determination is being made.
3. The term "Voting Stock" shall mean the stock of the
Corporation entitled to vote in the election of directors.
4. Any corporation, partnership, person, or entity will be
deemed to be a "beneficial owner" of or to own beneficially any share or shares
of stock of the Corporation: (a) which it owns directly, whether or not of
record; or (b) which it has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement or arrangement or understanding or upon exercise of conversion rights,
exchange rights, warrants or options, or otherwise, or which it has the right to
vote pursuant to any agreement, arrangement, or understanding; or (c) which are
beneficially owned, directly or indirectly (including shares deemed to be owned
through application of clause (b) above) by any Affiliate or Associate; or (d)
which are beneficially owned, directly or indirectly (including shares deemed to
be owned through application of clause (b) above) by any other corporation,
person, or entity with which it or any of its Affiliates or Associates have any
agreement or arrangement or understanding for the purpose of acquiring, holding,
voting, or disposing of Voting Stock.
For the purpose only of determining the percentage of the outstanding
shares of Voting Stock which any corporation, partnership, person, or other
entity beneficially owns, directly or indirectly, the outstanding shares of
Voting Stock will be deemed to include any shares of Voting Stock which such
corporation, partnership, person or other entity beneficially owns pursuant to
the foregoing provisions of this subsection (whether or not such shares of
Voting Stock are in fact issued or outstanding), but shall not include any other
shares of Voting Stock which may be issuable either immediately or at some
future date pursuant to any agreement, arrangement, or understanding or upon
exercise of conversion rights, exchange rights, warrants, options, or otherwise.
D. Exceptions. The provisions of this Article XIV shall not apply to a
Business Combination which is approved by two-thirds of those members of the
Board of Directors who were directors prior to the time when the Principal
Shareholder became a Principal Shareholder (the "Continuing Directors"). The
provisions of this Article XIV also shall not apply to a Business Combination
which (a) does not change any shareholder's percentage ownership in the shares
of stock entitled to vote in the election of directors of any successor of the
Corporation from the percentage of the shares of Voting Stock owned by such
shareholder; (b) provides for the provisions of this Article XIV, without any
amendment, change, alteration, or deletion, to apply to any successor to the
Corporation; and (c) does not transfer all or a Substantial Part of the
Corporation's assets other than to a wholly-owned subsidiary of the Corporation.
E. Additional Provisions. Nothing contained in this Article XIV, shall
be construed to relieve a Principal Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in this Article XIV shall prevent
any shareholders of the Corporation from objecting to any Business Combination
and from demanding any appraisal rights which may be available to such
Shareholder.
F. Notwithstanding Article XX or any provisions of this Certificate or
the Bylaws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, this Certificate or the Bylaws of the
Corporation), the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote thereon (and, if any class or series is
entitled to vote thereon
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separately, the affirmative vote of the holders of at least 80% of the
outstanding shares of each such class or series) shall be required to amend or
repeal this Article XIV or adopt any provisions inconsistent with this Article
XIV.
ARTICLE XV
Fair Price Requirements
A. General Requirement. No "Business Combination" (as defined in
Article XIV) shall be effected unless all of the following conditions, to the
extent applicable, are fulfilled.
1. The ratio of (a) the aggregate amount of the cash and the
fair market value of the other consideration to be received per share by the
holders of the common stock of the Corporation in the Business Combination to
(b) the "Market Price" (as hereinafter defined) of the common stock of the
Corporation immediately prior to the announcement of the Business Combination or
the solicitation of the holders of the common stock of the Corporation regarding
the Business Combination, whichever is first, shall be at least as great as the
ratio of (x) the highest price per share previously paid by the "Principal
Shareholder" (as hereinafter defined) (whether before or after it became a
Principal Shareholder) for any of the shares of common stock of the Corporation
at any time beneficially owned, directly, or indirectly, by the Principal
Shareholder to (y) the Market Price of the common stock of the Corporation on
the trading date immediately prior to the earliest date on which the Principal
Shareholder (whether before or after it became a Principal Shareholder)
purchased any shares of common stock of the Corporation during the two year
period prior to the date on which the Principal Shareholder acquired the shares
of common stock of the Corporation at any time owned by it for which it paid the
highest price per share (or, if the Principal Shareholder did not purchase any
shares of common stock of the Corporation during the two year period, the Market
Price of the common stock of the Corporation on the date of two years prior to
the date on which the Principal Shareholder acquired the shares of common stock
of the Corporation at any time owned by it for which it paid the highest price
per share).
2. The aggregate amount of the cash and the fair market value
of the other consideration to be received per share by the holders of the common
stock of the Corporation in the Business Combination shall be not less than the
highest price per share previously paid by the Principal Shareholder (whether
before or after it became a Principal Shareholder) for any of the shares of
common stock of the Corporation at any time beneficially owned, directly or
indirectly, by the Principal Shareholder.
3. The consideration to be received by the holders of the
common stock of the Corporation in the Business Combination shall be in the same
form and of the same kind as the consideration paid by the Principal Shareholder
in acquiring the majority of the shares of common stock of the Corporation
already beneficially owned, directly or indirectly, by the Principal
Shareholder.
The conditions imposed by this Article XV shall be in addition to all
other conditions (including, without limitation, the vote of the holders of any
class or series of stock of the Corporation) otherwise imposed by law, by any
other Article of this Certificate, by any resolution of the Board of Directors
providing for the issuance of a class or series of stock, or by any agreement
between the Corporation and any national securities exchange.
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B. Certain Definitions. For the purpose of this Article XV, the
definitions of "Business Combination," "Principal Shareholder", "Substantial
Part", "Voting Stock," and "Beneficial Owner" set forth in Article XIV will
apply to this Article XV.
The "Market Price" of the common stock of the Corporation shall be the
mean between the high "bid" and the low "asked" prices of the common stock in
the over-the-counter market on the day on which such value is to be determined
or, if no shares were traded on such date, on the next preceding day on which
such shares were traded, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or other national quotation
service. If the common stock of the Corporation is not regularly traded in the
over-the-counter market but is registered on a national securities exchange or
traded in the national over-the-counter market, the market value of the common
stock shall mean the closing price of the common stock on such national
securities exchange or market on the day on which such value is to be determined
or, if no shares were traded on such day, on the next preceding day on which
shares were traded, as reported by the National Quotation Bureau, Incorporated
or other national quotation service. If no such quotations are available, the
fair market value of the date in question of a share of such stock as determined
by the Board of Directors in good faith; and in the case of property other than
cash or stock, the fair market value of such property other than cash or stock,
the fair market value of such property on the date in question as determined by
the Board of Directors in good faith.
C. Exceptions. The provisions of this Article XV shall not apply to a
Business Combination which was approved by two-thirds of those members of the
Board of Directors of the Corporation who were directors prior to the time when
the Principal Shareholder became a Principal Shareholder. The provisions of
which this Article XV also shall not apply to a Business Combination which (a)
does not change any shareholder's percentage ownership in the shares of stock
entitled to vote in the election of directors of any successor of the
Corporation from the percentage of the shares of Voting Stock beneficially owned
by such shareholder; (b) provides for the provisions of this Article XV, without
any amendment, change alteration, or deletion, to apply to any successor to the
Corporation; and (c) does not transfer all or a Substantial Part of the
Corporation's assets other than to a wholly-owned subsidiary of the Corporation;
provided, however, that nothing contained in this Article XV shall permit the
Corporation to issue any of its shares of Voting Stock or to transfer any of its
assets to a wholly-owned subsidiary of the Corporation if such issuance of
shares of Voting Stock or transfer of assets is part of a plan to transfer such
shares of Voting Stock or assets to a Principal Shareholder.
D. Additional Provisions. Nothing contained in this Article XV shall be
construed to relieve a Principal Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in this Article XV shall prevent
any shareholders of the Corporation from objecting to any Business Combination
and from demanding any appraisal rights which may be available to such
shareholders.
E. Notwithstanding Article XX or any other provisions of this
Certificate or the Bylaws of the Corporation (and notwithstanding the fact that
a lesser percentage may be specified by law, this Certificate or the Bylaws of
the Corporation), the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote thereon (and, if any class or series is
entitled to vote thereon separately, the affirmative vote of the holders of at
least 80% of the outstanding shares of each such class or series) shall be
required to amend or repeal or adopt any provisions inconsistent with this
Article XV.
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ARTICLE XVI
Evaluation of Offers
The Board of Directors of the Corporation, when evaluating any offer to
(A) make a tender or exchange offer for any equity security of the Corporation,
(B) merge or consolidate the Corporation with another corporation or entity or
(C) purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer: on the
Corporation's present and future customers and employees and those of its
subsidiaries; on the communities in which the Corporation and its subsidiaries
operate or are located; on the ability of the Corporation to fulfill its
corporate objective as a savings and loan holding company under applicable
statutes and regulations; and on the ability of its subsidiary savings bank to
fulfill the objectives of a stock form savings bank under applicable statutes
and regulations.
ARTICLE XVII
Elimination of Directors' Liability
Directors of the Corporation shall have no liability to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XVII shall not eliminate liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not made in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which a director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after the effective date of this Certificate
to further eliminate or limit the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE XVIII
Indemnification
A. Persons. The Corporation shall indemnify, to the extent provided in
paragraphs B, D or F:
1. any person who is or was a director, officer, employee, of
the Corporation; and
2. any person who serves or served at the Corporation's
request as a director, officer, employee, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
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B. Extent -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
1. he is successful on the merits or otherwise; or
2. he acted in good faith in the transaction which is the
subject of the suit or action, and in a manner he reasonably believed to be in,
or not opposed to, the best interest of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article XIV of this
Certificate) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has been
adjudged liable to the Corporation unless (and only to the extent that) the
Court of Chancery or the court in which the suit was brought shall determine,
upon application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
person named in paragraph A shall be indemnified only if:
1. he is successful on the merits or otherwise; or
2. he acted in good faith in the transaction which is the
subject of the nonderivative suit and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article XIV of this
Certificate) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his conduct
was unlawful. The termination of a nonderivative suit by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, in itself, create a presumption that the person failed to satisfy the
standard of this paragraph E.2.
F. Determination That Standard Has Been Met. A determination that the
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in paragraph C.2 (second sentence), the determination may be
made by:
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1. the board of directors by a majority vote of a quorum
consisting of directors of the Corporation who were not parties to the action,
suit or proceeding; or
2. independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
3. the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation may pay in advance any expenses
(including attorneys' fees) which may become subject to indemnification under
paragraphs A-G if the person receiving the payment undertakes in writing to
repay the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A-G.
I. Nonexclusive. The indemnification and advancement of expenses
provided by paragraphs A-H or otherwise granted pursuant to Delaware law shall
not be exclusive of any other rights to which a person may be entitled by law,
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
J. Continuation. The indemnification and advance payment provided by
paragraphs A-H shall continue as to a person who has ceased to hold a position
named in paragraph A and shall inure to his heirs, executors and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in paragraph
A, against any liability asserted against him and incurred by him in any such
position, or arising out of his status as such, whether or not the Corporation
would have power to indemnify him against such liability under paragraphs A-H of
this Article XVIII.
L. Savings Clause. If this Article XVIII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVIII that shall
not have been invalidated and to the full extent permitted by applicable law.
If Delaware law is amended to permit further indemnification of the
directors, officers, employees and agents of the Corporation, then the
Corporation shall indemnify such persons to the fullest extent permitted by
Delaware law, as so amended. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director, officer, employee or agent existing at the time of
such repeal or modification.
16
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ARTICLE XIX
Amendment of Bylaws of the Corporation
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, repeal, alter, amend and rescind the Bylaws of the Corporation.
Notwithstanding any other provision of this Certificate or the Bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law), the Bylaws of the Corporation shall not be made, repealed,
altered, amended or rescinded by the stockholders of the Corporation except by
the vote of the holders of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the notice
of such meeting), or, as set forth above, by the board of directors.
ARTICLE XX
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles IX, X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX, and this
Article XX of this Certificate may not be repealed, altered, amended or
rescinded in any respect unless the same is approved by the affirmative vote of
the holders of not less than 80% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as a single class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the notice
of such meeting).
17
EXHIBIT 3.ii
<PAGE>
BYLAWS
OF
GUARANTY FEDERAL BANCSHARES, INC.
