<PAGE>
Pursuant to Rule 424(b)(3)
Registration No. 333-69191
Interests in
Palmyra Saving and Building Association
Employees' Savings & Profit-Sharing Plan and Trust
and
Offering of 32,178 Shares of
PFSB Bancorp, Inc.
Common Stock, $.01 Par Value
This prospectus supplement relates to the offer and sale to participants in
the Palmyra Saving and Building Association Employees' Savings & Profit-Sharing
Plan and Trust of participation interests and shares of common stock of PFSB
Bancorp.
The Board of Directors of Palmyra Saving has adopted a plan that will
convert the structure of Palmyra Saving from a mutual savings institution to a
stock savings institution. As part of the conversion, PFSB Bancorp has been
established to acquire all of the stock of Palmyra Saving and simultaneously
offer PFSB Bancorp common stock to the public under the purchase priorities in
Palmyra Saving's plan of conversion. Savings Plan participants may direct the
trustee of the Savings Plan to invest funds in their Savings Plan accounts in
PFSB Bancorp common stock. Based upon the value of the Savings Plan assets at
December 31, 1998, the trustee of the Savings Plan could purchase up to 32,178
shares of PFSB Bancorp common stock at the purchase price of $10.00 per share.
This prospectus supplement relates to the election of a Savings Plan participant
to invest all or a portion of their Savings Plan funds in PFSB Bancorp common
stock.
The prospectus dated February 11, 1999 of PFSB Bancorp, which is attached
to this prospectus supplement, includes detailed information regarding the
conversion, PFSB Bancorp common stock and the financial condition, results of
operations and business of Palmyra Saving. This prospectus supplement provides
information regarding the Savings Plan. You should read this prospectus
supplement together with the prospectus and keep both for future reference.
Please refer to "Risk Factors" beginning on page 8 of the prospectus.
The date of this Prospectus Supplement is February 11, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
THE OFFERING............................................................................. 1
Securities Offered.................................................................. 1
Election to Purchase PFSB Bancorp Common Stock in the Conversion of Palmyra Saving.. 1
Value of Participation Interests.................................................... 2
Method of Directing Transfer........................................................ 2
Time for Directing Transfer......................................................... 2
Irrevocability of Transfer Direction................................................ 2
Purchase Price of PFSB Bancorp Common Stock......................................... 2
Nature of a Participant's Interest in PFSB Bancorp Common Stock..................... 2
Voting and Tender Rights of PFSB Bancorp Common Stock............................... 2
DESCRIPTION OF THE SAVINGS PLAN.......................................................... 3
Introduction........................................................................ 3
Eligibility and Participation....................................................... 3
Contributions Under the Savings Plan................................................ 3
Limitations on Contributions........................................................ 4
Investment of Contributions......................................................... 4
Benefits Under the Savings Plan..................................................... 6
Withdrawals and Distributions From the Savings Plan................................. 7
Administration of the Savings Plan.................................................. 8
Savings Plan Administrator.......................................................... 8
Reports to Savings Plan Participants................................................ 8
Amendment and Termination........................................................... 8
Merger or Transfer.................................................................. 8
Federal Income Tax Consequences..................................................... 9
Restrictions on Resale.............................................................. 9
LEGAL OPINIONS........................................................................... 10
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the Savings Plan and shares of PFSB Bancorp common
stock. The interests offered under this prospectus supplement and the sale of
shares by PFSB Bancorp are conditioned on the completion of the conversion of
Palmyra Saving. Your ability to invest in the PFSB Bancorp Stock Fund Palmyra
is also limited by the purchase priorities contained in the plan of conversion
of Palmyra Saving.
This prospectus supplement contains information about the Savings Plan.
The attached prospectus contains information about the conversion of Palmyra
Saving and the financial condition, results of operations and business of
Palmyra Saving. The address of the principal executive office of Palmyra Saving
is 123 W. Lafayette Street, Palmyra, MO 63461. The telephone number of Palmyra
Savings is (573) 769-2134.
Election to Purchase PFSB Bancorp Common Stock in the Conversion of Palmyra
Saving
You may direct the trustee of the Savings Plan to invest all or part of the
funds in your account in the PFSB Bancorp Stock Fund. Based upon your election,
the trustee of the Savings Plan will subscribe for PFSB Bancorp common stock in
the conversion offering. If the conversion offering is oversubscribed and some
or all of your funds cannot be used to purchase common stock, the trustee will
return the funds to your account for investment in your most recent investment
choices on record at Pentegra. You do not have to invest any of your funds in
the PFSB Bancorp Stock Fund. If you do not elect to invest in the PFSB Bancorp
Stock Fund, your Savings Plan account will be invested, at your election, in the
other investment options of the Savings Plan.
If you elect to invest your funds in the PFSB Bancorp Stock Fund, you will
generally be able to sell your shares at any time. You may reinvest the
proceeds of a sale of shares in any of the other investment options offered by
the Savings Plan. At this time, we do not anticipate that you will be able to
purchase additional shares of PFSB Bancorp through the Savings Plan.
Your ability to invest in the PFSB Bancorp Stock Fund is based on your
status as an eligible account holder or supplemental eligible account holder of
Palmyra Saving.
You are an eligible account holder if you had a deposit in Palmyra Saving
of $50.00 or more on June 30, 1997.
You are a supplemental eligible account holder if you had a deposit in
Palmyra Saving of $50 or more on December 31, 1998.
If you are not an eligible account holder or supplemental eligible account
holder, you may be eligible to invest in the PFSB Bancorp Stock Fund if you were
a depositor of Palmyra Saving as of January 31, 1999 or if you were a borrower
from Palmyra Saving with an outstanding loan on June 1, 1995 which was still
outstanding on January 31, 1999. Persons in this category are referred to as
other members of Palmyra Saving.
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No eligible account holders, supplemental eligible account holders or other
members may purchase more than $60,000 of PFSB Bancorp common stock in the
subscription offering. If you fall into one of the subscription offering
categories, you have subscription rights to purchase shares of common stock in
the subscription offering and you may use funds in the Savings Plan account to
pay for PFSB Bancorp common stock for which you subscribe.
Value of Participation Interests
As of December 31, 1998, the market value of the assets of the Savings Plan
equaled $321,788. The plan administrator has informed each participant of the
value of his or her account in the Savings Plan as of December 31, 1998. The
value of Savings Plan assets represents your past contributions to the Savings
Plan, plus or minus earnings or losses on the contributions, less previous
withdrawals and loans.
Method of Directing Transfer
The last two pages of this prospectus supplement is a form for you to
direct an investment in the PFSB Bancorp Stock Fund (the "Change of Investment
Allocation Form"). If you wish to invest all or part (in whole percentages of
at least 1%) of your account in the PFSB Bancorp Stock Fund, you need to
complete the attached form. If you do not wish to make such an election, you do
not need to take any action.
Time for Directing Transfer
The deadline for submitting your direction to invest funds in the PFSB
Bancorp Stock Fund is March 1, 1999. If you want to invest in the PFSB Bancorp
Stock Fund, you must return the attached form to Eldon R. Mette of Palmyra
Saving by 4:00 p.m. on March 1, 1999.
Irrevocability of Transfer Direction
Your direction to invest your Savings Plan funds in the PFSB Bancorp Stock
Fund cannot be changed after you have turned in your form.
Purchase Price of PFSB Bancorp Common Stock
The trustee will pay $10 per share for shares of PFSB Bancorp common stock.
This price is the price that will be paid by all other persons who purchase
shares of PFSB Bancorp common stock in the conversion offering.
Nature of a Participant's Interest in PFSB Bancorp Common Stock
The trustee will hold PFSB Bancorp common stock in the name of the Savings
Plan. The shares you purchase will be allocated to your Savings Plan account.
The value of your PFSB Bancorp shares will not be affected by the investments of
other Savings Plan participants.
Voting and Tender Rights of PFSB Bancorp Common Stock
You will direct the trustee of the Savings Plan about how to vote your PFSB
Bancorp shares. If PFSB Bancorp or a third party offers to purchase some or all
of the stock of PFSB Bancorp, you will direct the trustee about whether to
tender your PFSB Bancorp shares. Your instructions to the trustee will be
confidential.
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DESCRIPTION OF THE SAVINGS PLAN
Introduction
Palmyra Saving established the Savings Plan in 1993. We added the PFSB
Bancorp Stock Fund as an investment option in February 1999. We intend that the
Savings Plan satisfy all the laws and regulations that relate to employer-
sponsored retirement programs, including the Internal Revenue Code and the
Employee Retirement Income Security Act or "ERISA." Palmyra Saving may change
the Savings Plan from time to time in the future to make sure that we are in
compliance with these laws. Palmyra Saving may also amend the Savings Plan from
time to time in the future to add, change, or eliminate certain features of the
plan. Federal law provides you with various rights and protections as a plan
participant. However, your benefits under the Savings Plan are not guaranteed
by any form of insurance, including by the federal government's Pension Benefit
Guaranty Corporation.
Federal tax law imposes substantial restrictions on your right to withdraw
amounts held under the plan before your termination of employment with Palmyra
Saving. Federal law may also impose a 10% excise tax on withdrawals you make
from the Savings Plan before you reach age 59 1/2 age regardless of whether the
withdrawal occurs during or after your employment with Palmyra Saving.
Reference to Full Text of Plan. The following portions of this prospectus
supplement provide an overview of the material provisions of the Savings Plan.
Palmyra Saving qualifies this overview in its entirety by reference to the full
text of the Savings Plan. You may obtain copies of the full Savings Plan
document by sending a request to Eldon R. Mette at Palmyra Saving. You should
carefully read the full text of the Savings Plan document to understand your
rights and obligations under the plan.
Eligibility and Participation
If you are age 21 or older, you may participate in the Savings Plan after
you work for us for one year. You must, however, work for at least 1,000 hours
during your first year of employment. If you are not age 21, but work 1,000
hours during your first year of employment, your participation will be postponed
until you turn 21.
Eighteen of our employees participated in the Savings Plan during 1998.
Contributions Under the Savings Plan
Savings Plan Participant Contributions. You may contribute up to 15% of
your annual pay, including salary, bonus or commissions, to the Savings Plan.
Your contributions will be deducted from your regular paycheck. You may change
the amount of your contributions at any time and your changes will be effective
on the first day of the next month.
Palmyra Saving Contributions. Palmyra Saving may match your contributions
to the Savings Plan but we are not obligated to match your contributions.
Palmyra Saving currently matches 50% of your contributions up to 4% of your
basic salary.
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Limitations on Contributions
Limitation on Employee Salary Deferral. Although you may contribute up to
15% of your pay to the Savings Plan, federal tax law limits the dollar amount of
your annual contribution to $10,000 in 1999. The Internal Revenue Service
periodically adjusts this limit for inflation. Contributions in excess of this
limit and earnings on those contributions will be generally be returned to you
by April 15 of the year following your contribution, and they will be subject to
regular federal income taxes.
Limitations on Annual Additions and Benefits. Under federal tax law, your
contributions and our contributions to the Savings Plan may not be greater 25%
of your annual pay or, if less, $30,000. Contributions that we make to any
other retirement program that we sponsor may also count against these limits.
Special Rules About Highly-Paid Employees. Special provisions of the
Internal Revenue Code limit contributions by employees who receive annual pay
greater than $80,000. If you are in this category, some of your contribution
may be returned if your contribution, when measured as a percentage of your pay,
is substantially higher than the contributions made by other employees.
If your annual pay is less than $60,000, we may be required to make a
minimum contribution to the Savings Plan of 3% of your annual pay if the Savings
Plan is considered to be a "top heavy" plan under federal tax law. The Savings
Plan is considered "top heavy" if, in any year, the value of the Savings Plan
accounts of employees making more than $60,000 represent more than 60 percent of
the value of all accounts.
Investment of Contributions
All amounts credited to your Savings Plan account are held in trust. A
trustee appointed by the Board of Directors of Palmyra Saving administers the
trust and invests the Savings Plan assets
The Savings Plan offers the following investment choices:
S&P 500 Stock Fund. This stock fund invests in the stocks of a broad array
of established U.S. companies. Its objective is long-term: to earn higher
returns by investing in the largest companies in the U.S. economy.
Stable Value Fund. This fund invests primarily in Guaranteed Investment
Contracts and Synthetic Guaranteed Investment Contracts. These contracts pay a
steady rate of interest over a certain period of time, usually between three and
five years. Its objective is short to intermediate term: to achieve a stable
return over short to intermediate periods of time while preserving the value of
your investment.
S&P MidCap Stock Fund. This stock fund invests in the stocks of mid-sized
U.S. companies, which are expected to grow faster than larger, more established
companies. Its objective is long-term: to earn higher returns which reflect the
growth potential of mid-sized companies.
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Money Market Fund. This fund invests in a broad range of high-quality,
short-term instruments issued by banks, corporations and the U.S. Government and
its agencies. These instruments include certificates of deposit and U.S.
Treasury bills. Its objective is short-term: to achieve competitive, short-term
rates of return while preserving the value of your principal.
Government Bond Fund. This bond fund invests in U.S. Treasury bonds with a
maturity of 20 years or more. Its objective is long-term: to earn a higher level
of income along with the potential for capital appreciation.
International Stock Fund. This fund invests in over 1,000 foreign stocks
in 20 countries, based in Europe, Australia, and the Far East. Its objective is
long-term: to offer the potential return of investing in the stocks of
established non-U.S. companies, as well as the potential risk-reduction of broad
diversification.
Income Plus Asset Allocation Fund. This fund diversifies among a broad
range of stable value securities to reduce short-term risk and among a broad
range of large U.S. and international companies to capture growth potential.
The Fund is structured to take advantage of market opportunities with a small
flexible component. Its objective is intermediate-term: to preserve the value
of your investment over short periods of time and to offer some potential for
growth.
Growth and Income Asset Allocation Fund. This fund diversifies among U.S.
and international stocks, U.S. bonds, and stable value investments to pursue
long-term appreciation and short-term stability and takes advantage of market
opportunities with a small flexible component. Its objective is intermediate-
term: to provide a balance between the pursuit of growth and protection from
risk.
Growth Asset Allocation Fund. This fund diversifies among a broad range of
domestic and international stocks and takes advantage of market opportunities
with a large flexible component. Its objective is long-term: to pursue high
growth of your investment over time.
PFSB Bancorp Stock Fund. The Savings Plan now offers you the PFSB Bancorp
Stock Fund as an additional investment choice. The PFSB Bancorp Stock Fund
invests primarily in the common stock of PFSB Bancorp.
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Previous Funds.
Before we added the PFSB Bancorp Stock Fund as an investment choice, your
contributions under the Savings Plan were invested in the funds identified
below. The annual percentage return on these funds for the prior three years
was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
S&P 500 Stock Fund....................... 27.9% 32.7% 22.3%
Stable Value Fund........................ 5.9 6.2 6.5
S&P MidCap Stock Fund.................... 18.6 31.5 18.6
Money Market Fund........................ 5.5 5.5 5.6
Government Bond Fund..................... 13.8 15.4 (2.3)
International Stock Fund................. 19.3 3.6 10.6
Income Plus Asset Allocation Fund........ 9.7 8.9 8.3
Growth and Income Asset Allocation Fund.. 15.5 13.6 12.3
Growth Asset Allocation Fund............. 24.3 19.0 18.0
</TABLE>
The PFSB Bancorp Stock Fund.
The PFSB Bancorp Stock Fund is invested in the common stock of PFSB
Bancorp. As of the date of this prospectus supplement, none of the shares of
common stock have been issued or are outstanding and there is no established
market for the PFSB Bancorp common stock. Accordingly, there is no record of
the investment performance of the PFSB Bancorp Stock Fund. Performance of the
PFSB Bancorp Stock Fund depends on a number of factors, including the financial
condition and profitability of PFSB Bancorp and Palmyra Saving and market
conditions for PFSB Bancorp common stock generally.
Investments in the PFSB Bancorp Stock Fund may involve certain special
risks in investments in the common stock of PFSB Bancorp. For a discussion of
these risk factors, see "Risk Factors" beginning on page 8 of the prospectus.
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Benefits Under the Savings Plan
Vesting. The contributions that you make the Savings Plan are fully vested
and cannot be forfeited. You vest in your matching contribution according to
the following schedule.
<TABLE>
<CAPTION>
Period Vested
of Service Percentage
---------- ----------
<S> <C>
0-2 Years.......... 0%
3 Years............ 100%
</TABLE>
Withdrawals and Distributions From the Savings Plan
Withdrawals Before Termination of Employment. Your plan account
provides you with a source of retirement income. But, while you are employed by
Palmyra Saving, if you need funds from your account before retirement, you may
be eligible to receive either an in-service withdrawal or (from your pre-tax
contributions) a hardship distribution or a loan. You can apply for a hardship
distribution or a loan from the Savings Plan by contacting Eldon R. Mette at
Palmyra Saving. In order to qualify for a hardship withdrawal, you must have an
immediate and substantial need to meet certain expenses, like a mortgage payment
or medical bill, and have no other reasonably available resources to meet your
financial need. If you qualify for a hardship distribution, the trustee will
make the distribution proportionately from the investment funds in which you
have invested your account balance.
Distribution Upon Retirement or Disability. Upon retirement at 65 or
disability, you may elect to receive a lump sum payment, partial lump sum
payment or installment payments from the Savings Plan equal to the vested
balance of your account.
Distribution Upon Death. If you die before your benefits are paid
from the Savings Plan, your benefits will be paid to your surviving spouse or
your designated beneficiary.
Distribution Upon Termination for Any Other Reason. If you terminate
employment with Palmyra Saving for any reason other than retirement, disability
or death and your account balance exceeds $5,000, the trustee will distribute
your benefits when you turn 65, unless you request otherwise. You may elect to
maintain your account balance in the Savings Plan for as long as Palmyra Saving
maintains the Savings Plan or you may elect one or more of the forms of
distribution available under the Savings Plan. If your account balance does not
exceed $5,000, the trustee will generally distribute your benefits to you as
soon as administratively practicable following termination of employment.
Nonalienation of Benefits. Your benefits are generally not available
to your creditors and cannot be pledged as collateral for a loan. Your benefits
may, however, be subject to federal tax withholding requirements. In addition,
in the event of your divorce, some or all of your benefits may be transferred to
your former spouse under the terms of a court order that meets certain
requirements of federal law.
7
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Administration of the Savings Plan
Palmyra Saving serves as Savings Plan administrator and is a fiduciary
of the Savings Plan. Palmyra Saving has appointed Bank of New York to serve as
trustee of the Savings Plan for PFSB Bancorp stock after the conclusion of the
offering and the stock has traded on the open market. Bank of New York will
hold and invest contributions to the Savings Plan and distribute them to
participants and their beneficiaries at retirement, termination of employment,
death or disability. Currently, Palmyra Saving is serving as the trustee.
A fiduciary is a person, persons or entity that is responsible for the
holding and investment of the Savings Plan's assets and the proper
administration of the Savings Plan. A fiduciary is required to act prudently
and in the best interests of Savings Plan participants.