ARTICLE I
Home Office
The home office of Guaranty Federal Bancshares, Inc. (the
"Corporation") shall be at 1341 W. Battlefield, City of Springfield, County of
Greene, in the State of Missouri. The Corporation may also have offices at such
other places within or without the State of Missouri as the board of directors
shall from time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the home office of the Corporation or at such
other place within or without the State in which the home office of the
Corporation is located as the board of directors may determine and as designated
in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may be called at any time by the majority of the board
of directors or by a committee of the board of directors in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be mailed by the secretary or the officer performing his duties,
not less than ten days nor more than sixty days before the meeting to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the stockholder at his address as it appears on the stock transfer
books or records of the Corporation as of the record date prescribed in Section
6 of this Article II, with postage thereon prepaid. If a stockholder is present
at a meeting, or in writing waives notice thereof before or after the meeting,
notice of the meeting to such stockholder shall be unnecessary. When any
stockholders' meeting, either annual or special, is adjourned for thirty days,
notice of the adjourned meeting shall be given as in the case of an original
meeting. It shall not be necessary to give any notice of the time and place of
any meeting adjourned for less than thirty days or
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of the business to be transacted at such adjourned meeting, other than an
announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent, having charge of the
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of shareholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
The record, for a period of ten days before such meeting, shall be kept on file
at the principal office of the Corporation, and shall be subject to inspection
by any shareholder for any purpose germane to the meeting at any time during
usual business hours. Such record shall also be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
stockholder for any purpose germane to the meeting during the whole time of the
meeting. The original stock transfer books shall be prima facie evidence as to
who are the stockholders entitled to examine such record or transfer books or to
vote at any meeting of stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
SECTION 10. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Unless otherwise provided in the Certificate of
Incorporation, by Statute, or by these Bylaws, a majority of those votes cast by
stockholders at a lawful meeting shall be sufficient to pass on a transaction or
matter.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event
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an attempt is made to cast conflicting votes, in person or by proxy, by the
several persons in whose name shares of stock stand, the vote or votes to which
these persons are entitled shall be cast as directed by a majority of those
holding such stock and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian trustee or conservator may be voted by him,
either in person or by proxy, without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee
and thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation,
nor shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Certificate of Incorporation.
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SECTION 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
shall annually elect a president from among its members and may also elect a
chairman of the board from among its members. The board of directors shall
designate, when present, either the chairman of the board or the president to
preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall
initially consist of six (6) members and shall be divided into three classes as
nearly equal in number as possible. The members of each class shall be elected
for a term of three years and until their successors are elected or qualified.
The board of directors shall be classified in accordance with the provisions of
the Corporation's Certificate of Incorporation. The board of directors may
increase the number of members of the board of directors but in no event shall
the number of directors be increased in excess of fifteen.
SECTION 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, the annual meeting of stockholders. The board of
directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board or the
president, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place in the State of
Missouri as the place for holding any special meeting of the board of directors
called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but directors will not receive any
compensation for participation in meetings by conference telephone.
SECTION 5. Notice. Written notice of any special meeting shall be given
to each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
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SECTION 6. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 5 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the laws of Delaware.
SECTION 8. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 9. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by the
chairman of the board or the president.
SECTION 10. Vacancies. Any vacancy occurring in the board of directors
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. Any directorship to be filled by reason of an
increase in the number of directors may be filled by the affirmative vote of
two-thirds of the directors then in office. The term of such director shall be
in accordance with the provisions of the Corporation's Certificate of
Incorporation.
SECTION 11. Removal of Directors. Any director or the entire board of
directors may be removed for cause and then only in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive a stated fee
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
Nothing herein shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving remuneration therefor.
SECTION 13. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who votes in favor of such action.
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ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution and procedures thereof. Each committee
shall consist of one or more directors of the Corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation provided, however, that notice to the board, the chairman of the
board, the chief executive officer, the chairman of such committee, or the
secretary shall be deemed to constitute notice to the Corporation. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Any member of any such
committee may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the authorized number of directors at any
meeting of the board called for that purpose.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer unless the board of directors designates the chairman of
the board as chief executive officer. The president shall be a director of the
Corporation. The offices of the secretary and treasurer may be held by the same
person and a vice president may also be either the secretary or the treasurer.
The board of directors may designate one or more vice presidents as executive
vice president or senior vice president. The board of directors may also elect
or authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment
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contract with any officer in accordance with state law; but no such contract
shall impair the right of the board of directors to remove any officer at any
time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
director of the Corporation.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
may authorize any officer, employee, or agent of the Corporation to enter into
any contract or execute and deliver any instrument in the name of and on behalf
of the Corporation. Such authority may be general or confined to specific
instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its duly authorized depositories as the board of directors may select.
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ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the chairman of the board of directors
or by the president or a vice president and by the treasurer or by the secretary
of the Corporation, and may be sealed with the seal of the Corporation or a
facsimile thereof. Any or all of the signatures upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. If any officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such officer before
the certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Delaware; the
name of the person to whom issued; the number and class of shares; the date of
issue; the designation of the series, if any, which such certificate represents;
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
shares until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority, or by
his attorney thereunto authorized by power of attorney duly executed and filed
with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name shares
of capital stock stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 7. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or
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destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen, or destroyed. When authorizing such
issue of a new certificate, the board of directors may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen, or destroyed certificate, or his legal representative, to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen, or destroyed.
SECTION 8. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the last day of June of
each year. The Corporation shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Certificate of Incorporation and
applicable law, the board of directors may, at any regular or special meeting,
declare dividends on the Corporation's outstanding capital stock. Dividends may
be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
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ARTICLE XI
Amendments
In accordance with the Corporation's Certificate of Incorporation,
these Bylaws may be repealed, altered, amended or rescinded by the stockholders
of the Corporation only by vote of not less than 80% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alternation, amendment or rescission is included in the notice of such
meeting). In addition, the board of directors may repeal, alter, amend or
rescind these Bylaws by vote of a majority of the board of directors at a legal
meeting held in accordance with the provisions of these Bylaws.
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EXHIBIT 13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Contents Investor
2 Investor information Information
President's Message Annual Meeting of Shareholders:
3 Financial Highlights The Annual Meeting of
Stockholders will be held
4 Selected Consolidated Financial and Other Data Wednesday, October 28,1998,
Management's Discussion and Analysis of Financial at 5:00 p.m., at the offices of the
5 Condition and Results of Operations Bank, 1341 West Battlefield Street,
Springfield, Missouri.
17 Consolidated Financial Statements Annual Report on Form 10-K:
Copies of the Guaranty Federal
46 1ndependent Accountants' Report Bancshares Form 10-K Report to the Securities and Exchange
Commission are available without
47 Directors and Officers charge upon written request to:
Lorene Thomas, Secretary,
Guaranty Federal Bancshares,
Common Stock Prices 1341 W. Battlefield St.,
& Divdends Springfield, MO 65807-4181.
Copies are also available via the
The common stock of Guaranty Federal Bancshares, Inc., is Internet: http://wwwgfed.com
traded in the over-the-counter market and quoted on the NAS- Transfer Agent:
DAQ National Market. As of August 12,1998, there were 2,727 Registrar and Transfer Company
stockholders of the 6,228,035 shares of common stock issued 10 Commerce Drive and outstanding.
Cranford, NJ 07016
Guaranty Federal Savings Bank paid cash dividends of $0.22 per Stock Trading Information:
share on October 18, 1997, to stockholders of record as of Over-the-Counter Symbol: GFED
September 12,1997. The Company paid cash dividends of $0.15
per share on April 30, 1998, to stockholders of record as of Special Legal Counsel:
April 3,1998. Malizia, Spidi, Sloane & Fisch, RC.
1301 K Street, Suite 700 East
The table below reflects the dividends paid and the range of Washington, D.C. 20005
N.W., Suite 700 East common stock closing prices' by quarter since
conversion.
- --------------------------------------------------------------- Independent Certified Public Accountants:
Fiscal Year Ended June 30, 1998 HIGH LOW DIVIDENDS Baird, Kurtz & Dobson
Quarter Ended June 30, 1998 $ 13.63 12.25 0.15 901 St. Louis St.
Quarter Ended March 31, 1998 13.38 12.00 - P.O. Box 1190
- --------------------------------------------------------------- Springfield, MO 65801-1190
Shareholder and Financial
Information:
Bruce Winston, Vice President,
Chief Financial Officer
417-520-0206
</TABLE>
2
<PAGE>
GUARANTY
FEDERAL
BANCSHARES President's Message
Dear Shareholders,
This is the first annual report for Guaranty Federal Bancshares, Inc., which
became the holding company for Guaranty Federal Savings Bank through a public
offering consummated on December 30,1997. The enclosed reports are on a
consolidated basis, and comparison with prior periods is difficult due to the
large infusion of capital from the offering, and a legislatively mandated
assessment to recapitalize the FDIC deposit insurance fund in the year ending
June 30, 1997.
Nevertheless, there are some notable achievements which are indicative of our
performance:
1. Net income increased to $2.8 million.
2. Net loans receivable increased by 35%, from $152,232,000 at 6/30/97, to
$205,414,000 at 6/30/98.
3. Core deposits increased by 28% from $28,629,000 at 6/30/97, to $36,855,000
at 6/30/98.
4. Non-interest income increased by 80% from $530,000 at 6/30/97, to $953,000
at 6/30/98.
Loans were funded by advances from the Federal Home Loan Bank at a lower
marginal cost than would have been possible by maintaining higher-cost
certificates of deposit. These advances also allow us to minimize exposure to
shifts in interest rates, creating more stability in earnings.
In April, the Company paid a semi-annual dividend of $0.15 per share, and has
just recently announced its second semi-annual dividend at $0.16 per share, to
be paid on October 15,1998.
The Bank's Year 2000 effort is well under way with testing of our core
processing systems currently in progress. Peripheral systems testing will be
completed by year end, 1998, and all hardware has been tested and replacement
needs identified.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Financial Highlights
<S> <C> <C> <C> <C>
We have accomplished much this
year in terms of growth, earnings, For the Year Ended June 30, 1998 1997 1996
market share and service. Our Net Interest Income (in thousands) $8,453 6,401 5,463
people are top notch, and are Net Income (in thousands) $2,841 1,162 1,753
dedicated to the tasks ahead of Earnings per Common Share $0.29 n/a n/a
us. We appreciate your support (since conversion in December, 1997)
and, with you, we look forward Dividend Payout Ratio 52% n/a n/a
to our future. (since conversion in December, 1997)
Return on Average Assets 1.25% 0.60 0.96
Return on Average Equity 5.81% 4.30 6.61
Respectfully, As of the Year Ended June 30, 1998 1997 1996
/s/James E. Haseltin Assets (in thousands) $260,042 199,465 185,167
James E. Haseltin Loans (in thousands) $206,220 158,135 135,029
President & CEO Stockholders' Equity (in thousands) $ 70,690 27,490 26,586
Stockholders' Equity per Common Share $ 12.01 n/a n/a
Stock Price per Common Share $ 12.94 n/a n/a
Stockholders' Equity to Assets 27.2% 13.8 14.4
----------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Summary Statement of Income Years Ended
June 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 17,196 14,711 13,702 11,637 10,858
Interest expense 8,743 8,310 8,239 6,595 5,924
--------- ------ ------ ------ ------
Net interest income 8,453 6,401 5,463 5,042 4,934
Provision (credit) for loan losses 123 -- (1,212) 16 14
--------- ------ ------ ------ ------
Net interest income after provision (credit)
for loan losses 8,330 6,401 6,675 5,026 4,920
Noninterest income (loss) 953 530 221 71 (50)
Noninterest expense 4,823 5,105 4,117 3,077 2,815
--------- ------ ------ ------ ------
Income before income taxes 4,460 1,826 2,779 2,020 2,055
Provision for income taxes 1,619 664 1,026 690 637
--------- ------ ------ ------ ------
Income before change in accounting principle 2,841 1,162 1,753 1,330 1,418
Change in accounting principle -- -- -- -- 628
--------- ------ ------ ------ ------
Net income $ 2,841 1,162 1,753 1,330 2,046
========= ===== ===== ===== =====
Basic and diluted earnings per share, since conversion $ 0.29 n/a n/a n/a n/a
=========
</TABLE>
<TABLE>
<CAPTION>
Summary Balance Sheet As of June 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 7,305 3,817 2,675 4,350 3,569
Investment securities 13,687 11,946 17,708 24,118 28,899
Mortgage-backed securitites 21,004 15,814 20,067 13,855 14,138
Loans receivable, net 206,220 158,135 135,029 119,842 105,265
Accrued interest receivable 1,604 1,312 1,381 1,274 1,124
Prepaids and other assets 2,503 1,964 1,913 1,802 2,675
Foreclosed assets 286 210 2 656 805
Premises and equipment 7,433 6,267 6,392 4,987 2,375
--------- ------- ------- ------- -------
$ 260,042 199,465 185,167 170,884 158,850
========= ======= ======= ======= =======
LIABILITIES
Deposits $ 140,975 151,246 157,008 139,595 141,017
Federal Home Loan Bank advances 45,081 18,151 -- 4,000 --
Other liabilities 3,296 2,578 1,573 1,245 1,271
--------- ------- ------- ------- -------
189,352 171,975 158,581 144,840 142,288
--------- ------- ------- ------- -------
STOCKHOLDERS' EQUITY
Common stock 623 3,125 3,125 3,125 --
Additional paid-in capital 49,017 3,687 3,556 3,900 --
Unearned ESOP shares (3,445) -- -- -- --
Retained earnings 21,683 18,620 18,646 17,892 16,562
--------- ------- ------- ------- -------
67,878 25,432 25,327 24,917 16,562
Unrealized appreciation on available-for-
sale securities, net 2,812 2,058 1,259 1,127 --
--------- ------- ------- ------- -------
70,690 27,490 26,586 26,044 16,562
--------- ------- ------- ------- -------
$ 260,042 199,465 185,167 170,884 158,850
========= ======= ======= ======= =======
Supplemental Data As of June 30,
----------------- --------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Number of full-service offices 5 4 4 3 3
Cash dividends per share $ 0.15 n/a n/a n/a n/a
</TABLE>
4
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
Guaranty Federal Bancshares, Inc. (and with its subsidiary, the
"Company") is a Delaware corporation organized on December 30, 1997 for the
purpose of becoming the holding company of Guaranty Federal Savings Bank (the
"Bank").