Savings Plan Administrator
As plan administrator, Palmyra Saving is responsible for the
administration of the Savings Plan, interpretation of the provisions of the
plan, developing procedures for filing applications for benefits, preparation
and distribution of information explaining the plan, maintenance of plan
records, books of account and all other data necessary for the proper
administration of the plan, and preparation and filing of all returns and
reports relating to the Savings Plan which are required to be filed with the
U.S. Department of Labor and the Internal Revenue Service, and for all
disclosures required to be made to participants, beneficiaries and others under
federal law. Palmyra Saving relies on experienced retirement plan consultants
to assist with some of these tasks.
Reports to Savings Plan Participants
We will provide you with a statement at least quarterly showing the
balance in your account as of the end of that period, the amount of
contributions you made to the Savings Plan for that period, and any adjustments
to your account to reflect earnings or losses.
Amendment and Termination
We intend to maintain the Savings Plan indefinitely. Nevertheless, we
may decide to terminate the Savings Plan at any time or makes changes to the
Savings Plan. If we terminate the Savings Plan, in whole or in part, your
account will be fully vested and cannot be forfeited for any reason. We may
make changes to the Savings Plan to comply with legal requirements or for other
reasons but any changes cannot reduce your vested account balance or use the
Savings Plan's funds for any purpose other than to pay your benefits.
Merger or Transfer Involving the Savings Plan
Your account balance will not be affected if the Savings Plan is
merged with another, similar plan or if the assets of the Savings Plan are
transferred to another plan.
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Federal Income Tax Consequences
The following is only a brief summary of the material federal income
tax aspects of the Savings Plan. You should not rely on this summary as a
complete or definitive description of the material federal income tax
consequences relating to the Savings Plan. The tax rules that affect your
benefits under the Savings Plan change frequently and may vary based on your
individual situation. This summary also does not discuss how state or local tax
laws affect your Savings Plan benefits. We urge you to consult your tax advisor
with respect to any distribution from the Savings Plan and transactions
involving the plan.
Federal tax law provides the Savings Plan with a number of special
benefits:
(1) we may deduct amounts contributed to the Savings Plan on your
behalf;
(2) you pay no current income tax on your contributions or Palmyra
Saving contributions;
(3) the earnings on your Savings Plan accounts are not taxable until
you receive a distribution.
These benefits are conditioned on the Savings Plan's compliance with
special requirements of federal tax law. We intend to satisfy all of the rules
that apply to the Savings Plan. However, if the rules are not satisfied, the
special tax benefits available to the Savings Plan may be lost.
Special Distribution Rules. If you receive a distribution of all of
your benefits from the Savings Plan, you may be eligible to spread the taxes on
the distribution over the next five years. If you turned 50 before 1986, you may
be eligible to spread the taxes on the distribution over as much as 10 years.
You should consult with your tax advisor to determine if your are eligible for
these special tax benefits and whether they are appropriate to your financial
needs.
PFSB Bancorp Common Stock Included in Lump Sum Distribution. If a
distribution of all of your benefits includes shares of PFSB Bancorp common
stock, you will generally not be taxed on the increase in the value of the stock
since its purchase until you sell the stock. You will be taxed on the amount of
the distribution equal to your original cost for the stock when you receive your
distribution.
Distributions: Rollovers and Direct Transfers to Another Qualified
Plan or to an IRA. You may roll over virtually all distributions from the
Savings Plan to retirement programs sponsored by other employers or to an
individual retirement account. We will provide you with detailed information on
how to roll over a distribution when you are eligible to receive benefits under
the Savings Plan.
Restrictions on Resale
If you are an "affiliate" of PFSB Bancorp or Palmyra Saving, you may
be subject to special rules under federal securities laws that affect your
ability to sell shares you hold in the PFSB Bancorp Stock Fund. Directors,
officers and substantial shareholders of PFSB Bancorp are generally considered
"affiliates." Any person who may be an "affiliate" of Palmyra Saving may wish to
consult with counsel before transferring any common stock they own. If you are
not considered an "affiliate" of Palmyra Saving you may freely sell any shares
of PFSB Bancorp common stock distributed to them under the Savings Plan, either
publicly or privately.
9
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SEC Reporting and Short-Swing Profit Liability
If you are an officer, director or more than 10% owner of PFSB
Bancorp, you may be required to report purchases and sales of PFSB Bancorp
common stock through the Savings Plan to the Securities and Exchange Commission.
In addition, you may be subject to special rules that provide for the recovery
by PFSB Bancorp of profits realized by an officer director or a more than 10%
owner from the purchase and sale or sale and purchase of the common stock within
any six-month period. However, the rules exempt many transactions involving the
Savings Plan from the reporting and profit recovery rules. You should consult
with us regarding the impact of these rules on your transactions involving PFSB
Bancorp common stock.
LEGAL OPINIONS
The validity of the issuance of the common stock of PFSB Bancorp will
be passed upon by Muldoon, Murphy & Faucette LLP, Washington, D.C. Muldoon,
Murphy & Faucette LLP acted as special counsel for Palmyra Saving in connection
with the conversion of Palmyra Saving.
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<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION
CHANGE OF INVESTMENT ALLOCATION
1. Member Data
________________________________________________________________________________
Print your full name above (Last, first, middle initial) Social Security Number
________________________________________________________________________________
Street Address City State Zip
2. Instructions
Palmyra Saving and Building Association Employees' Savings & Profit Sharing Plan
and Trust (the "Plan") is giving members a special opportunity to invest their
401(k) account balances in a new investment fund - the Employer Stock Fund -
which is comprised primarily of common stock ("Common Stock") issued by PFSB
Bancorp (the "Company") in connection with the reorganization of Palmyra Saving
and Building Association into the two-tier holding company form of organization.
The percentage of a member's account transferred at the direction of the member
into the Employer Stock Fund will be used to purchase shares of Common Stock
during the Subscription and Community Offering. Please review the Prospectus
(the "Prospectus") and the Prospectus Supplement (the "Supplement") before
making any decision.
In the event of an oversubscription in the Offering so that the total amount you
allocate to the Employer Stock Fund can not be used by the trustee to purchase
Common Stock, your account will be reinvested in the other funds of the Plan as
previously directed in your last investment election.
Investing in Common Stock entails some risks, and we encourage you to discuss
this investment decision with your spouse and investment advisor. The Plan
trustee and the Plan administrator are not authorized to make any
representations about this investment other than what appears in the Prospectus
and Supplement, and you should not rely on any information other than what is
contained in the Prospectus and Supplement. For a discussion of certain factors
that should be considered by each member as to an investment in the Common
Stock, see "Risk Factors" beginning on page __ of the Prospectus. Any shares
purchased by the Plan pursuant to your election will be subject to the
conditions or restrictions otherwise applicable to Common Stock, as discussed in
the Prospectus and Supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the Employer Stock Fund, you should complete and file this form with Mr. Eldon
Mette, President, Palmyra Saving and Building Association, no later than Monday,
March 1, 1999 at 12:00 noon. If you need any assistance in completing this
form, please contact Mr. Mette at (314) 769-2134. If you do not complete and
return this form to Mr. Mette by Monday, March 1, 1999 at 12:00 noon, the funds
credited to accounts under the Plan will continue to be invested in accordance
with your prior investment direction, or in accordance with the terms of the
401(k) Plan if no investment direction had been provided.
<PAGE>
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund and invested (in whole
percentages) in the Employer Stock Fund as follows:
Fund Percentage to be transferred
---- ----------------------------
S&P 500 Stock Fund _____ %
Stable Value Fund _____ %
S&P MidCap Stock Fund _____ %
Money Market Fund _____ %
Government Bond Fund _____ %
International Stock Fund _____ %
Income Plus Fund _____ %
Growth & Income Fund _____ %
Growth Fund _____ %
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only)
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made by me or on my behalf
by Palmyra Saving and Building Association, including those contributions and/or
repayments received by Palmyra Saving and Building Association Employees'
Savings & Profit Sharing Plan and Trust during the same reporting period as this
form, be invested in the following whole percentages.
Fund Percentage
---- ----------
S&P 500 Stock Fund ____ %
Stable Value Fund ____ %
S&P MidCap Stock Fund ____ %
Money Market Fund ____ %
Government Bond Fund ____ %
International Stock Fund ____ %
Income Plus Fund ____ %
Growth & Income Fund ____ %
Growth Fund ____ %
Total (Important!) 100 %
Notes: No amounts invested in the Stable Value Fund may be transferred directly
- -----
to the Money Market Fund. Stable Value Fund amounts invested in the S&P 500
Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International Stock
Fund, Income Plus Fund, Growth & Income Fund, Growth Fund and/or Employer Stock
Fund, for a period of three months may be transferred to the Money Market Fund
upon the submission of a separate Change of Investment Allocation form.
The percentage that can be transferred to the Money Market Fund may be limited
by any amounts previously transferred form the Stable Value Fund that have not
satisfied the equity wash requirement. Such amounts will remain in either the
S&P 500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International
Stock Fund, Income Plus Fund, Growth & Income Fund, Growth Fund and/or Employer
Stock Fund and a separate direction to transfer them to the Money Market Fund
will be required when they become available.
<PAGE>
6. Participant Signature and Acknowledgment - Required
By signing this Change Of Investment Allocation form, I authorize and direct the
Plan Administrator and trustee to carry out my instructions. I acknowledge that
I have been provided with and read a copy of the Prospectus and Supplement
relating to the issuance of Common Stock. I am aware of the risks involved in
the investment in Common Stock, and understand that the trustee and Plan
administrator are not responsible for my choice of investment.
MEMBER'S SIGNATURE
________________________________ __________________
Signature of Member Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
________________________________________________________ __________________
Signature of Palmyra Saving and Building Association Date
Authorized Representative
Please complete and return by 12:00 noon on Monday, March 1, 1999.
<PAGE>
PROSPECTUS
[LOGO]
PFSB BANCORP, INC.
(Proposed Holding Company for Palmyra Savings)
747,500 Shares of Common Stock
Palmyra Saving and Building Association, F.A. is converting from the mutual
form to the stock form of organization and will become a wholly-owned
subsidiary of PFSB Bancorp, Inc.
WHO IS ELIGIBLE TO PURCHASE STOCK?
. First priority: Depositors of Palmyra Saving with at least $50 on deposit
on June 30, 1997, provided that PFSB Bancorp has registered the shares
for sale under the securities laws of their state of residence.
. Second priority: Palmyra Saving's employee stock ownership plan.
. Third priority: Depositors of Palmyra Saving with at least $50 on deposit
on December 31, 1998, provided that PFSB Bancorp has registered the
shares for sale under the securities laws of their state of residence.
. Fourth priority: Depositors of Palmyra Saving on January 31, 1999 and
borrowers of Palmyra Saving's on June 1, 1995 whose loans were still
outstanding on January 31, 1999, provided that PFSB Bancorp has
registered the shares for sale under the securities laws of their state
of residence.
. Fifth priority: Residents of Marion, Lewis and Clark Counties, Missouri,
or trusts of those residents, provided that PFSB Bancorp decides to
extend the offering to them.
. Sixth priority: All other people, provided that PFSB Bancorp has
registered the shares for sale under the securities laws of their state
of residence and that PFSB Bancorp decides to extend the offering to
them.
OFFERING SUMMARY
Price Per Share: $10.00
Expected Trading Market: OTC Bulletin Board
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
---------- ---------- ----------
<S> <C> <C> <C>
Number of shares: 552,500 650,000 747,500
Gross offering proceeds: $5,525,000 $6,500,000 $7,475,000
Estimated underwriting commissions
and other offering expenses: $535,000 $535,000 $535,000
Estimated net proceeds: $4,990,000 $5,965,000 $6,940,000
Estimated net proceeds per share: $9.03 $9.18 $9.28
</TABLE>
With the approval of the Office of Thrift Supervision, PFSB Bancorp may
increase the maximum number of shares by up to 15% to 859,625 shares.
Trident Securities, Inc. will use its best efforts to assist PFSB Bancorp in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. Trident Securities is not obligated to purchase any shares
of common stock in the offering. Trident Securities intends to make a market in
the common stock.
The subscription offering will end at 12:00 Noon, Central Time, on March 16,
1999. If the conversion is not completed by May 20, 1999, and the Office of
Thrift Supervision gives Palmyra Saving more time to complete the conversion,
PFSB Bancorp will give all subscribers the opportunity to increase, decrease or
cancel their orders. All extensions may not go beyond March 22, 2001. PFSB
Bancorp will hold all funds received from subscribers in an interest-bearing
savings account at Palmyra Saving until the conversion is completed or
terminated. PFSB will return all funds promptly with interest if the conversion
is terminated.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
For a discussion of certain risks that you should consider, see "Risk Factors"
beginning on page 8.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
For assistance, please contact the stock information center at (573) 769-2655.
TRIDENT SECURITIES, INC.
The date of this prospectus is February 11, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 8
Selected Consolidated Financial Information.............................. 13
Recent Developments...................................................... 15
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 21
Market for Common Stock.................................................. 22
Capitalization........................................................... 23
Historical and Pro Forma Regulatory Capital Compliance................... 25
Pro Forma Data........................................................... 26
Shares to be Purchased by Management with Subscription Rights............ 30
Palmyra Saving and Building Association, F.A. Consolidated Statements of
Income.................................................................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business of PFSB Bancorp................................................. 45
Business of Palmyra Saving............................................... 45
Management of PFSB Bancorp............................................... 65
Management of Palmyra Saving............................................. 65
Regulation............................................................... 73
Taxation................................................................. 80
The Conversion........................................................... 82
Restrictions on Acquisition of PFSB Bancorp.............................. 96
Description of Capital Stock of PFSB Bancorp............................. 101
Registration Requirements................................................ 102
Legal and Tax Opinions................................................... 102
Experts.................................................................. 102
Change in Accountants.................................................... 103
Where You Can Find More Information...................................... 103
Index to Consolidated Financial Statements............................... 104
</TABLE>
<PAGE>
Map of the State of Missouri shows the location of the Palmyra, Kahoka
and Canton branches of Palmyra Saving and Building Association, F.A.
<PAGE>
SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire prospectus carefully before you
decide to invest. For assistance, please contact the stock information center at
(573) 769-2655.
THE COMPANIES
PFSB BANCORP, INC. Palmyra Saving formed PFSB Bancorp to be its
123 West Lafayette Street holding company. To date, PFSB Bancorp has only
Palmyra, Missouri 63461 conducted organizational activities. After the
(573) 769-2134 conversion, it will own all of Palmyra Saving's
capital stock and will direct, plan and coordinate
Palmyra Saving's business activities. After the
conversion, PFSB Bancorp might become an operating
company or acquire or organize other operating
subsidiaries, including other financial
institutions, although it currently has no
specific plans or agreements to do so.
PALMYRA SAVING AND BUILDING Palmyra Saving's business strategy is to operate
ASSOCIATION, F.A. as a traditional, community-oriented savings
123 West Lafayette Street association dedicated to financing home ownership
Palmyra, Missouri 63461 and providing quality customer service. Palmyra
(573) 769-2134 Saving operates out of three offices in northeast
Missouri located in the towns of Palmyra (Marion
County), Canton (Lewis County) and Kahoka (Clark
County). It considers Marion, Lewis and Clark
Counties as its primary market area for making
loans and attracting deposits.
Palmyra Saving's principal business is attracting
deposits from the general public and using those
funds to originate residential mortgage loans. It
also purchases participation interests in
residential, multi-family and commercial real
estate loans, generally secured by properties
located outside of its primary market area. At
September 30, 1998, Palmyra Saving had total
assets of $59.5 million, deposits of $52.7 million
and total equity of $6.0 million.
For a discussion of Palmyra Saving's business
strategy and recent results of operations, see
"Management's Discussion and Analysis of Financial
Condition and Results of Operations." For a
discussion of Palmyra Saving's business
activities, see "Business of Palmyra Saving."
1
<PAGE>
THE CONVERSION
WHAT IS THE CONVERSION (PAGE 82) The conversion is a change in Palmyra
Saving's legal form of organization. As
a mutual savings association, Palmyra
Saving currently has no stock or
stockholders. Instead, Palmyra Saving
operates for the mutual benefit of its
depositors who elect its directors and
vote on other important matters. Through
the conversion Palmyra Saving will
become a stock savings association, will
change its name to "Palmyra Savings" and
will be owned and controlled by the
holder of its stock, PFSB Bancorp.
Voting rights in PFSB Bancorp will
belong to its stockholders.
Palmyra Saving is conducting the
conversion under the terms of its plan
of conversion. The Office of Thrift
Supervision has approved the conversion
with the condition that Palmyra Saving's
members approve the plan of conversion.
Palmyra Saving has called a special
meeting for March 22, 1999 to vote on
the plan of conversion.
REASONS FOR THE CONVERSION (PAGE 83) By converting to the stock form of
organization, Palmyra Saving will be
structured in the form used by
commercial banks, most business entities
and a large number of savings
institutions. The conversion will be
important to Palmyra Saving's future
growth and performance by:
. providing a larger capital
base from which it can
operate;
. enhancing its ability to
attract and retain qualified
management through stock-based
compensation plans;
. enhancing its ability to
diversify into other financial
services related activities;
and
. expanding its ability to serve
the public.
Presently, Palmyra Saving does not have
any specific plans or arrangements for
diversification or expansion.
BENEFITS OF THE CONVERSION TO PFSB Bancorp and Palmyra Saving intend
MANAGEMENT (PAGE 67) to adopt the following benefit plans and
employment agreements :
. EMPLOYEE STOCK OWNERSHIP PLAN.
This plan intends to purchase
8% of the shares issued in the
conversion. This would range
from 44,200 shares, assuming
552,500 shares are issued in
the conversion, to 68,770
shares, assuming 859,625
shares are issued in the
conversion. Palmyra Saving
will allocate these shares to
employees over
2
<PAGE>
a period of years in proportion to their
compensation.
. STOCK OPTION PLAN. Under this plan, PFSB
Bancorp may award stock options to key
employees and directors. The number of
options available under this plan will be
equal to 10% of the number shares sold in the
conversion. This would range from 55,250
shares, assuming 552,550 shares are issued in
the conversion, to 85,962 shares, assuming
859,625 shares are issued in the conversion.
This plan will require shareholder approval.
. MANAGEMENT DEVELOPMENT AND RECOGNITION PLAN.
Under this plan, PFSB Bancorp may award
shares of restricted stock to key employees
and directors at no cost to the recipient.
The number of shares available under this
plan will equal 4% of the number of shares
sold in the conversion. This would range from
22,100 shares, assuming 552,550 shares are
issued in the conversion, to 34,385 shares,
assuming 859,625 shares are issued in the
conversion. This plan will require
shareholder approval.
. EMPLOYMENT AGREEMENTS with Palmyra Saving's
President and Chief Executive Officer, and
Vice President and Treasurer. These
agreements will provide for severance
benefits if the executive is terminated
following a change in control of PFSB Bancorp
or Palmyra Saving.
. EMPLOYEE SEVERANCE COMPENSATION PLAN. This
plan will provide severance benefits to
eligible employees if there is a change in
control of PFSB Bancorp or Palmyra Saving.