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. In December 1997, the Company completed the
conversion and reorganization of the Bank and the former MHC by selling common
stock to depositors of the Bank and a benefit plan of the Bank. In addition, all
shares of common stock of the Bank held by public stockholders were exchanged
for shares of common stock of the Company. Per share data prior to December 30,
1997 is not presented herein as the information would not be meaningful.
The Company's principal business 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 Company 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 Company uses borrowings as an additional financing source.
The Company 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 Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation ("FDIC") significantly influence the Company's
operations. Interest rates on competing investments and general market interest
rates influence the Company's cost of funds. Lending activities are affected by
the interest rates at which such financing may be offered. The Company intends
to continue to focus on its lending programs for both one- to four-family
lending and consumer lending throughout southwestern Missouri.
FINANCIAL CONDITION
From June 30, 1997 to June 30, 1998, the Company's total assets
increased $60,577,520 (30%), liabilities increased $17,377,577 (10%) and
stockholders' equity increased $43,199,943 (157%).
Securities available-for-sale increased $1,405,021 (42%), from
$3,360,000 as of June 30, 1997, to $4,765,021 as of June 30, 1998. The Company
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, 1998, the gross unrealized gain on
the stock was $4,424,000, an increase of $1,158,000 over the $3,266,000
unrealized gain as of June 30, 1997. Securities held-to-maturity decreased
$336,636 (4%), from $8,585,753 as of June 30, 1997, to $8,922,389 as of June 30,
1998.
Mortgage-backed securities, held-to-maturity, decreased $3,865,236
(24%), from $15,813,890 as of June 30, 1997, to $11,948,654 as of June 30, 1998.
This decrease is attributable to repayments received during the year. During the
year ended June 30, 1998, the Company purchased floating rate collateralized
mortgage obligations ("CMOs") in an effort to replace the refinancing of the
Bank's adjustable rate mortgage loans. The Bank categorized these CMOs as
available-for-sale. As of June 30, 1998, the balance of these CMOs classified as
available-for-sale was $9,055,658.
Mortgage loans held-for-sale decreased $5,097,819 (86%) from $5,903,002
as of June 30, 1997 to $805,183 as of June 30, 1998. Due to the Bank's increased
lending limit, the Bank no longer needs to sell these loans and determined the
majority of these loans should be held in the portfolio.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Net loans receivable increased by $53,182,266 (35%), from $152,232,295
as of June 30, 1997, to $205,414,561 as of June 30, 1998. During this period,
permanent loans secured by both owner and non-owner occupied one to four unit
residential real estate increased by $37,052,555 (34%), multi-family permanent
loans increased by $6,079,221 (39%), construction loans increased by $9,580,786
(38%) and permanent loans secured by commercial real estate increased $4,397,814
(53%). Loans past maturity and past due 90 days or more decreased $828,000 from
$828,000 (0.5% of net loans) as of June 30, 1997 to $0 (0.0% of net loans) as of
June 30, 1998. As of June 30, 1998, management considers $1,011,873 as impaired
with a related allowance for loan losses of $151,965. Growth in loans receivable
is anticipated to continue and represents a major part of the Company's planned
asset growth.
The Bank increased the allowance for loan losses $14,548 (1%) in fiscal
year 1998, and $68,950 (3%) in fiscal year 1997. During fiscal year 1998, loan
charge-offs exceeded recoveries by $108,804. During fiscal year 1997, recoveries
exceeded charge-offs by $68,950. The allowance for loan losses as of June 30,
1998, was 1.06% of net loans outstanding versus 1.41% as of June 30, 1997. As of
June 30, 1998, the allowance for loan losses was 217% of impaired loans versus
173% as of June 30, 1997.
Foreclosed assets held for sale as of June 30, 1998 include three
duplexes and a partially constructed single-family residence acquired in May
1998. The Bank carries these properties at their fair value of $286,000.
Subsequent to June 30, 1998, the Bank sold these properties at their book value.
Premises and equipment increased $1,165,814 (19%), from $6,267,157 as
of June 30, 1997, to $7,432,971 as of June 30, 1998. During fiscal year 1998,
the MHC transferred the land at 4343 South National, Springfield Missouri to the
Bank. The Bank subsequently sold the land to the Company.
Deposits decreased $10,271,146 (7%), from $151,246,482 as of June 30,
1997, to $140,975,336 as of June 30, 1998. During this period core deposit
accounts increased by $8,226,054 (29%), while certificates of deposit decreased
by $18,497,200 (15%). 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 Company increased borrowings from the Federal Home
Loan Bank ("FHLB") by $26,930,184 (148%) from $18,150,844 as of June 30, 1997 to
$45,081,028 as of June 30, 1998. Based on existing collateral the Bank has the
ability to borrow an additional $69,200,000 from the FHLB in the future.
Stockholders' equity (including unrealized appreciation on securities
available-for-sale, net of tax) increased $43,199,943 (157%), from $27,490,155
as of June 30, 1997, to $70,690,098 as of June 30, 1998. Net income for the year
exceeded cash dividends paid by $1,219,749. Net proceeds of the conversion
contributed $39,183,513 and the MHC transferred $1,842,982. Unrealized
appreciation on securities available-for-sale, net of tax, contributed $754,312
to the increase in stockholders' equity. On a per share basis, stockholders'
equity as of June 30, 1998, was $12.01.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 Company'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. Dollar amounts are expressed in thousands.
<TABLE>
<CAPTION>
June 30, 1998 Year Ended June 30, 1998 Year Ended June 30, 1997 Year Ended June 30, 1996
--------------- ----------------------------- -----------------------------------------------------------
Yield Average Interest Yield Average Interest Yield Average Interest Yield
Balance / Cost Balance / Cost Balance / Cost Balance / Cost
--------------- ----------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning:
Loans $206,220 7.95% $177,361 $14,875 8.39% $146,468 $12,347 8.43% $127,485 $10,534 8.26%
Investment
securitites 8,922 6.83% 7,127 420 5.89% 8,879 552 6.22% 19,271 1,317 6.83%
Mortgage-backed
securities 21,004 7.20% 14,996 1,109 7.40% 18,032 1,412 7.83% 18,522 1,371 7.40%
Other assets 13,474 4.34% 17,010 792 4.66% 8,160 400 4.90% 9,494 480 5.06%
------- ---- -------- ------ ---- ------- ------ ---- -------- ------ ----
Total interest-
earning 249,620 7.65% 216,494 17,196 7.94% 181,539 14,711 8.10% 174,772 13,702 7.84%
---- ------ ----- ------ ------- ------ ----
Noninterest-
earning 10,422 11,334 8,387 8,137
-------- -------- -------- -------
260,042 $227,828 $189,926 $182,909
======== ======== ======== =======
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-bearing:
Savings accounts $8,658 2.68% $8,779 241 2.75% $9,191 258 2.81% $10,272 315 3.07%
Transaction accounts 25,055 2.83% 21,950 616 2.81% 13,846 406 2.93% 10,355 276 2.67%
Certificates of Deposit 5.44% 110,786 6,112 5.52% 122,219 6,807 5.57% 132,265 7,609 5.75%
104,120
FHLB Advances 45,081 6.08% 27,630 1,695 6.13% 13,767 839 6.09% 690 39 5.65%
Other Borrowed Funds - 0.00% 2,897 79 2.73% - - 0.00% - - 0.00%
------- ---- ------- ------ ---- ------- ------ ---- ------- ------ -----
Total interest-bearing 182,914 5.11% 172,042 8,743 5.08% 159,023 8,310 5.23% 153,582 8,239 5.36%
------- ------ ---- ------ ---- ------ ----
Noninterest-bearing 6,438 6,863 4,122 2,821
------- ------- ------- -------
Total liabilities 178,905 163,145 156,403
189,352
Stockholders' equity 70,690 48,923 26,781 26,506
------- ------- ------- -------
260,042 $227,828 $189,926 $182,909
======= ======= ======= =======
Net earning balance $66,706 $44,452 $ 22,516 $ 21,190
====== ====== ======= =======
Earning yield less
costing rate 2.54% 2.86% 2.88% 2.48%
==== ==== ==== ====
Net interest income,
and net yield spread
on interest-earning
assets 3.91% $8,453 3.90% $6,401 3.53% $5,463 3.13%
==== ====== ==== ====== ==== ====== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities 136% 126% 114% 114%
=== === === ===
</TABLE>
7
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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, 1998 versus 1997 Year Ended June 30, 1997 versus 1996
------------------------------------------- ---------------------------------------------
Rate & Rate &
Balance Rate Balance Total Balance Rate Balance Total
------- ---- ------- ----- ------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 2,604 (63) (13) 2,528 1,569 213 31 1,813
Investment securitites (109) (29) 6 (132) (710) (119) 64 (765)
Mortgage-backed securitites (238) (78) 13 (303) (36) 79 (2) 41
Other assets 434 (20) (22) 392 (67) (15) 2 (80)
------- ---- --- ----- --- --- - -----
Net change in interest income 2,691 (190) (16) 2,485 756 158 95 1,009
------- ---- --- ----- --- --- - -----
Interest expense:
Savings accounts (12) (6) 1 (17) (33) (27) 3 (57)
Transaction accounts 238 (17) (11) 210 93 28 9 130
Certificates of deposit (637) (64) 6 (695) (578) (242) 18 (802)
Advances 845 6 5 856 739 3 58 800
Other borrowed funds -- -- 79 79 -- -- -- --
------- ---- --- ----- --- --- ---- -----
Net change in interest expense 434 (81) 80 433 221 (238) 88 71
------- ---- --- ----- --- --- ---- -----
Change in net interest income $ 2,257 (109) (96) 2,052 535 396 7 938
======= ==== === ===== === === ==== =====
</TABLE>
RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 1998 AND 1997
Interest Rates. The Bank charges borrowers and pays depositors interest
rates that are largely a function of the general level of interest rates. The
following table sets forth the weekly average interest rates on U.S. Treasury
securities for the twelve months ending.
Ten-Year One-Year
Maturity Maturity Spread
-------- -------- ------
June 30, 1998 5.84% 5.44% 0.40%
June 30, 1997 6.60% 5.69% 0.91%
---- ---- ----
Decline in interest rates -0.76% -0.25% -0.51%
==== ==== ====
The Bank's principal assets are single family home mortgage loans.
Fixed rate mortgage loans are typically priced at a spread over the ten-year US
Treasury securities. The 76 basis point decline in the ten-year treasury is
indicative of the decline in the fixed-rates on single family mortgage loans. As
a result, borrowers preferred fixed rate mortgages over adjustable and they took
advantage of the relatively low rates to refinance their home mortgages. During
the year, the average yield on loans decreased four basis points from 8.43% to
8.39% and the average yield on interest-earning assets decreased from 8.10% to
7.94%. This 16 basis point decline translated to a $190,000 decline in interest
income.
The Bank's principal retail deposit is the certificate of deposit.
Management attempts to price certificates so that the marginal cost of
attracting deposits is equal to the marginal cost of FHLB advances on a duration
adjusted basis. The average cost of certificates decreased five basis points
from 5.57% to 5.52%. During the year, start-up banks in the market area paid
interest rates on certificates of deposit well above
8
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
comparable maturity treasury rates. As a result, the Bank was unable to reduce
the cost of certificates in line with the overall decline in the general level
of interest rates. The average cost of transaction accounts decreased 12 basis
points from 2.93% to 2.81%. In total, the average cost of interest-bearing
liabilities decreased from 5.23% to 5.08%. This 15 basis point decline
translated to a $81,000 decline in interest expense.
The Bank's net interest income is materially impacted by the spread
between yields earned on longer-term securities and the cost paid on
shorter-term deposit accounts. At the same time the spread between the ten-year
and one-year treasury was narrowing by 51 basis points, the Bank's spread
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities decreased by two basis points from 2.88% to 2.86%.
This spread narrowing reduced net interest margin by $109,000.
Interest Income. Total interest income increased $2,484,837 (17%) as
the average balance of interest-earning assets increased $34,955,000 (19%). This
increase in income was due primarily to an increase in loan interest of
$2,527,977 (20%) as the average loan receivable balance increased $30,893,000
(21%). Average balances of investment securities declined $1,752,000 (20%)
during the year as the Company replaced securities with higher yielding loans.
To the extent possible, subject to market conditions and competition, the
Company intends to emphasize loan production and will purchase investment
securities or 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 $433,068 (5%) as the
average balance of interest-bearing liabilities increased $13,019,000 (8%). The
average balances of transaction accounts increased $8,104,000 (59%) and the
average balances of certificates of deposit decreased $11,433,000 (9%). In order
to fund the increase in assets and decrease in deposits, the Company borrowed
additional funds from the FHLB. The average balance of FHLB advances increased
by $13,863,000 (101%).
Net Interest Income. The Company's net interest income increased
$2,051,769 (32%) from $6,401,110 to $8,452,879. During the year ended June 30,
1998, the average balance of interest-earning assets exceeded the average
balance of interest-bearing liabilities by $44,452,000, an increase in the
average net earning balance of $21,936,000 (97%) due to the net proceeds of the
December 30, 1997 offering.
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 Company to provide for potential loan losses in the existing portfolio.
When making the assessment, the Company considers prior loss experience, volume
and type of lending, industry standards and past due loans in the Bank's
portfolio. In addition, the Company considers general economic conditions and
other factors related to collectability of the Bank's portfolio.
During fiscal year 1998, the Bank experienced loan charge-offs in
excess of recoveries of $108,804 and based on a review as discussed above,
elected to add $123,352 to the allowance. Management anticipates the need to
continue adding to loss reserves through charges to provision for loan losses
based on the anticipated growth in the loan portfolio.
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 $423,262 (80%) from $529,801 to $953, 063. This
increase is primarily due to the $340,275 (129%) increase in service charges due
to continued growth in the Bank's checking accounts.
Non-Interest Expense. Non-interest expense decreased $282,132 (6%),
from $5,104,631 to $4,822,499. This decrease was primarily due to a special
one-time assessment in fiscal year 1997 of $931,989 by the Federal Deposit
Insurance Corporation ("FDIC") on all assessable deposits as of March 31, 1995.
Beginning January 1, 1997 deposit premiums declined from an average of 23.4
basis points to an average of 6.4 basis points. Non-interest expense other than
this special assessment increased $649,857 (16%). In general, this increase can
be attributed to the overall increase in accounts served, the addition of
9
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
our fifth location, and the expenses associated with the December 30, 1997
offering. Salaries and employee benefits increased $280,664 (14%). Occupancy
expense increased $115,985 (18%) due primarily to the opening of a new branch
location in October 1997. Data processing expense increased $38,165 (11%) due to
the increased volume of transactions handled. Advertising expenses increased
$77,641 (24%) which reflects a full year of promoting our checking account
programs. All other expenses increased $254,003 (42%). More specifically, legal
expense increased $44,153 and office supplies increased $69,683.
Income Taxes. The change in income tax is a direct result of changes in
the Company's taxable income.
Cash Dividends Paid. Guaranty Federal Savings Bank paid cash dividends
of $687,500 (3,125,000 shares at $0.22 per share) on October 18, 1997, to the
stockholders of record as of September 12, 1997. The Company paid cash dividends
of $933,842 (6,225,610 at $0.15 per share) on April 30, 1998, to the
stockholders of record as of April 3, 1998.
RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 1997 AND 1996
Interest Rates. The following table sets forth the weekly average
interest rates on U.S. Treasury securities for the twelve months ending.
Ten-Year One-Year
Maturity Maturity Spread
-------- -------- ------
June 30, 1997 6.60% 5.69% 0.91%
June 30, 1996 6.26% 5.48% 0.78%
---- ---- ----
Increase in interest rates 0.34% 0.21% 0.13%
==== ==== ====
During the same period that yields on U.S. Treasury securities
increased from 21 to 34 basis points, the average yield on the Bank's
interest-earning assets increased 26 basis points from 7.84% to 8.10% and the
average yield on loans increased 17 basis points from 8.26% to 8.43%. The
average cost of interest-bearing liabilities decreased 13 basis points from
5.36% to 5.23%. The average cost of certificates decreased 18 basis points from
5.75% to 5.57% due to the maturity of a promotional rate certificate offered in
conjunction with the opening of the new home office facility. The average cost
of transaction accounts increased 26 basis points from 2.67% to 2.93%. The
spread between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities increased by 40 basis points from 2.48% to
2.88%. This spread widening resulted in an improved net interest margin of
$398,000.
Interest Income. Total interest income increased $1,009,129 (7%) as the
average balance of interest-earning assets increased $6,767,000 (4%). This
increase was due primarily to an increase in loan interest of $1,812,497 (17%).
During the year, the average loan receivable balance increased $18,983,000
(15%). Average balances of investment securities declined $10,392,000 (54%)
during the year as the Company replaced securities with higher yielding loans.
Interest Expense. Total interest expense increased $71,072 (1%) as the
average balance of interest-bearing liabilities increased $5,441,000 (4%). The
average balance of certificates of deposit decreased $10,046,000 (8%). The
decrease in the average balances of certificates was partially offset by an
increase in the average balance of transaction accounts of $3,491,000 (34%). In
order to fund the increase 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.
Net Interest Income. The Company'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%).
10
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Provision for Loan Losses. 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 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 $167,557 (172%) increase in service charges
generated by the Bank's new checking account promotion.
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 Federal Deposit Insurance Corporation ("FDIC") on all
assessable deposits as of March 31, 1995. This assessment resulted in a $802,451
(237%) increase in Savings Association Insurance Fund ("SAIF") premiums. While
this special assessment had a negative impact on earnings for fiscal year 1997,
deposit premiums in the future may 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.
ASSET / LIABILITY MANAGEMENT
The goal of the Bank's asset/liability policy is to manage interest
rate risk so as to maximize net interest income over time in changing interest
rate environments. Management monitors the Bank's net interest spreads (the
difference between yields received on assets and paid on liabilities) and,
although constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates that 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. However
during fiscal year 1998, the general level of long term interest rates dropped
and borrowers opted for fixed rate mortgages. As of June 30, 1998, ARMs
represent 71% of the loan portfolio. Of the ARMs originated during the year
ended June 30, 1998, borrower's preferred initial fixed rate periods of three or
five years. In response to this shift in customer preference, the Bank started a
program of borrowing longer-term funds from the FHLB.
The Bank is also managing interest rate risk by the origination of
construction loans. As of June 30, 1998, such loans made up 16% 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.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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. As of June 30, 1998, these accounts
totaled $36,855,202 or 26% of total deposits. The Bank believes, based on
historical experience, that a substantial portion of such accounts represents
non-interest rate sensitive, core deposits.
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.
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth as of June 30, 1998, OTS estimate of the
projected changes in net portfolio value ("NPV") in the event of 100, 200, 300,
and 400 basis point ("bp") instantaneous and permanent increases and decreases
in market interest rates. Dollar amounts are expressed in thousands.
<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>
+400 bp $49,632 $(7,222) -13% 20.4% -122 bp
+300 52,616 (4,238) -7% 21.2% -48 bp
+200 54,977 (1,877) -3% 21.7% 0 bp
+100 56,440 (414) -1% 21.8% +18 bp
NC 56,854 21.7%
- -100 56,296 (558) -1% 21.2% -48 bp
- -200 54,719 (2,135) -4% 20.4% -131 bp
- -300 53,423 (3,431) -6% 19.6% -206 bp
- -400 52,107 (4,747) -8% 18.8% -283 bp
</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 run-offs, 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 an initial fixed rate period typically from
one to five years and over the remaining life of the asset changes in the
interest rate are restricted. 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 the future.
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.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets equal to 4% of deposits and short-term borrowings. The
Bank's liquidity ratio as of June 30, 1998, was 10.6%.
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, and proceeds from maturing
investment securities. The Bank considers deposits and FHLB advances as primary
sources 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. The Bank's
cash and cash equivalents totaled $7,304,923 as of June 30, 1998. The variations
in levels of cash and cash equivalents are influenced by deposit flows and
anticipated future deposit flows.
As of June 30, 1998, the Bank had one conditional commitment in the
form of a letter of credit in the amount of $29,000. Outstanding loan
commitments were $12,741,000. As of June 30, 1998, the Bank had granted unused
lines of credit to borrowers aggregating approximately $173,000 and $5,247,000
for commercial lines and open-end consumer lines, respectively. As of June 30,
1998, the Bank had $76,313,000 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 $51,908,000 is 20% of total assets as of
June 30, 1998. The Bank has an excess of $45,304,000, $38,950,000, and
$38,262,000 of required regulatory levels of tangible, core and risk-based
capital, respectively. Under current regulatory guidelines, the Bank is
classified as well-capitalized.
During July and August 1998, the Company purchased 484,922 shares of
common stock in open market transactions with the intent to grant stock awards
for 173,632 shares of common stock in accordance with the Bank's Restricted
Stock Plan and to place 311,290 shares in a treasury stock account. The Company
intends to monitor the common stock price and with regulatory approval may from
time to time initiate further treasury stock transactions in order to improve
the Company's long-term earnings per share while at the same time maintaining an
adequate level of stockholders' equity.
IMPACT OF INFLATION AND CHANGING PRICES
The Company 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
The Financial Accounting Standards Board (FASB) recently adopted
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement was effective for transactions that occur after December 31,
13
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
1997, and imposes new rules for determining when transfers of financial assets
are accounted for as sales versus when transfers are accounted for as
borrowings. Management believes that SFAS 125 does not have a material impact on
the Company's financial statements.
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 was effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Management believes that SFAS 128 does not have a material impact on
the Company'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 130 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 Company'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. The Statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for years beginning after December 15, 1997. SFAS 131, which the
Company will initially adopt for fiscal year 1999, is not expected to have a
material impact on the Company's financial statements.
The FASB recently adopted SFAS 133, "Accounting for Derivative
Financial Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, may be adopted early for periods beginning after issuance of the
Statement and may not be applied retroactively. The Company does not expect to
adopt SFAS 133 early. Management is currently unable to determine whether the
effects of adoption of SFAS 133 will have a material impact on the Company's
financial statements.
Impact of Year 2000
Rapid and accurate data processing is essential to the Bank's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as the year 1980
and incorrectly attempt to compute payments, interest, delinquency and other
data. The Bank has been evaluating both information technology (computer
systems) and non-information technology systems (e.g., telephone systems, vault
timers, security systems and elevator controls). We have evaluated our risk in
three areas: (1) our own computers, (2) computers of others used by our
borrowers, depositors, and business partners, and (3) computers of others who
provide us with data processing services.
Our own computers. The Bank expects to spend approximately $175,000
($137,000 for hardware and $38,000 for software) through June 30, 1999 to
upgrade our computer systems. These upgrades are expected to eliminate the Year
2000 risk in our computers. We do not expect to have material costs to address
this risk area after December 31, 1998. As of June 30, 1998, the Bank has spent
approximately $18,000 ($17,000 for hardware and $1,000 for software) to fix Year
2000 problems. We expect to be Year 2000 compliant in this risk area by June 30,
1999.