The following table summarizes the total number and
dollar value of the shares of common stock, assuming
747,500 shares are issued in the conversion, which the
employee stock ownership plan would acquire and the
total value of all shares available for award under the
stock option plan and the management development and
recognition plan. The table assumes the value of the
shares is $10.00 per share. The table does not include
a value for the options because their value would be
equal to the fair market value of the common stock on
the day that the options are granted. As a result,
financial gains can be realized on an option only if
the market price of common stock increases above the
price at which the options are granted.
3
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
NUMBER ESTIMATED ISSUED
OF VALUE IN THE
SHARES OF SHARES CONVERSION
-------- ----------- ------------
<S> <C> <C> <C>
Employee stock ownership
plan........................ 59,800 $598,000 8.0%
Management development
and recognition plan awards 29,900 299,000 4.0
Stock options................ 74,750 -- 10.0
------- -------- ----
Total.............. 164,450 $897,000 22.0%
======= ======== ====
</TABLE>
For a discussion of certain risks
associated with these plans and
agreements, see "Risk Factors--The
Implementation of Benefit Plans Will
Increase Future Compensation Expense
and May Lower Palmyra Saving's Net
Income" and "--Employment Agreements
and Severance Plan Could Make Takeover
Attempts More Difficult to Achieve."
THE OFFERING
SUBSCRIPTION OFFERING (PAGE 86) Palmyra Saving has granted subscription
rights in the following order of
priority to:
1. Persons with $50 or more on
deposit at Palmyra Saving as of
June 30, 1997.
2. The Palmyra Saving employee
stock ownership plan.
3. Persons with $50 or more on
deposit at Palmyra Saving as of
December 31, 1998.
4. Palmyra Saving's depositors as
of January 31, 1999 and
borrowers of Palmyra Saving as
of June 1, 1995 whose loans
continue to be outstanding as of
January 31, 1999.
To ensure that Palmyra Saving properly
identifies your subscription ights, you
must list all of your savings accounts
and loans as of the eligibility dates
on the stock order form. If you fail to
do so, your subscription may be reduced
or rejected if the offering is
oversubscribed.
Subscription rights are not
transferable, and persons with
subscription rights may not subscribe
for shares for the benefit of any other
person. If you violate this
prohibition, you may lose your right to
purchase shares and may face criminal
prosecution and/or other sanctions.
4
<PAGE>
The subscription offering will end at
12:00 Noon, Central time, on March 16,
1999. If the offering is oversubscribed,
PFSB Bancorp will allocate the shares in
order of the priorities described above
under a formula outlined in the plan of
conversion.
COMMUNITY OFFERING (PAGE 87) PFSB Bancorp may offer shares not sold
in the subscription offering to the
general public in a community offering.
People and trusts of people who are
residents of Marion, Lewis and Clark
Counties, Missouri will have first
preference to purchase shares in a
community offering. If shares are
available, PFSB Bancorp expects to offer
them to the general public immediately
after the end of the subscription
offering, but may begin a community
offering at any time during the
subscription offering.
PFSB Bancorp and Palmyra Saving may
reject orders received in the community
offering either in whole or in part. If
your order is rejected in part, you
cannot cancel the remainder of your
order.
PURCHASE PRICE The purchase price is $10.00 per share.
The Boards of Directors of PFSB Bancorp
and Palmyra Saving consulted with
Trident Securities in determining it.
You will not pay a commission to buy any
shares in the conversion.
NUMBER OF SHARES TO BE ISSUED (PAGE 92) PFSB Bancorp will sell between 552,500
and 747,500 shares of its common stock
in this offering. With regulatory
approval, PFSB Bancorp may increase the
number of shares to 859,625 without
giving you further notice.
The amount of common stock that PFSB
Bancorp will offer in the conversion is
based on an independent appraisal of the
estimated market value of PFSB Bancorp
and Palmyra Saving as if the conversion
had occurred as of the date of the
appraisal. RP Financial, LC., the
independent appraiser, has estimated
that, in its opinion, as of December 11,
1998 and updated as of January 22, 1999,
the estimated market value ranged
between $5,525,000 and $7,475,000, with
a midpoint of $6,500,000. The appraisal
was based in part on Palmyra Saving's
financial condition and operations and
the effect on Palmyra Saving of the
additional capital raised by the sale of
common stock in this offering. The
independent appraisal will be updated
before the conversion is completed.
PURCHASE LIMITATIONS (PAGE 94) The minimum purchase is 25 shares.
The maximum purchase in the subscription
offering by any person or group of
persons through a single deposit account
is $60,000 of common stock, which equals
6,000 shares.
5
<PAGE>
The maximum purchase by any person in
the community offering is $60,000 of
common stock, which equals 6,000 shares.
The maximum purchase in the subscription
offering and community offering combined
by any person, related persons or
persons acting together is $100,000 of
common stock, which equals 10,000
shares.
HOW TO PURCHASE COMMON STOCK (PAGE 90) If you want to subscribe for shares, you
must complete an original stock order
form and send it together with full
payment to Palmyra Saving in the
postage-paid envelope provided. You
must sign the certification that is part
of the stock order form. Palmyra Saving
must receive your stock order form
before the end of the subscription
offering.
You may pay for shares in any of the
following ways:
. IN CASH if delivered in person.
. BY CHECK OR MONEY ORDER made
payable to PFSB Bancorp, Inc.
. BY WITHDRAWAL from an account
at Palmyra Saving. To use funds
in an IRA at Palmyra Saving,
you must transfer your account
to an unaffiliated institution
or broker. Please contact the
stock information center at
least one week before the end
of the subscription offering
for assistance.
Palmyra Saving will pay interest on your
subscription funds at the rate it pays
on passbook accounts from the date it
receives your funds until the conversion
is completed or terminated. All funds
authorized for withdrawal from deposit
accounts with Palmyra Saving will earn
interest at the applicable account rate
until the conversion is completed. There
will be no early withdrawal penalty for
subscriptions paid for by withdrawal
from certificates of deposit.
After Palmyra Saving receives your
order, you cannot cancel or change it
without Palmyra Saving's consent. If
PFSB Bancorp intends to sell fewer than
552,500 shares or more than 859,625
shares, all subscribers will be notified
and given the opportunity to change or
cancel their orders. If you do not
respond to this notice, PFSB Bancorp
will return your funds promptly with
interest.
USE OF PROCEEDS (PAGE 20) PFSB Bancorp will pay 50% of the net
offering proceeds to Palmyra Saving to
buy all of the common stock of Palmyra
Saving. Palmyra Saving will use these
funds to originate and purchase loans
and purchase investments similar to the
kinds it currently holds.
6
<PAGE>
PFSB Bancorp will also loan an amount
equal to 8% of the gross proceeds of the
offering to the employee stock ownership
plan to fund its purchase of common
stock and will keep the remainder of the
net proceeds for general corporate
purposes. These purposes may include,
for example, paying cash dividends or
buying back shares of common stock.
PFSB Bancorp and Palmyra Saving may also
use the proceeds of the offering to
expand and diversify their businesses,
although they have no specific plans to
do so at this time.
PURCHASES BY DIRECTORS AND EXECUTIVE Palmyra Saving's directors and executive
OFFICERS (PAGE 30) officers intend to subscribe for 41,700
shares, regardless of the number of
shares issued in the conversion. This
number equals 5.6% of the 747,500 shares
that would be issued at the maximum of
the offering range. If fewer shares are
issued in the conversion, then directors
and executive officers may own a greater
percentage of PFSB Bancorp. Directors
and executive officers will pay the same
$10.00 per share price as everyone else
who purchases shares in the conversion.
MARKET FOR COMMON STOCK (PAGE 22) PFSB Bancorp intends to list the common
stock over-the-counter through the OTC
Bulletin Board or the National Daily
Quotation System "Pink Sheets" published
by the National Quotation Bureau, Inc.
Trident Securities intends to be a
market maker in the common stock. After
shares of the common stock begin
trading, you may contact a stock broker
to buy or sell shares. PFSB Bancorp
cannot assure you that there will be an
active trading market for the common
stock. See "Risk Factors--Possible
Limited Market for PFSB Bancorp's Common
Stock May Lower Market Price."
DIVIDEND POLICY (PAGE 21) PFSB Bancorp intends to adopt a policy
of paying regular cash dividends, but
has not yet decided on the amount or
frequency of payments.
7
<PAGE>
RISK FACTORS
Before investing in PFSB Bancorp's common stock please carefully
consider the matters discussed below.
PALMYRA SAVING'S BUSINESS DEPENDS HEAVILY ON ECONOMIC CONDITION OF ITS PRIMARY
MARKET AREA AND WEAK MARKET AREA DEMOGRAPHICS HAS HURT CORE EARNINGS AND LIMITS
GROWTH PROSPECTS
Because Palmyra Saving operates primarily in a rural market area with a
small population that is not growing significantly, Palmyra Saving's earnings
from lending, investment and deposit activities, or what is commonly referred to
as "core earnings," has been below that of its peers. The rural and low growth
characteristics of Palmyra Saving's primary market area also limits its ability
to increase its loan portfolio and deposit base. Furthermore, because a
substantial portion of Palmyra Saving's borrowers and depositors and
substantially all of Palmyra Saving's real estate collateral is located in this
market area, a downturn in the economy of the primary market area could increase
the risk of loan losses. See "Business of Palmyra Saving--Market Area."