Computers of others used by borrowers, depositors, and business
partners. The Bank has evaluated most of our material borrowers and depositors
and does not believe that the Year 2000 problem should, on an aggregate basis,
impact their ability to make payments or deposits to the Bank. We believe that
most of
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
our residential customers are not dependent on their home computers for income
and that none of our commercial customers are so large that a Year 2000 problem
would render them unable to collect revenue or rent and, in turn, continue to do
business with the Bank. We have solicited our material business partners
regarding their Year 2000 readiness and are currently evaluating their
responses.
Computers of others who provide us with data processing services. This
risk is primarily focused on one, third party service bureau that provides all
of the Bank's core data processing. This service bureau tells us they have
completed program changes required for Year 2000 processing. If these program
changes are not correct before the year 2000, we would likely experience
significant delays, mistakes, or failures. These delays, mistakes, or failures
could have a significant impact on our financial condition and results of
operations.
Contingency Plan. The Bank is monitoring our service bureau to evaluate
whether our data processing system will fail. We are serving as a "proxy" Year
2000 test site for other financial institutions on the same system. Such tests
are scheduled to end before October 31, 1998. After our experience with these
tests, we will develop a contingency plan including a range of alternatives
depending on the results of the tests. The alternatives could range from
shifting to a compliant system to back-up for unforeseen contingencies on our
current system. We currently utilize many spreadsheet programs to compute and
store data. Should our core system fail, we will enter deposit and loan
transactions in spreadsheets in order to conduct business until the core system
is corrected. If this labor-intensive approach is necessary, management and our
employees will become much less efficient. However, we believe that we would be
able to operate in this manner until our existing service bureau, or their
replacement, is able to again provide data processing services. If very few
financial institution service bureaus are operating in the year 2000, our
replacement costs, assuming we could negotiate an agreement, could be material.
Five stages have been identified as necessary to implement a Year
2000-Compliant system. These stages are:
1. Awareness Stage - Encompasses establishing a budget and project plan for
dealing with the Year 2000 issue.
2. Assessment Stage - When the organization begins the actual process of
identifying all of its systems and individual components for Year 2000
compliance or, through a risk analysis, identifies only mission-critical
systems to check for compliance.
3. Remediation Stage - When the organization actually makes changes to
systems. This stage deals primarily with the technical issues of converting
existing systems, or switching to compliant systems. During this stage,
decisions are made on how to make the systems or processes Year
2000-Compliant, and the required system changes are made.
4. Validation/Testing Stage - When the organization determines that no errors
were introduced during the conversion process. The development of test data
and test scripts, the running of test scripts, and the review of test
results are crucial for this stage of the conversion process to be
successful. If the testing results show anomalies, the tested area needs to
be corrected and retested.
5. Implementation Stage - When a tested Year 2000-Compliant system is ready
for use.
The following chart displays the current status of our Year 2000
project using the stages defined above:
_________________________________________________________________
Year 2000 Series
Service Bureau ----------------------------------
Computers of Others -------------------
Our Computers --------------------------
0 1 2 3 4 5
_________________________________________________________________
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has not deferred any information technology projects due to
Year 2000 priorities.
Summary of Unaudited Operating Results
<TABLE>
<CAPTION>
Fiscal Year 1998
----------------------------------------------------------------------------
September-97 December-97 March-98 June-98
---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income $3,939,502 4,210,294 4,383,799 4,662,527
Interest expense 2,188,158 2,318,489 2,028,113 2,208,483
--------- --------- --------- ----------
Net interest income 1,751,344 1,891,805 2,355,686 2,454,044
Provision for loan losses 33,352 30,000 30,000 30,000
Gain (loss) on loans, investment securities
and mortgage-backed securities 38,131 19,240 12,295 (799)
Other noninterest income, net 173,335 219,932 240,180 250,749
Noninterest expense 1,120,763 1,138,416 1,245,480 1,317,840
--------- --------- --------- ----------
Income before income taxes 808,695 962,561 1,332,681 1,356,154
Provision for income taxes 292,192 367,773 489,438 469,597
--------- --------- --------- -----------
Net income $ 516,503 $ 594,788 $ 843,243 $ 886,557
========= ========= ========= ===========
Basic and diluted earnings
per common share since conversion n/a n/a $ 0.14 $ 0.15
========== ===========
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1997
----------------------------------------------------------------------------
September-96 December-96 March-97 June-97
---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income $3,498,091 3,683,502 3,682,392 3,847,300
Interest expense 1,965,828 2,068,797 2,105,151 2,170,399
----------------------------------------------------------------------------
Net interest income 1,532,263 1,614,705 1,577,241 1,676,901
Provision for loan losses - - - -
Gain (loss) on loans, investment securities
and mortgage-backed securities 25,178 2,832 (5,736) 39,194
Other noninterest income, net 84,428 85,356 141,583 156,966
SAIF special assessment 931,989 - - -
Noninterest expense 1,128,611 982,281 1,007,475 1,054,275
----------------------------------------------------------------------------
Income (loss) before income taxes (418,731) 720,612 705,613 818,786
Provision (credit) for income taxes (169,331) 267,260 253,797 312,774
----------------------------------------------------------------------------
Net income (loss) $ (249,400) 453,352 451,816 506,012
============================================================================
Basic and diluted earnings
per common share since conversion n/a n/a n/a n/a
</TABLE>
16
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Balance Sheets
June 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS
------
1998 1997
---- ----
<S> <C> <C>
Cash $ 846,691 417,485
Interest-bearing deposits in other financial institutions 6,458,232 3,399,866
------------- -------------
Cash and cash equivalents 7,304,923 3,817,351
------------- -------------
Available-for-sale securities 4,765,021 3,360,000
Held-to-maturity securities 8,922,389 8,585,753
Mortgage-backed securities, held-to-maturity 11,948,654 15,813,890
Mortgage-backed securities, available-for-sale 9,055,658 --
Mortgage loans held for sale 805,183 5,903,002
Loans receivable, net 205,414,561 152,232,295
Accrued interest receivable:
Loans 1,188,162 996,014
Investments 252,865 165,949
Mortgage-backed securities 163,117 149,598
Prepaid expenses and other assets 2,503,055 1,963,875
Foreclosed assets held for sale 286,000 210,155
Premises and equipment 7,432,971 6,267,157
------------- -------------
$ 260,042,559 199,465,039
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits $ 140,975,336 151,246,482
Federal Home Loan Bank advances 45,081,028 18,150,844
Advances from borrowers for taxes and insurance 870,476 674,618
Accrued expenses and other liabilities 513,943 666,427
Accrued interest payable 256,975 131,245
Income taxes payable 417,532 289,268
Deferred income taxes 1,237,171 816,000
------------- -------------
189,352,461 171,974,884
------------- -------------
STOCKHOLDERS' EQUITY
Common Stock:
1998-$0.10 par value; authorized 10,000,000 shares;
issued and outstanding 6,228,035
1997-$1.00 par value; authorized 8,000,000 shares;
issued and outstanding 3,125,000 622,804 3,125,000
Additional paid-in capital 49,016,992 3,687,356
Unearned ESOP shares (3,444,540) --
Retained earnings, substantially restricted 21,682,950 18,620,219
------------- -------------
67,878,206 25,432,575
Unrealized appreciation on available-for-sale securities,
net of income taxes 1998 - $1,651,429, 1997 - $1,208,000 2,811,892 2,057,580
------------- -------------
70,690,098 27,490,155
------------- -------------
$ 260,042,559 199,465,039
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Income
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $14,874,797 12,346,820 10,534,323
Investment securities 419,887 551,741 1,317,152
Mortgage-backed securities 1,109,042 1,412,302 1,370,770
Other 792,396 400,422 479,911
----------- ---------- ----------
17,196,122 14,711,285 13,702,156
----------- ---------- ----------
INTEREST EXPENSE
Deposits 6,969,284 7,471,093 8,200,026
Federal Home Loan Bank advances 1,694,916 839,082 39,077
Other 79,043 -- --
----------- ---------- ----------
8,743,243 8,310,175 8,239,103
----------- ---------- ----------
NET INTEREST INCOME 8,452,879 6,401,110 5,463,053
PROVISION (CREDIT) FOR LOAN LOSSES 123,352 -- (1,211,502)
----------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,329,527 6,401,110 6,674,555
----------- ---------- ----------
NONINTEREST INCOME
Service charges 604,924 264,649 97,092
Late charges and other fees 109,200 85,673 69,754
Gain on loans, investment
securities and mortgage-backed securities 68,867 61,468 43,065
Income on foreclosed assets 14,127 17,896 --
Other income 155,945 100,115 11,492
----------- ---------- ----------
953,063 529,801 221,403
----------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,310,877 2,030,213 1,992,534
Occupancy 769,836 653,851 655,783
SAIF deposit insurance:
Special assessment -- 931,989 --
Insurance premiums 92,558 209,159 338,697
Data processing 397,568 359,403 222,097
Advertising 396,803 319,162 316,556
Other expense 854,857 600,854 590,879
----------- ---------- ----------
4,822,499 5,104,631 4,116,546
----------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,460,091 1,826,280 2,779,412
PROVISION FOR INCOME TAXES 1,619,000 664,500 1,026,000
----------- ---------- ----------
NET INCOME $ 2,841,091 1,161,780 1,753,412
=========== ========= =========
BASIC AND DILUTED
EARNINGS PER COMMON SHARE
Since conversion $ 0.29 n/a n/a
=========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Unrealized
Appreciation
Additional on Available-
Common Paid-In Unearned Retained for-Sale
Stock Capital ESOP Shares Earnings Securities, Net Total
----- ------- ----------- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 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,
($0.32 per share on 3,125,000 shares) -- -- -- (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 securitites, 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,
($0.38 per share on 3,125,000 shares) -- -- -- (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 securitites, net of
income taxes of $468,000 -- -- -- -- 798,169 798,169
----------- ---------- ---------- ---------- --------- ----------
-----------
Balance, June 30, 1997 3,125,000 3,687,356 -- 18,620,219 2,057,580 27,490,155
Net income -- -- -- 2,841,091 -- 2,841,091
Dividends on common stock,
($.22 per share on 3,125,000 shares &
$.15 per share on 6,225,610 shares) -- -- -- (1,621,342) -- (1,621,342)
Dividends received on RRP stock -- 15,780 -- -- -- 15,780
Recognition and Retention Plan --
(RRP) expense -- 92,407 -- -- -- 92,407
Stock redeemed and stock issued under plan
of conversion to stock ownership, net (2,502,868) 45,130,921 (3,444,540) -- -- 39,183,513
Transfer from MHC -- -- -- 1,842,982 -- 1,842,982
Stock options exercised 672 58,299 -- -- -- 58,971
Tax benefit of RRP shares -- 32,229 -- -- -- 32,229
Change in unrealized appreciation on --
available-for-sale securitites, net of --
income taxes of $443,429 -- -- -- -- 754,312 754,312
----------- ---------- ---------- ---------- --------- ----------
-----------
Balance, June 30, 1998 $ 622,804 49,016,992 (3,444,540) 21,682,950 2,811,892 70,690,098
=========== ========== ========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 2,841,091 1,161,780 1,753,412
Items not requiring (providing) cash:
Deferred income taxes (22,258) 22,000 128,000
Depreciation 469,532 441,367 384,988
Provision (credit) for loan losses 123,352 -- (1,211,502)
Gain on loans, investment securities
and mortgage-backed securities (68,867) (61,468) (43,065)
(Gain) loss on sale of premises and equipment -- (5,169) 79,218
Gain on sale of foreclosed assets (15,231) (9,921) --
FHLB stock dividends received -- -- (34,200)
Amortization of deferred income,
premiums and discounts (77,945) (220,135) (102,016)
Origination of loans held for sale (6,152,677) (6,626,148) (6,364,845)
Proceeds from sale of loans held for sale 6,364,053 4,134,389 5,361,589
RRP expense 92,407 106,197 120,925
Changes in:
Accrued interest receivable (292,583) 69,448 (107,366)
Prepaid expenses and other assets (539,181) (11,357) (76,843)
Accrued expenses and other liabilities (26,754) 283,466 102,140
Income taxes payable 113,685 131,141 51,567
------------ --------- ---------
Net cash provided by (used in) operating activities 2,808,624 (584,410) 42,002
------------ --------- ---------
</TABLE>
20
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows (continued)
Years Ended June 30, 198, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
1998
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (48,620,302) (20,918,542) (12,266,153)
Principal payments on mortgage-backed securities,
held-to-maturity 3,881,091 4,300,576 4,627,722
Purchases of mortgage-backed securities,
held-to-maturity -- -- (10,833,592)
Purchases of mortgage-backed securities,
available-for-sale (9,063,546) -- --
Purchase of premises and equipment (406,548) (337,112) (2,132,191)
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
Proceeds from maturities of available-for-sale securities -- -- 1,000,000
Purchase of available-for-sale securities (4,812,359) -- (248,638)
Proceeds from maturitites of held-to-maturity securities 4,345,229 1,739,461 5,607,624
Purchases of held-to-maturity securities -- -- (2,002,500)
Proceeds from sale of foreclosed assets 317,855 362,900 --
Capitalized costs on foreclosed assets -- (90,167) 2,227
------------ --------- ---------
Net cash used in investing activities (54,358,580) (9,599,209) (13,634,106)
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net 39,216,426 -- --
Stock options exercised 58,971 -- --
Cash dividends paid (1,621,342) (1,187,500) (1,000,000)
Cash dividends received on RRP Stock 15,780 11,987 --
Net increase in demand deposits,
NOW accounts and savings accounts 8,738,851 4,944,356 3,314,286
Net increase (decrease) in certificates of deposit (18,497,200) (10,705,764) 14,098,895
Proceeds from FHLB advances 61,050,000 31,163,750 --
Repayments of FHLB advances (34,119,816) (13,012,906) (4,000,000)
Advances from borrowers for taxes and insurance 195,858 99,132 (32,101)
Contributions to RRP Trust -- -- (464,643)
Reduction of shares in RRP Trust -- 13,358 --
------------ --------- ---------
Net cash provided by financing activities 55,037,528 11,326,413 11,916,437
------------ --------- ---------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,487,572 1,142,794 (1,675,667)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,817,351 2,674,557 4,350,224
------------ --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,304,923 3,817,351 2,674,557
============ ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
Notes to Consolidated Financial Statements
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 were owned by the MHC
(see Note 16).
Guaranty Federal Bancshares, Inc. (the "Company") completed the
conversion from a federally chartered mutual holding company, (formerly Guaranty
Federal Bancshares, M. H. C.) to a Delaware-chartered stock corporation on
December 30, 1997. In connection with the conversion and reorganization, the
shares of the Bank held by the mutual holding company were extinguished along
with the mutual holding company and the shares of the Bank held by the public
were exchanged for shares of the Company. Additional shares of the Company were
issued as of December 30, 1997 (see Note 17).
Nature of Operations
- --------------------
The Company operates as a unitary savings and loan holding company. The
Bank is primarily engaged in providing a full range of banking and mortgage
services to individual and corporate customers in southwest Missouri. The Bank's
subsidiary provides other services, such as insurance, annuities, and securities
brokerage. The Bank is subject to competition from other financial institutions.
The Company and the Bank are also subject to the regulation of certain federal
agencies and undergo periodic examinations by those regulatory authorities.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, the Bank, and the Bank's 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
valuation of foreclosed assets held for sale are adequate. While management uses
available information to recognize losses on loans and value 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.
22
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Cash and Investments in Equity and Mortgage-Backed and Other Debt Securities
- ----------------------------------------------------------------------------
Regulations require the Bank to maintain an amount equal to 4.0% 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
Company or 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.
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
- ----------------------------
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. 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
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
23
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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 potential 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.
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 and gains/losses on sales of foreclosed
assets are included in noninterest income.
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.
Fee Income
- ----------
Loan origination fees, net of direct origination costs, are recognized
as income over the term 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.
24
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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
and 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, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, 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.
25
<PAGE>
Notes to Consolidated Financial Statements
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, 1998:
Stockholders equity,
and ratio to total assets ........ $ 51,908 20.1
Unrealized appreciation on
available-for-sale securities .... (2,792)
---------
Tangible capital,
and ratio to adjusted total assets $ 49,116 19.3% $ 3,812 1.5%
========= ==== ======= ===
Tier 1 (core) capital,
and ratio to adjusted total assets $ 49,116 19.3% $10,166 4.0% $ 12,707 5.0%
========= ==== ======= === ========= ===
Tier 1 (core) capital,
and ratio to risk-weighted assets $ 49,116 30.5% $ 15,249 6.0%
=========
Allowance for loan losses -
Tier 2 capital ................... 2,010
-----
Total risk-based capital,
and ratio to risk-weighted assets $ 51,126 31.8 $12,864 8.0% $ 16,080 10.0%
========= ==== ======= === ========= ====
Total assets ............................. $ 258,566
=========
Adjusted total assets .................... $ 254,142
=========
Risk-weighted assets ..................... $ 160,804
=========
</TABLE>
The amount of dividends that the Bank may pay is subject to various
regulatory limitations. As of June 30, 1998, approximately $21,188,000 was
available from the Bank's retained earnings, without regulatory approval, for
distribution as dividends.
26
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
<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>
Earnings Per Share
- ------------------
As more fully described in the Note 17, the Company had no operations
prior to December 30, 1997 and earnings per share information for the common
stock of the Bank prior to this date has not been presented because the
information would not be meaningful.
The computation for earnings per share for the six-month period ended
June 30, 1998 since conversion is as follows:
For six months ended June 30, 1998
----------------------------------
Income Shares Per-share
Basic EPS
Income available to common shareholders $ 1,729,800 5,879,791 $ 0.29
=========
Effect of Dilutive Securities
Stock Options 73,341
RRP shares 22,976
----------- ---------
Income available to common stockholders $ 1,729,800 5,976,108 $ 0.29
=========== ========= =========
As discussed in Note 13, subsequent to year end, the Company's
shareholders approved a stock option plan and a restricted stock plan. Shares
granted under these two plans may increase outstanding shares for purposes of
diluted earnings per share in future periods. In addition, ESOP shares released
from collateral will increase outstanding shares for purposes of basic and
diluted earnings per share calculations as discussed in Note 13.
27
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Reclassifications
- -----------------
Certain 1997 and 1996 amounts have been reclassified to conform to the
1998 financial statements presentation. These reclassifications had no effect on
net income.
Impact of Recent Accounting Pronouncements
- ------------------------------------------
The Financial Accounting Standards Board (FASB) recently adopted
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement was effective for transactions that occur after December 31,
1997, and imposes new rules for determining when transfers of financial assets
are accounted for as sales versus when transfers are accounted for as
borrowings. Management believes that SFAS 125 does not have a material impact on
the Company's financial statements.
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 was effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Management believes that SFAS 128 does not have a material impact on
the Company'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 130 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 Company'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. The Statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for years beginning after December 15, 1997. SFAS 131, which the
Company will initially adopt for fiscal year 1999, is not expected to have a
material impact on the Company's financial statements.
The FASB recently adopted SFAS 133, "Accounting for Derivative
Financial Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, may be adopted early for periods beginning after issuance of the
Statement and may not be applied retroactively. The Company does not expect to
adopt SFAS 133 early. Management is currently unable to determine whether the
effects of adoption of SFAS 133 will have a material impact on the Company's
financial statements.
28
<PAGE>
Notes to Consolidated 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>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
As of June 30, 1998:
Equity Securities:
FHLMC stock $ 94,000 4,424,000 -- 4,518,000
Other stock 215,697 32,522 (1,198) 247,021
-------------- --------- ----------- ---------
$ 309,697 4,456,522 (1,198) 4,765,021
============== ========= =========== =========
As of June 30, 1997:
Equity Securities:
FHLMC stock $ 94,000 3,266,000 -- 3,360,000
-------------- --------- ----------- ---------
$ 94,000 3,266,000 -- 3,360,000
============== ========= =========== =========
</TABLE>
The amortized cost and approximate fair values of held-to-maturity
securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
As of June 30, 1998:
Debt Securities:
US government agencies $ 8,922,389 14,358 (75,747) 8,861,000
================ ====== ======= =========
As of June 30, 1997
Debt Securities:
US government agencies $ 8,585,753 5,143 (217,896) 8,373,000
================ ===== ======== =========
</TABLE>
Maturities of held-to maturity securities as of June 30, 1998:
<TABLE>
<CAPTION>
Amortized Approximate
Cost Fair Value
---- ----------
<S> <C> <C>
Due in one through five years .................................. $ 7,784,213 7,718,100
Due after ten years ............................................ 1,138,176 1,142,900
----------- ---------
$ 8,922,389 8,861,000
=========== =========
</TABLE>
There were no sales of available-for-sale securities for the year ended
June 30, 1998. 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. There were no sales of debt
securities from the "held-to-maturity" portfolio for the years ended June 30,
1998, 1997, or 1996.
29
<PAGE>
Notes to Consolidated Financial Statements
NOTE 3: MORTGAGE-BACKED SECURITIES
The amortized cost and approximate fair values of available-for-sale
mortgage-backed securities are as follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
As of June 30, 1998
FNMA $ 9,047,661 7,997 -- 9,055,658
----------- ------- ------- ----------
$ 9,047,661 7,997 -- 9,055,658
=========== ======= ======== ==========
The amortized cost and approximate fair values of held-to-maturity
mortgage-backed securities are as follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
As of June 30, 1998
Certificates:
GNMA .... $ 4,749,948 333,052 -- 5,083,000
FHLMC ... 6,111,639 130,248 (11,887) 6,230,000
FNMA .... 1,087,067 58,816 (9,883) 1,136,000
----------- ------- ------- ----------
$11,948,654 522,116 (21,770) 12,449,000
=========== ======= ======== ==========
As of June 30, 1997:
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
=========== ======= ======== ==========
Included in mortgage-backed securities at June 30, 1998, are certain U.
S. Government agency derivative securities with an amortized cost of $9,048,000
and an approximate fair value of $9,056,000. The yield on these derivative
securities varies with the level of certain published interest rates,
principally LIBOR.
There were no sales of mortgage-backed securities for the years ended
June 30, 1998, 1997, and 1996.
30
<PAGE>
Notes to Consolidated Financial Statements
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at June 30, 1998 and 1997, include:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate - residential mortgage
One to four family units ............................. $ 147,590,286 110,537,731
Multi-family ......................................... 21,535,948 15,456,727
Real estate - construction ................................... 34,729,329 25,148,543
Real estate - commercial ..................................... 12,721,393 8,323,579
Commercial loans ............................................. 646,156 383,116
Installment loans ............................................ 5,268,955 4,492,833
Loans on savings accounts .................................... 622,916 719,657
------------- -------------
223,114,983 165,062,186
Undisbursed portion of
loansinprocess ....................................... (15,234,620) (10,475,789
Allowance for loan losses .................................... (2,191,557) (2,177,009
Unearned discounts ........................................... (190,594) (216,141
Deferred loan costs, net ..................................... (83,651) 39,048
------------- -------------
$ 205,414,561 152,232,295
============= =============
</TABLE>
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year ...................... $ 2,177,009 $ 2,108,059 1,718,316
Provision (credit) charged to operations 123,352 -- (1,211,502)
Loans charged off ....................... (150,649) (62,768) (4,648)
Recoveries .............................. 41,845 131,718 1,406,860
Allowances reclassified to loans which
were previously classified as in-
substance foreclosures (Note 5) . -- -- 199,033
----------- ----------- ---------
Balance, end of year ............................ $ 2,191,557 $ 2,177,009 2,108,059
=========== =========== =========
</TABLE>
The weighted average interest rate on loans at June 30, 1998 and 1997
was 7.95% and 8.43%, respectively.
The Bank serviced mortgage loans for others amounting to $15,970,974,
$14,165,126 and $11,290,426 as of June 30, 1998, 1997 and 1996 respectively.
Impaired loans totaled $1,011,873 as of June 30, 1998, and $1,257,352
as of June 30, 1997 with a related allowance for loan losses of $151,965 and
$206,897, respectively. As of June 30, 1998 and 1997, respectively, impaired
loans of $220,488 and $75,956 had no related allowance for loan losses.
Interest of $111,950, $66,676 and $995 was recognized on average
impaired loans of $1,290,853, $1,342,217 and $157,574 for 1998, 1997 and 1996
respectively. Interest of $96,622 was recognized on impaired loans on a cash
basis during 1998. No interest was recognized on impaired loans on a cash basis
during 1997 and 1996.