LOANS SECURED BY PROPERTIES LOCATED OUTSIDE OF PALMYRA SAVING'S PRIMARY MARKET
AREA MAKE PALMYRA SAVING'S LOAN PORTFOLIO RISKIER
Palmyra Saving invests in one- to four-family mortgage loans, multi-
family loans and commercial real estate loans secured by properties located
outside of Palmyra Saving's primary market area. Many of the one- to four-family
mortgage loans are secured by non-owner occupied duplex properties, principally
located in Columbia, Missouri. At September 30, 1998, purchased loans amounted
to $8.6 million, or 21.2% of net loans, of which $6.9 million were one- to four-
family mortgage loans, $806,000 were multi-family loans and $863,000 were
commercial real estate loans. In addition, loans secured by non-owner occupied
properties pose additional risk, such as the borrowers' ability to earn enough
rental income on the property to pay the underlying mortgage debt. See "Business
of Palmyra Saving--Lending Activities."
LOSS OF KEY PERSONNEL MAY HURT PALMYRA SAVING'S OPERATIONS
Eldon R. Mette, Palmyra Saving's President and Chief Executive Officer,
and Ronald L. Nelson, Palmyra Saving's Vice President, Treasurer and Secretary,
have been instrumental in managing the business affairs of Palmyra Saving for
over 25 years. The loss of either individual could have a material adverse
impact on the operations of Palmyra Saving. Palmyra Saving does not have an
established management succession plan. Accordingly, should Palmyra Saving lose
the services of Mr. Mette and Mr. Nelson, the Board of Directors would have to
search outside of Palmyra Saving for qualified, permanent replacements. This
search may be prolonged and Palmyra Saving cannot assure you that it will be
able to locate and hire qualified replacements. Neither Palmyra Saving nor PFSB
Bancorp has any plans to obtain a "key man" life insurance policy for either
individual. For a discussion of Palmyra Saving's management, see "Management of
Palmyra Saving."
PALMYRA SAVING'S NET INTEREST INCOME IS LOW BECAUSE OF LARGE RESIDENTIAL
MORTGAGE LOAN PORTFOLIO
Historically, Palmyra Saving's principal lending activity has been
making one- to four-family mortgage loans for long-term investment purposes. At
September 30, 1998, approximately 61.9% of Palmyra Saving's assets were
residential mortgage loans, which represented 88.9% of the total loan portfolio
at that date. While generally considered to involve less risk than other types
of lending, such as commercial mortgage loans, commercial business loans and
consumer loans, Palmyra Saving generally earns less interest income on
residential mortgage loans than these other types of loans. Palmyra Saving
expects that one- to four-family residential mortgage loans will continue to be
its primary lending activity for the foreseeable future.
8
<PAGE>
YEAR 2000 DATA PROCESSING PROBLEMS COULD INTERRUPT AND HURT PALMYRA SAVING'S
OPERATIONS
Computer programs that use only two digits to identify a year could
fail or create erroneous results by or at the year 2000. All of the material
data processing of the Bank is performed by a third-party service bureau. If the
service bureau is unable to complete its year 2000 adjustments in a timely
fashion, or if it does not successfully make all the necessary year 2000
adjustments, then resulting computer malfunctions could interrupt the operations
of Palmyra Saving and have a significant adverse impact on Palmyra Saving's
financial condition and results of operations. For further discussion of Palmyra
Saving's year 2000 compliance program, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Issues."
RISING INTEREST RATES COULD HURT PALMYRA SAVING'S PROFITS
Like most financial institutions, Palmyra Saving's ability to make a
profit depends largely on its net interest income, which is the difference
between interest income it receives from its loans and investment securities and
interest it pays on deposits and borrowings. If interest rates rise, Palmyra
Saving anticipates that its net interest income would decline as interest paid
on deposits would increase more quickly than the interest earned on loans and
investment securities. In addition, rising interest rates may adversely affect
Palmyra Saving's earnings because rising rates may cause a decrease in customer
demand for loans and a reduction in value of Palmyra Saving's securities
available for sale. For further discussion of how changes in interest rates
could impact Palmyra Saving, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Analysis."
INVESTMENT OF OFFERING PROCEEDS IN DEBT SECURITIES COULD PRODUCE LOWER EARNINGS
PFSB Bancorp expects to retain 42% of the net offering proceeds for its
own use. PFSB Bancorp intends to invest these funds in short-term U.S.
Government and agency obligations until they may be used for other purposes such
as paying dividends or repurchasing stock. Furthermore, Palmyra Savings also
intends to invest the portion of the net offering proceeds that PFSB Bancorp
will contribute to it in short-term U.S. government and agency obligations until
they may be used to make or purchase loans. Interest income earned on short-term
investment securities is generally lower than interest income earned on loans.
Consequently, as long as PFSB Bancorp and Palmyra Saving primarily invest the
net offering proceeds in short term investment securities, particularly during
times like now of low market interest rates, you should expect their earnings to
be less than what they generally could be if the net offering proceeds were
invested primarily in loans. See "Use of Proceeds" for further information
regarding PFSB Bancorp's and Palmyra Saving's intended uses of the net proceeds
of this offering.
PALMYRA SAVING'S RETURN ON EQUITY WILL BE BELOW AVERAGE AFTER CONVERSION BECAUSE
OF HIGH CAPITAL LEVELS
Return on equity, which equals net income divided by average equity, is
a ratio used by many investors to compare the performance of a particular
company with other companies. In recent years, Palmyra Saving's return on
average equity has been below the average return on equity for publicly held
savings associations and banks of comparable size. As a result of the additional
capital that will be raised in this offering, PFSB Bancorp expects that its
return on average equity will continue to be below average after the offering.
In addition, compensation expense will increase as a result of the new benefit
plans. Over time, PFSB Bancorp intends to use the net proceeds from this
offering to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded financial institutions. This goal could take a number
of years to achieve, and PFSB Bancorp cannot assure you that this goal can be
attained. Consequently, you should not expect a competitive return on equity in
the near future. See "Pro Forma Data" for an illustration of the financial
effects of this stock offering.
9
<PAGE>
IMPLEMENTATION OF BENEFIT PLANS WILL INCREASE FUTURE COMPENSATION EXPENSE AND
MAY LOWER PALMYRA SAVING'S NET INCOME
Palmyra Saving will recognize additional material employee compensation
and benefit expenses that stem from the shares purchased or granted to employees
and executives under new benefit plans. Palmyra Saving cannot predict the actual
amount of these new expenses because applicable accounting practices require
that they be based on the fair market value of the shares of common stock at
specific points in the future. Palmyra Saving would recognize expenses for its
employee stock ownership plan when shares are committed to be released to
participants' accounts and would recognize expenses for the Management
Development and Recognition Plan over the vesting period of awards made to
recipients. These expenses have been reflected in the pro forma financial
information under "Pro Forma Data" assuming the $10.00 per share purchase price
as fair market value. Actual expenses, however, may be higher or lower. Recently
proposed accounting rules would also require PFSB Bancorp to recognize
compensation expense for stock options awarded to nonemployee directors. For
further discussion of these plans, see "Management of Palmyra Saving--Benefits."
ISSUANCE OF SHARES FOR BENEFIT PROGRAMS MAY LOWER YOUR OWNERSHIP INTEREST
If stockholders approve the new stock-based benefit programs, PFSB
Bancorp intends to issue shares to its officers and directors through these
plans. If the shares for the management development and recognition plan are
issued from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 3.85%. If the shares for the stock option plan
are issued from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 9.09%. See "Pro Forma Data."
POSSIBLE VOTING CONTROL BY MANAGEMENT AND EMPLOYEES MAY MAKE TAKEOVER ATTEMPTS
MORE DIFFICULT TO ACHIEVE
The shares of common stock that Palmyra Saving's directors and
executive officers intend to purchase in the conversion, when combined with the
shares that may be awarded or sold to participants under the Palmyra Saving's
Employee Stock Ownership Plan and PFSB Bancorp's stock-based benefit plans,
could ultimately result in management and employees controlling a significant
percentage of PFSB Bancorp's common stock. If these individuals were to act
together, they could have significant influence over the outcome of any
stockholder vote. This voting power may discourage takeover attempts that you
would like to see happen. In addition, the total voting power of management and
employees could reach in excess of 20% of PFSB Bancorp's outstanding stock. That
level would enable management and employees as a group to defeat any stockholder
matter that requires an 80% vote. For information about management's intended
stock purchases and the number of shares that may be awarded under new benefit
plans, see "Shares to Be Purchased by Management with Subscription Rights,"
"Management of Palmyra Saving--Executive Compensation" and "Restrictions on
Acquisition of PFSB Bancorp."
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS COULD MAKE TAKEOVER ATTEMPTS
MORE DIFFICULT TO ACHIEVE
Provisions in PFSB Bancorp's Articles of Incorporation and Bylaws, the
corporation law of the state of Missouri, and federal regulations may make it
difficult and expensive to pursue a takeover attempt that management opposes.
These provisions may discourage or prevent takeover attempts that you would like
to see happen. These provisions will also make the removal of the current board
of directors or management of PFSB Bancorp, or the appointment of new directors,
more difficult. These provisions include: limitations on voting rights of
beneficial owners of more than 10% of PFSB Bancorp's common stock; supermajority
voting requirements for certain business combinations; the election of directors
to staggered terms of three years; the elimination of cumulative voting for
directors; and the removal of directors without cause only upon the vote of
holders of 80% of the outstanding voting shares. The Articles of Incorporation
of PFSB Bancorp also contain provisions regarding the timing and content of
stockholder proposals and nominations and limiting the calling of special
meetings. For further information about these provisions, see "Restrictions on
Acquisition of PFSB Bancorp."
10
<PAGE>
EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN COULD MAKE TAKEOVER ATTEMPTS MORE
DIFFICULT TO ACHIEVE
The employment agreements of senior officers of PFSB Bancorp and
Palmyra Saving provide for cash severance payments and/or the continuation of
health, life and disability benefits if the executive is terminated following a
change in control of PFSB Bancorp or Palmyra Saving. If a change in control had
occurred at September 30, 1998, the aggregate value of the severance benefits
available to these executive officers under the agreements would have been
approximately $356,000. In addition, if a change in control had occurred at
September 30, 1998 and all eligible employees had been terminated, the aggregate
payment due under the severance plan would have been approximately $197,000.