31
<PAGE>
Notes to Consolidated Financial Statements
NOTE 5: FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale consist of the following:
1998 1997
---- ----
Foreclosed real estate $286,000 $210,155
Valuation allowance -- --
-------- --------
$286,000 $210,155
======== ========
Changes in the valuation allowance on foreclosed assets were as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year $ -- $ -- 45,637
Valuation allowance related to
in-substance foreclosures -- -- (45,637)
------ ------ -------
Balance, end of year $ -- $ -- --
====== ====== =======
As of July 1, 1995, the Bank implemented Statement of Financial
Standards No. 114. In accordance with the pronouncement, loans totaling
$851,818, net of 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:
1998 1997
---- ----
Land $ 2,222,243 $ 993,445
Buildings and improvements 5,357,027 5,244,129
Furniture, fixtures and equipment 1,607,647 1,330,275
Automobiles 20,243 20,243
----------- -----------
9,207,160 7,588,092
Accumulated depreciation (1,774,189) (1,320,935)
----------- -----------
$ 7,432,971 $ 6,267,157
=========== ===========
Depreciation expense was $469,532, $441,367 and $384,988 for the years
ended June 30, 1998, 1997 and 1996, respectively.
32
<PAGE>
Notes to Consolidated Financial Statements
NOTE 7: DEPOSITS
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------------------------- -------------------------------------
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% $ 3,142,007 2.2% 0.00% $ 2,334,159 1.5%
NOW 2.24 14,468,104 10.3 2.34 9,385,517 6.2
Money market 3.64 10,587,222 7.5 3.62 8,288,164 5.5
Passbook savings 2.68 8,657,869 6.1 2.76 8,621,308 5.7
----------- ---- ----------- ----
2.55 36,855,202 26.1 2.64 28,629,148 18.9
----------- ---- ----------- ----
Certificates:
0% - 3.99% 5.35 - 0.0 2.75 5,928 0.0
4.00% - 5.99% 6.35 95,138,774 67.5 5.47 108,383,612 71.7
6.00% - 7.99% 5.44 8,981,360 6.4 6.40 14,227,794 9.4
----------- ---- ----------- ----
4.68 104,120,134 73.9 5.58 122,617,334 81.1
----------- ---- ----------- ----
Total Deposits 5.02 $140,975,336 100.0% 5.02 $151,246,482 100.0%
============ ===== ============ =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum balance
of $100,000 was approximately $5,872,000 and $8,000,000 as of June 30, 1998 and
1997, respectively.
A summary of certificates of deposit by maturity as of June 30, 1998,
is as follows:
Fiscal year ending:
June 30, 1999 $ 76,313,219
June 30, 2000 15,624,451
June 30, 2001 7,110,399
June 30, 2002 3,511,276
June 30, 2003 1,545,691
Thereafter 15,098
-------------
$ 104,120,134
=============
A summary of interest expense on deposits is as follows:
1998 1997 1996
---- ---- ----
NOW and Money Market accounts $ 615,928 $ 406,025 276,460
Savings accounts 241,176 258,143 314,557
Certificate accounts 6,131,573 6,823,212 7,633,893
Early withdrawal penalties (19,393) (16,287) (24,884)
----------- ----------- ---------
$ 6,969,284 $ 7,471,093 8,200,026
=========== =========== =========
33
<PAGE>
Notes to Consolidated Financial Statements
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Maturity Date Rate Amount Rate Amount
------------- ---- ------ ---- ------
<S> <C> <C> <C> <C>
Fiscal Year 1998 0.00% $ -- 5.90% $ 5,000,000
Fiscal Year 1999 6.20 3,972,255 6.22 3,000,000
Fiscal Year 2000 6.11 8,561,864 6.11 7,528,750
Fiscal Year 2001 6.05 2,098,240 -- --
Fiscal Year 2002 6.15% 3,102,475 6.21 1,635,000
Fiscal Year 2003 6.03% 1,641,079 -- --
Thereafter 6.05% 25,705,115 6.84 987,094
---- ----------- ---- -----------
6.08% $45,081,028 6.12 $18,150,844
==== =========== ==== ===========
</TABLE>
The FHLB requires the Bank to maintain collateral equal to outstanding
balances of advances. The FHLB values mortgage loans free of other pledges,
liens and encumbrances at 80% of their fair value, and investment securities
free of other pledges, liens and encumbrances at 95% of their fair value.
NOTE 9: INCOME TAXES
The Company files a consolidated federal income tax return. 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 beginning in 1999. The
amount of the deferred tax liability which must be recaptured is $338,000 as of
June 30, 1998 and 1997.
As of June 30, 1998, and 1997, retained earnings included 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, 1998 and 1997.
The provision for income taxes consists of:
1998 1997 1996
---- ---- ----
Taxes currently payable $1,641,258 $ 642,500 898,000
Deferred income taxes (22,258) 22,000 128,000
---------- ---------- ---------
$1,619,000 $ 664,500 1,026,000
========== ========== =========
34
<PAGE>
Notes to Consolidated Financial Statements
NOTE 9: INCOME TAXES (Continued)
The tax effects of temporary differences related to deferred taxes
shown on the June 30, 1998 and 1997, balance sheets are:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan and foreclosed asset losses $ 783,885 $ 778,000
Accrued compensated absences 23,945 19,000
Accrued retirement plan costs -- 33,000
Unrealized loss on loans held for sale 69,942 80,000
Accrued ESOP expense 52,379 --
RRP expense 30,365 57,000
Deferred loan fees/costs 30,951 --
----------- -----------
991,467 967,000
----------- -----------
Deferred tax liabilities:
FHLB stock dividends (206,867) (207,000)
Deferred loan fees/costs -- (15,000)
Tax bad debt reserves in excess of base year (337,633) (338,000)
Mortgage servicing rights (32,709) (15,000)
Unrealized appreciation on available-for-sale securities (1,651,429) (1,208,000)
----------- -----------
(2,228,638) (1,783,000)
----------- -----------
Net deferred tax liability $(1,237,171) $ (816,000)
=========== ===========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income
tax expense at the Company's effective rate is shown below:
1997 1997 1996
---- ---- ----
Computed at statutory rate 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State financial institution tax 3.1 3.3 4.5
Taxexempt interest -- -- (.5)
Change in deferred tax valuation allowance -- -- --
Other (.8) (.9) (1.1)
---- ---- ----
Actual tax provision 36.3% 36.4% 36.9%
==== ==== ====
State legislation provides that savings banks 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 $443,429, $468,000 and $78,000 for 1998, 1997 and 1996,
respectively.
35
<PAGE>
Notes to Consolidated Financial Statements
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
- ----------------------------
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.
36
<PAGE>
Notes to Consolidated Financial Statements
NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table presents estimated fair values of the Company'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 Company 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.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,304,923 7,304,923 $ 3,817,351 3,871,351
Available-for-sale securities 4,765,021 4,765,021 3,360,000 3,360,000
Held-to-maturity securities 8,922,389 8,861,000 8,585,753 8,373,000
Mortgage-backed securities, available-for-sale 9,055,658 9,055,658 -- --
Mortgage-backed securities, held-to-maturity 11,948,654 12,449,000 15,813,890 16,091,000
Mortgage loans held-for-sale 805,183 805,183 5,903,002 5,903,002
Loans, net 205,414,561 208,964,000 152,232,295 155,505,000
Interest receivable 1,604,144 1,604,144 1,311,561 1,311,561
Financial liabilities:
Deposits 140,975,336 141,230,000 151,246,482 150,926,000
Federal Home Loan Bank advances 45,081,028 45,348,000 18,150,844 18,180,000
Interest payable 256,975 256,975 131,245 131,245
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.
Service Bureau
- --------------
The Bank utilizes a commercial service bureau to provide data
processing services for its core system (deposit, loan and general ledger
applications). There are a limited number of providers of these services to
financial institutions. The existing service bureau is in the process of
revising and testing its computer equipment and software to be Year 2000
compliant and currently expects to successfully complete this process in early
1999.
However, if the service bureau's efforts are not successful on a timely
basis, the Bank could experience significant delays, mistakes or failures that
could have a material impact on the Company's financial condition and results in
operations.
37
<PAGE>
Notes to Consolidated Financial Statements
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Noncash Investing and Financing Activities
Transfer of insubstance foreclosed assets to loans $ -- -- 652,785
Loans held-for-sale transferred to
loans receivable portfolio 4,950,891 -- 708,700
Loans receivable transferred to
foreclosed assets held-for-sale 689,550 471,440 --
Foreclosed assets held for sale transferred
to loans receivable 311,500 -- --
Additional Cash Payment Information
Interest paid 8,632,457 8,198,629 8,266,794
Income taxes paid 1,497,087 582,319 845,682
</TABLE>
NOTE 13: EMPLOYEE BENEFIT PLANS
Pension Plan
- ------------
The Bank has participated in a multi-employer pension plan covering all
employees who met minimum service requirements. As a member of a multi-employer
pension plan, disclosures of plan assets and liabilities for individual
employers are not required or practicable. Pension plan expense was $5,063,
$128,785 and $156,013 for the years ended June 30, 1998, 1997 and 1996
respectively. This plan was terminated effective December 12, 1997.
Recognition and Retention Plan
- ------------------------------
In conjunction with the reorganization discussed in Note 16, 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
provides directors, officers and employees of the Bank with a proprietary
interest in the Company in a manner designed to encourage these individuals to
remain with the Bank.
A Committee consisting of members of the Bank's Board of Directors
administers the Plan. Under the Plan, the Committee can award up to 75,106
shares of the Company's common stock to selected directors, officers and
employees. As of June 30, 1998, all shares have been awarded. The awards vest at
the rate of 20% per year over a five-year period. Compensation expense is
recognized based on the Company's stock price on the date the shares were
awarded to employees. The Bank recognized $92,407, $106,197 and $120,925 of
expense under the RRP in 1998, 1997 and 1996, respectively. Shares to be issued
under the RRP were 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.
Stock Option and Incentive Plan
- -------------------------------
In conjunction with the reorganization discussed in Note 16, the
Company 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 is administered by the Company's Option Committee. Under the Plan, the
Option Committee may grant stock options or awards of up to 187,764 shares of
the Company'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 Company stock on the date of grant. All options
expire no later than ten years from the date of grant. The options vest at the
rate of 20% per year over a five-year period.
38
<PAGE>
Notes to Consolidated Financial Statements
NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)
The table below summarizes transactions under the Company's stock
option plan:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30, 1996
------------------------------------------------------------ --------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ----------------- ------ ----------------- ------ ----------------
Outstanding,
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning of Year 151,990 (1) $ 6.02 84,375 $ 11.62 -- $ --
Granted 5,000 12.63 6,640 11.55 97,237 11.62
Exercised (9,794) 6.02 -- -- -- --
Forfeited (3,196) 6.02 (12,305) 11.62 (12,862) --
------ ------- ------ ------- ------ -------
Outstanding, End of Year 144,000 $ 6.25 78,710 $ 11.61 84,375 $ 11.62
====== ======= ====== ======= ====== =======
Options Exercisable, End of Year 48,642 14,383 --
====== ====== ======
</TABLE>
Stock options were originally for Bank stock. This Plan was converted
to Company stock at the exchange ratio of 1.931. See Note 17.
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, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Dividends per share $0.30 $0.33 0.32
Risk-Free Interest Rate 5.46% 6.36% 5.54
Expected Life of Options 5 years 5 years 5 years
Weighted-Average Fair Value of Options Granted During Year $2.07 $2.51 2.46
</TABLE>
The following table summarizes information about stock options under
the Plan outstanding at June 30, 1998:
Options Outstanding Options Exercisable
------------------------------- ----------------------
Range of Number Remaining Number Exercise
Exercise Prices Outstanding Contractual Life Exercisable Price
- --------------- ----------- ---------------- ----------- -----
$ 5.83 5,098 8.5 years 1,020 $ 5.83
$ 6.02 126,178 7.5 years 46,077 $ 6.02
$ 6.08 7,724 8.0 years 1,545 $ 6.12
$ 12.63 5,000 9.7 years -- $ 12.63
The Company 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 Plan been determined based on the fair value
at the dates using Statement of Financial Accounting Standards No. 123, the
Company's net income would have decreased by $33,007, $32,187 and $16,083 for
1998, 1997 and 1996, respectively. Earnings per share since conversion would be
unchanged for 1998. 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.
39
<PAGE>
Notes to Consolidated Financial Statements
NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)
Employee Stock Ownership Plan
- -----------------------------
In conjunction with the conversion discussed in Note 17, the Bank
established an internally-leveraged Employee Stock Ownership Plan (ESOP). All
employees are eligible to participate after they attain age 21 and complete 12
consecutive months of service during which they work at least 1,000 hours. The
ESOP borrowed $3,444,540 from the Company and purchased 344,454 shares of the
common stock of the Company. The ESOP debt is secured by shares of the Company.
The loan will be repaid from contributions to the ESOP as approved annually by
the Bank's Board of Directors. As the debt is repaid, shares are released from
collateral and allocated to employees' accounts. The shares pledged as
collateral are reported as unearned ESOP shares in the consolidated balance
sheet. When shares are released from collateral, the shares become outstanding
for Earnings Per Share computations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings and may be paid directly to
participants or credited to their account; dividends on unallocated ESOP shares
are recorded as a reduction of the unearned ESOP shares and accrued interest.
Compensation expense is recognized ratably based on the average fair value of
shares committed to be released. Compensation expense attributed to the ESOP was
$141,566 for the year ended June 30, 1998. The following is a summary of ESOP
shares at June 30, 1998:
Allocated shares -
Shares released for allocation -
Unreleased for allocation 344,454
----------
Total ESOP shares 344,454
==========
Fair value of unreleased shares $4,456,374
==========
Employment Agreements
- ---------------------
The Bank has entered into employment agreements with James E.
Haseltine, President and Chief Executive Officer and certain other executive
officers of the Bank. Mr. Haseltine's employment agreement covers a term of two
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
employee agreement contains 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 as
amount equal to 1.99 times Mr. Haseltine's five year average annual taxable
compensation. In addition, the Bank has entered 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.
1998 Stock Option and Incentive Plan
- ------------------------------------
In conjunction with the conversion discussed in Note 17, the Company
has established the 1998 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 July 22, 1998, special
stockholders' meeting. The Company's Option Committee administers the Plan.
Under the Plan, the Option Committee may grant stock options or awards of up to
434,081 shares of the Company's common stock. Following approval of the Plan,
402,377 shares were granted.
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 Company stock on the date of grant. All options
expire no later than ten years from the date of grant. The options vest at the
rate of 20% per year over a five-year period.
40
<PAGE>
Notes to Consolidated Financial Statements
NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)
1998 Restricted Stock Plan
- --------------------------
In conjunction with the conversion discussed in Note 17, the Bank has
established a Restricted Stock Plan (RSP) for the benefit of directors, officers
and employees of the Bank and its subsidiary. The RSP was voted on and approved
by the Company's stockholders at the July 22, 1998, special stockholders'
meeting. The RSP provides directors, officers and employees of the Bank with a
proprietary interest in the Company in a manner designed to encourage these
individuals to remain with the Bank.
A Committee consisting of members of the Bank's Board of Directors
administers the Plan. Under the Plan, the Committee can award up to 173,632
shares of the Company's common stock to selected directors, officers and
employees. Following approval of the Plan, 164,950 shares were granted. The
awards vest at the rate of 20% per year over a five-year period. Compensation
expense is recognized based on the Company's stock price on the date the Plan
was ratified by stockholders, which was $13.44 per share. Shares to be issued
under the RSP are purchased on the open market by a separate RSP Trust. The
Company contributed $2,373,065 to the Trust for stock purchased following
approval of the Plan. These contributions have been accounted for as a reduction
of stockholders' equity subsequent to the year ended June 30, 1998.
NOTE 14: TRANSACTION WITH RELATED PARTIES
Certain directors and executive officers of the Company and the Bank
were customers of and had transactions with the Bank in the ordinary course of
business. As of June 30, 1998 and 1997, loans outstanding to these directors and
executive officers amounted to $485,224 and $281,000, 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.
NOTE 15: 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 case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, commercial real estate and
residential real estate.
As of June 30, 1998 and 1997, the Bank had outstanding commitments to
originate loans of approximately $12,741,000 and $2,084,000, respectively. The
commitments extend over varying periods of time with the majority being
disbursed within a thirty-day period. As of June 30, 1998 and 1997, commitments
of $11,568,000 and $395,000, respectively, were at fixed rates and $1,173,000
and $1,689,000, respectively, were at floating market rates.
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 as of June 30, 1997. As
of June 30, 1998, there were no such commitments outstanding.
41
<PAGE>
Notes to Consolidated Financial Statements
NOTE 15: COMMITMENTS AND CREDIT RISK (Continued)
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 an outstanding letter of credit as of June 30, 1998 in
the amount of $29,000 and no outstanding letters of credit as of June 30, 1997.
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 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.
As of June 30, 1998, unused lines of credit to borrowers aggregated
approximately $173,000 for commercial lines and $5,247,000 for open-end consumer
lines. As of June 30, 1997, unused lines of credit to borrowers aggregated
approximately $266,000 for commercial lines and $2,275,000 for open-end consumer
lines.
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. As of June 30, 1998, the Bank had eighteen
borrowers with balances in excess of $1,000,000 each, aggregating $49,304,000,
for which the collateral is primarily single-family and multi-family residential
rental real estate and commercial real estate. As of 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 single-family and
multi-family residential rental real estate and commercial real estate. Also, as
of June 30, 1998 and 1997, the Bank had $25,848,000 and $19,340,000,
respectively, in construction loans to or guaranteed by builders of primarily
residential property.
NOTE 16: 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 were included in common
stock and capital surplus 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 with respect to the Bank.
42
<PAGE>
Notes to Consolidated Financial Statements
NOTE 17: CONVERSION TO STOCK FORM OF OWNERSHIP
On December 30, 1997, Guaranty Federal Bancshares, Inc. completed the
conversion and reorganization of Guaranty Federal Savings Bank and its former
mutual holding company by selling 4,340,812 shares of common stock to certain
depositors of the Bank and a benefit plan of the Bank at a price of $10.00 per
share. In addition all shares of common stock of the Bank held by public
stockholders were exchanged for 1,880,710 shares of common stock of the Company
at an exchange ratio of 1.931. The only class of securities registered pursuant
to the offering was common stock, par value $0.10 per share, and all 6,221,522
shares registered were issued.
Of the 6,221,522 shares registered and issued: (1) 3,996,358 shares
were sold (at $10.00 per share), resulting in cash proceeds to the Company of
$39,963,580, (2) 344,454 shares were sold (at $10.00 per share) to the trust of
the employee stock ownership plan of the Bank (the "ESOP") and funded by a
direct loan (with proceeds used from the offering) from the Company to the
trust, an affiliate of the Company, in the amount of $3,444,540, and (3)
1,880,710 shares (minus a certain de minimus number of fractional shares for
which cash was paid) were issued in exchange for the common stock of the Bank.
The expenses for the offering were $780,067 resulting in net proceeds
of $42,628,053 of which $19,943,834 was directly contributed to the Bank, and
$22,684,219 was retained by the Company. The proceeds retained by the Company
were used for various investments, including interest-bearing advances to the
Bank.
43
<PAGE>
Notes to Consolidated Financial Statements
NOTE 18: CONDENSED PARENT COMPANY STATEMENTS
The condensed balance sheet as of June 30, 1998, and statements of
income and cash flows for the period December 30, 1997 to June 30, 1998, for the
parent company, Guaranty Federal Bancshares, Inc., are as follows:
Balance Sheet
- -------------
Assets $ 51,587
Cash 17,523,918
Due from subsidiary 51,908,392
Investment in subsidiary 1,228,799
Land 247,021
Available-for sale securities 9,471
------------
Deferred income taxes $ 70,969,188
============
Liabilities and Stockholder's Equity
Accrued expenses and
other liabilities $ 7,090
Income taxes payable 272,000
Stockholders' equity
Common stock 622,804
Additional paid-in capital 49,016,992
Unearned ESOP shares (3,444,540)
Retained earnings 21,682,950
Unrealized appreciation on
available-for-sale securities, net 2,811,892
------------
$ 70,969,188
============
Statement of Income
- -------------------
Income
Interest income:
Related party $ 734,464
Other 508
Other 550
------------
Total income 735,522
------------
Expense
Occupancy 4,500
Other 17,355
------------
Total expense 21,855
------------
Income before income taxes and equity in
undistributed earnings of subsidiary 713,667
Provision for income taxes 272,000
------------
Income before equity
in undistributed earnings subsidiary 441,667
Equity in undistributed
earnings of subsidiary 1,288,133
------------
Net income $ 1,729,800
============
44
<PAGE>
Notes to Consolidated Financial Statements
NOTE 18: CONDENSED PARENT COMPANY STATEMENTS (Continued)
<TABLE>
<CAPTION>
Statements of Cash Flows
- ------------------------
<S> <C>
Cash Flows From Operating Activities
Net income $ 1,729,800
Item not requiring providing cash:
Undistributed earnings of net income
of subsidiary (1,288,133)
Changes in:
Income taxes payable 272,000
Accrued expenses 7,090
------------
Net cash provided by operating activities 720,757
------------
Cash FLows From Investing Activities
Investment in subsidiary (19,943,834)
Loan to ESOP (3,444,540)
Purchase of land (1,228,799)
Purchase of available-for-sale securities (272,619)
Net increase in advance to subsidiary (17,523,918)
------------
Net cash used in investing activities (42,413,710)
------------
Cash Flows From Financing Activities
Proceeds from sale of common stock, net 42,628,053
Stock options exercised 40,454
Cash dividends received on RRP shares 9,875
Cash dividends paid (933,842)
------------
Net cash provided by financing activities 41,744,540
------------
Increase in cash 51,587
Cash, beginning of period --
------------
Cash, end of period $ 51,587
============
Noncash Investing and Financing Activities
Acquisition of Guaranty Federal Savings Bank through stock conversion $ 30,316,999
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Baird Hammons Tower
Kurtz & 901 E. St. Louis Street, Suite 1000 1034 W. Main Street
Dobson P.O. Box 1190 P.O. Box 1277 http://www.bkd.com
Certified Public Accountants Springfield, MO 65801-1190 Branson, MO 65615-1277
417 865-8701 Fax: 417 865-0682 417 334-5165 Fax: 417 334-3823 Member of
Moores Rowland International
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Independent Accountants' Report
We have audited the accompanying consolidated balance sheets of GUARANTY
FEDERAL BANCSHARES, INC. as of June 30, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company'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 BANCSHARES,
INC. as of June 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/Baird, Kutz & Dobson
July 27, 1998
Springfield, Missouri
BKD 75
We Deliver
Results
--------------
1923-1998
EXHIBIT 21
<PAGE>
Subsidiaries of the Registrant
The registrant has one subsidiary, Guaranty Federal Savings Bank. The bank under
this name through a charter issued by the United States. The bank has one
subsidiary, Guaranty Financial Services of Springfield, Inc., which operates
with this name under a charter issued by the State of Missouri.
EXHIBIT 23
<PAGE>
[Baird, Kurtz & Dobson letterhead]
Consent of Independent Accountants
Board of Directors
Guaranty Federal Bancshares, Inc.
We consent to incorporation by reference in Registration Statement No. 333-47241
on Form S-8 of Guaranty Federal Bancshares, Inc. of our report dated July 27,
1998, relating to the consolidated balance sheets of Guaranty Federal
Bancshares, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ending June 30, 1998, which report appears in the
June 30, 1998 annual report on Form 10-K of Guaranty Federal Bancshares, Inc.
/s/ Baird, Kurtz & Dobson
September 25, 1998
Springfield, Missouri
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-K405 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 847
<INT-BEARING-DEPOSITS> 6,458
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,821
<INVESTMENTS-CARRYING> 20,871
<INVESTMENTS-MARKET> 21,310
<LOANS> 208,412
<ALLOWANCE> 2,192
<TOTAL-ASSETS> 260,043
<DEPOSITS> 140,975
<SHORT-TERM> 45,081
<LIABILITIES-OTHER> 3,296
<LONG-TERM> 0
0
0
<COMMON> 623
<OTHER-SE> 70,067
<TOTAL-LIABILITIES-AND-EQUITY> 260,043
<INTEREST-LOAN> 14,875
<INTEREST-INVEST> 1,529
<INTEREST-OTHER> 792
<INTEREST-TOTAL> 17,196
<INTEREST-DEPOSIT> 6,969
<INTEREST-EXPENSE> 8,743
<INTEREST-INCOME-NET> 8,453
<LOAN-LOSSES> 123
<SECURITIES-GAINS> 69
<EXPENSE-OTHER> 4,822
<INCOME-PRETAX> 4,460
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,841
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<YIELD-ACTUAL> 3.91
<LOANS-NON> 1,012
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,138
<ALLOWANCE-OPEN> 2,177
<CHARGE-OFFS> 151
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2,192
<ALLOWANCE-DOMESTIC> 2,192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