These arrangements may have the effect of increasing the costs of acquiring PFSB
Bancorp, thereby discouraging future attempts to take over PFSB Bancorp or
Palmyra Saving. For information about the proposed employment and severance
agreements and severance plan, see "Management of Palmyra Saving--Executive
Compensation."
COMPETITION HAS HURT PALMYRA SAVING'S NET INTEREST INCOME
Palmyra Saving faces intense competition both in making loans and
attracting deposits. This competition has made it more difficult for Palmyra
Saving to make new loans and has forced it to offer amongst the highest deposit
rates in its market area. This competition for loans and deposits has
contributed to a narrow interest rate spread, which has hurt net interest
income. Palmyra Saving expects that the competition for loans and deposits will
continue to be intense. For more information about the Palmyra Saving's market
area and the competition it faces, see "Business of Palmyra Saving--Market Area"
and "Business of Palmyra Saving--Competition."
POSSIBLE LIMITED MARKET FOR PFSB BANCORP'S COMMON STOCK MAY LOWER MARKET PRICE
Because PFSB Bancorp has never issued capital stock, PFSB Bancorp does
not know whether an active trading market will develop. Because of the
relatively small size of the offering, it is highly unlikely that an active and
liquid market for the common stock will develop. As a result, you may not be
able to sell all of your shares on short notice and the sale of a large number
of shares all at once could lower the market price. Therefore, you should
consider the potentially illiquid and long-term nature of an investment in the
common stock. Furthermore, PFSB Bancorp cannot guarantee anyone who purchases
shares in the conversion that they will be able to sell their shares at or above
the $10.00 purchase price. For further information on the expected trading
market for PFSB Bancorp's common stock, see "Market For Common Stock."
PALMYRA SAVING COULD HOLD YOUR SUBSCRIPTION FUNDS FOR AN EXTENDED TIME PERIOD IF
THE CONVERSION IS DELAYED
If the conversion is not completed by May 20, 1999 and the Office of
Thrift Supervision gives Palmyra Saving more time to complete the conversion,
PFSB Bancorp will contact everyone who subscribed for shares to see if they
still want to purchase stock. This is commonly referred to as a "resolicitation
offering." A material change in the independent appraisal of PFSB Bancorp and
Palmyra Saving would be the most likely, but not necessarily the only, reason
for a delay in completing the conversion. Federal regulations permit the Office
of Thrift Supervision to grant one or more time extensions, none of which may
exceed 90 days. Extensions may not go beyond March 22, 2001. In the
resolicitation offering, PFSB Bancorp would mail a supplement to this prospectus
to you if you subscribed for stock to let you confirm, modify or cancel your
subscription. If you fail to respond to the resolicitation offering, it would be
as if you had canceled your order and all subscription funds, together with
accrued interest, would be returned to you. If you authorized payment by
withdrawal of funds on deposit at Palmyra Saving, that authorization would
terminate. If you affirmatively confirm your subscription order during the
resolicitation offering, PFSB Bancorp and Palmyra Saving would continue to hold
your subscription funds until the end of the resolicitation offering. Your
resolicitation order would be irrevocable without the consent of PFSB Bancorp
and Palmyra Saving until the conversion is completed or terminated.
11
<PAGE>
BANKING REFORM LEGISLATION MAY REDUCE PFSB BANCORP'S AND PALMYRA SAVING'S POWERS
In 1998 the U.S. Congress considered legislation that was intended to
modernize the financial services industry. Under the proposed legislation, newly
formed unitary savings and loan holding companies would not be permitted to
exercise the broad powers currently available to these companies. Previous
proposals would have eliminated the federal savings association charter by
requiring that all federal savings associations convert to national banks or
other banking charters, but these provisions were not included in the final
legislation that was considered. Palmyra Saving is a federal savings association
and PFSB Bancorp, upon completion of the conversion, will be a unitary savings
and loan holding company. PFSB Bancorp does not know whether federal legislation
will be enacted that affects the federal savings association charter or unitary
savings and loan holding companies, or if the legislation is enacted, what form
this legislation might take. Accordingly, management of Palmyra Saving and PFSB
Bancorp cannot predict what effect, if any, banking reform legislation would
have on the activities and operations of Palmyra Saving and PFSB Bancorp.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables contain certain information concerning the
financial position and results of operations of Palmyra Saving at the dates and
for the periods indicated. This information should be read in conjunction with
the Consolidated Financial Statements and related Notes at the back of this
prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------
1998 1997 1996
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets....................................... $59,476 $58,433 $57,223
Cash and cash equivalents.......................... 2,268 2,146 1,732
Investment securities available for sale........... 7,087 8,509 6,245
Investment securities held to maturity............. 5,589 5,093 7,198
Mortgage-backed securities held to maturity........ 2,584 2,828 3,280
Loans receivable, net.............................. 40,513 38,394 37,259
Deposits........................................... 52,724 51,412 51,391
FHLB advances...................................... 500 1,000 200
Total equity, substantially restricted............. 6,048 5,715 5,302
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income ................................... $ 4,164 $ 4,133 $ 3,982
Interest expense .................................. 2,685 2,626 2,598
------- ------- -------
Net interest income ............................... 1,479 1,507 1,384
Provision for loan losses ......................... 25 21 87
------- ------- -------
Net interest income after provision for loan losses 1,454 1,486 1,297
Noninterest income ................................ 75 63 85
Noninterest expense (1) ........................... 1,104 1,035 1,368
------- ------- -------
Income before income taxes ........................ 425 514 14
Income tax expense (benefit) ...................... 149 182 (8)
------- ------- -------
Net income ........................................ $ 276 $ 332 $ 22
======= ======= =======
</TABLE>
_____________________
(1) Includes a one-time assessment of $305,000 in 1996 to recapitalize the
Savings Association Insurance Fund.
13
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
SELECTED OTHER DATA:
Number of:
Mortgage loans outstanding............................................. 1,221 1,244 1,295
Deposit accounts....................................................... 7,761 7,678 7,716
Full-service offices................................................... 3 3 3
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR
THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on average assets(1)............................................ 0.47% 0.57% 0.04%
Return on average equity............................................... 4.64 6.49 0.41
Interest rate spread(3)................................................ 2.24 2.34 2.18
Net interest margin(4)................................................. 2.62 2.70 2.54
Noninterest expense as a percent of average total assets............... 1.88 1.79 2.43
Average interest-earning assets to average interest-bearing liabilities 107.87 107.66 107.62
Capital Ratios:
Tangible............................................................... 10.13 9.82 9.43
Core................................................................... 10.13 9.82 9.43
Risk-based............................................................. 22.30 22.25 21.46
Average equity as a percent of average assets.......................... 10.12 9.66 9.65
Asset Quality Ratios:
Nonperforming loans as a percent of loan receivable, net(5)............ 0.54 0.47 2.39
Nonperforming assets as a percent of total assets(6)................... 0.37 0.31 1.56
Allowance for loan losses as a percent of gross loans receivable....... 0.68 0.64 0.62
Allowance for loan losses as a percent of nonperforming loans.......... 127.82 140.82 26.32
Net charge-offs as a percent of average outstanding loans.............. -- -- --
</TABLE>
___________________________
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(6) Nonperforming assets consist of nonaccrual loans. See "Business of Palmyra
Saving--Lending Activities--Nonperforming Assets and Delinquencies."
14
<PAGE>
RECENT DEVELOPMENTS
The following selected financial and operating data at December 31,
1998 and for the three month periods ended December 31, 1998 and 1997 are
derived from unaudited financial data but, in the opinion of management, reflect
all adjustments needed to present fairly the results for these interim periods.
All adjustments are normal recurring ones. The results of operations of the
three months ended December 31, 1998 do not necessarily indicate the results of
operations that may be expected for the year ending September 30, 1999.
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................................... $61,125 $59,476
Cash and cash equivalents....................................... 3,671 2,268
Investment securities available for sale........................ 7,707 7,087
Investment securities held to maturity.......................... 5,260 5,589
Mortgage-backed securities held to maturity..................... 2,445 2,584
Loan receivable, net............................................ 40,413 40,513
Deposits........................................................ 54,323 52,724
FHLB advances................................................... 500 500
Total equity, substantially restricted.......................... 6,096 6,048
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
-------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income............................................. $ 1,034 $ 1,040
Interest expense............................................ 694 678
-------- ---------
Net interest income......................................... 340 362
Provision for loan losses................................... -- --
-------- ---------
Net interest income after provision for loan losses......... 340 362
Non interest income......................................... 65 15
Non interest expense........................................ 298 282
-------- ---------
Income before income tax.................................... 107 95
Income tax expense.......................................... 38 33
-------- ---------
Net income.................................................. $ 69 $ 62
======== =========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
KEY FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets(2)........................................................... 0.46% 0.43%
Return on average equity(3)........................................................... 4.52 4.32
Interest rate spread(4)............................................................... 1.99 2.20
Net interest margin(5)................................................................ 2.34 2.58
Noninterest expense as a percent of average assets.................................... 1.97 1.94
Average interest-bearing assets to interest-bearing liabilities....................... 107.39 107.76
Capital Ratios:
Tangible.............................................................................. 9.96 10.01
Core.................................................................................. 9.96 10.01
Risk-based............................................................................ 22.01 22.54
Average equity as a percent of average assets......................................... 10.07 9.91
Asset Quality Ratios:
Nonperforming loans as a percent of loans receivable, net(6).......................... 0.38 0.35
Nonperforming assets as a percent of total assets(7).................................. 0.53 0.23
Allowance for loan losses as a percent of gross loans receivable...................... 0.68 0.65
Allowance for loan losses as a percent of nonperforming loans......................... 182.69 187.73
Net charge-offs as a percent of average outstanding loans............................. -- --
</TABLE>
_______________________________
(1) Annualized where appropriate.
(2) Net income dividend by average assets.
(3) Net income divided by average equity.
(4) Difference between average yield on interest-earning assets and average
cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(7) Nonperforming assets consist of nonaccrual loans.
16
<PAGE>
REGULATORY CAPITAL
The table below sets forth Palmyra Saving's capital position relative to
its OTS capital requirements at the date indicated. For a discussion of the
Palmyra Saving's regulatory capital requirements, see "Regulation--Federal
Regulation of Savings Associations--Capital Requirements."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------
PERCENT OF
ADJUSTED
AMOUNT TOTAL ASSETS
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital.................................................. $6,086 9.96%
Tangible capital requirement...................................... 916 1.50
------ -----
Excess............................................................ $5,170 8.46%
====== =====
Core capital...................................................... $6,086 9.96%
Core capital requirement(2)....................................... 1,833 3.00
------ -----
Excess............................................................ $4,253 6.96%
====== =====
Risk-based capital(3)............................................. $6,366 22.01%
Risk-based capital requirement(3)................................. 2,313 8.00
------ -----
Excess............................................................ $4,053 14.01%
====== =====
</TABLE>
__________________________
(1) Based on total tangible assets of $61.1 million for purposes of the
tangible capital requirement and the core capital requirement, and on
risk-weighted assets of $28.9 million for purposes of the risk-based
capital requirement.
(2) The current Office of Thrift Supervision core capital requirement for
savings associations is 3% of total adjusted assets. The Office of Thrift
Supervision has proposed core capital requirements that would require a
core capital ratio of 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness and a core capital
ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
NONPERFORMING ASSETS AND DELINQUENCIES
At December 31, 1998, Palmyra Saving had $153,000 of loans accounted
for on a nonaccrual basis, compared to $219,000 at September 30, 1998.
Nonaccrual loans at December 31, 1998 consisted of $131,000 in residential real
estate loans and $22,000 in commercial real estate loans. At December 31, 1998,
Palmyra Saving had no accruing loans contractually past due 90 days or more, no
restructured loans and $173,000 of foreclosed real estate.
The allowance for loan losses was $280,000 at December 31, 1998. There
were no charge-offs or recoveries for either the three months ended December 31,
1998 or 1997.
17
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by category at December 31, 1998.
<TABLE>
<CAPTION>
PERCENT OF
LOANS IN
CATEGORY TO
AMOUNT TOTAL LOANS
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
One- to four-family......................... $151 88.72%
Multi-family................................ 16 1.94
Commercial.................................. 68 5.42
Construction................................ 1 2.23
Land........................................ 6 0.73
Consumer.................................... -- 0.96
Unallocated................................. 38 --
---- ------
Total allowance for loan losses.......... $280 100.00%
==== ======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
At December 31, 1998, total assets were $61.1 million compared to $59.5
million at September 30, 1998. This increase is primarily the result of a $1.4
million increase in cash and cash equivalents due to an increase in deposits.
Loans receivable, net, were relatively unchanged. Investment securities
available for sale increased as a result of purchases exceeding maturities and
prepayments. Mortgage-backed securities balances decreased as a result of
maturities and prepayments. At December 31, 1998, deposits were $54.3 million
compared to $52.7 million at September 30, 1998. Management attributes the
increase, which occurred primarily in certificates of deposit, to normal growth.
Total equity increased from $6.0 million at September 30, 1998 to $6.1 million
at December 31, 1998 as a result of retained earnings.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
1997
NET INCOME. Net income was $69,000 in the 1998 quarter compared to
$62,000 in 1997 quarter. This increase is primarily the result of a $52,000
one-time gain on the sale of a branch office building which more than offset
total interest income, which was relatively unchanged, and increases in both
interest expense and noninterest expense. Excluding this one-time gain, net
income for the 1998 quarter would have been $36,000.
NET INTEREST INCOME. Net interest income was $340,000 in the 1998
quarter compared to $362,000 in the 1997 quarter primarily as a result of an
increase in total interest expense, which increased from $678,000 in the 1997
quarter to $694,000 in the 1998 quarter primarily as a result of higher average
deposit balances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. There was no provision for
loan losses in either quarter based on management's opinion that there was not a
material increase in the risk of loss inherent in the loan portfolio during
those periods. There were no charge-offs or recoveries in either the 1998
quarter or 1997 quarter. The allowance for loan losses was $280,000 at December
31, 1998. Management deemed such allowance as adequate at both dates. Although
management uses the best information
18
<PAGE>
available, future adjustments to the allowance may be necessary due to changes
in economic, operating, regulatory and other conditions that may be beyond
Palmyra Saving's control. While Palmyra Saving maintains its allowance for loan
losses at a level which it considers to be adequate to provide for estimated
losses, there can be no assurance that further additions will not be made to the
allowance for loan losses and that actual losses will not exceed the estimated
amounts. See "Business of Palmyra Saving--Lending Activities--Allowance for Loan
Losses" for further information regarding the allowance for loan losses.
NONINTEREST INCOME. Noninterest income increased from $15,000 in the
1997 quarter to $65,000 in the 1998 quarter primarily as a result of a $52,000
gain on the sale of the Kahoka branch office. Palmyra Saving now leases this
branch office at $500 per month. See "Business of Palmyra Saving--Properties"
for further information regarding this lease. This gain was offset primarily by
an $8,000 loss on the sale of real estate owned.
NONINTEREST EXPENSE. Noninterest expense increased from $282,000 in the
1997 quarter to $298,000 in the 1998 quarter. This increase is primarily
attributable to a $10,000 increase in depreciation expense associated with the
purchase of new computer equipment, an $12,000 increase in employee salaries and
benefits as a result of the hiring of three new employees, and a $4,000 increase
in data processing expense associated with the increased number of deposit
accounts.
INCOME TAXES. Income taxes increased between the 1998 and 1997 quarters
as a result of higher income before income taxes in the 1998 quarter.
19
<PAGE>
USE OF PROCEEDS
The following table presents the estimated net proceeds of the
offering, the amount to be retained by PFSB Bancorp, the amount to be
contributed to Palmyra Saving, and the amount of PFSB Bancorp's loan to the
employee stock ownership plan. See "Pro Forma Data" for the assumptions used to
arrive at these amounts. The Office of Thrift Supervision must approve the
issuance of up to 859,625 shares in the conversion.
<TABLE>
<CAPTION>
552,500 650,000 747,500 859,625
SHARES AT SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
---------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross proceeds................................................. $5,525 $6,500 $7,475 $8,596
Less: estimated underwriting commissions and
other offering expenses................................. (535) (535) (535) (535)
------- ------- ------- -------
Net proceeds................................................... $4,990 $5,965 $6,940 $8,061
======= ======= ======= =======
Amount to be retained by PFSB Bancorp.......................... $2,495 $2,982 $3,470 $4,030
Amount to be contributed to Palmyra Savings.................... $2,495 $2,983 $3,470 $4,031
Amount of loan by PFSB Bancorp to employee
stock ownership plan........................................ $ 442 $ 520 $ 598 $ 688
</TABLE>
PFSB Bancorp has received conditional Office of Thrift Supervision
approval to purchase all of the capital stock of Palmyra Saving to be issued in
the conversion in exchange for 50% of the net proceeds of the stock offering.
Receipt of 50% of the net proceeds of the sale of the common stock will increase
Palmyra Saving's capital and will support the expansion of Palmyra Saving's
existing business activities. Palmyra Saving will use the funds contributed to
it for general corporate purposes, including, initially, lending and investment
in short-term U.S. Government and agency obligations. Depending on local loan
demand, Palmyra Saving may consider using a portion of the conversion proceeds
to purchase loan participation interests of the type it has purchased in the
past and/or for investment in mortgage-backed securities.
PFSB Bancorp intends to loan the employee stock ownership plan the
amount necessary to purchase 8% of the shares sold in the conversion.
Accordingly, the employee stock ownership plan purchases would range between
44,200 shares at the minimum of the offering range and 59,800 shares at the
maximum of the offering range. At the midpoint of the offering range, the
employee stock ownership plan would purchase 52,000 shares. If 859,625 shares
are issued in the conversion, the employee stock ownership plan would purchase
68,770 shares. It is anticipated that the employee stock ownership plan loan
will have a 10-year term with interest payable at the prime rate as published in
The Wall Street Journal on the closing date of the conversion. The loan will be
repaid principally from Palmyra Saving's contributions to the employee stock
ownership plan and from any dividends paid on shares of common stock held by the
employee stock ownership plan.
20
<PAGE>
The remaining net proceeds retained by PFSB Bancorp initially will be
invested primarily in short-term U.S. Government and agency obligations. These
proceeds will be available for additional contributions to Palmyra Saving in the
form of debt or equity, to support future diversification or acquisition
activities, as a source of dividends to the stockholders of PFSB Bancorp and for
future repurchases of common stock to the extent permitted under Missouri law
and federal regulations. PFSB Bancorp will consider exploring opportunities to
use these funds to expand operations through acquiring or establishing
additional branch offices or acquiring other financial institutions. Currently,
there are no specific plans, arrangements, agreements or understandings, written
or oral, regarding any expansion activities.
Except as described above, neither PFSB Bancorp nor Palmyra Saving has
specific plans for the investment of the proceeds of this offering. Although
Palmyra Saving's capital currently exceeds regulatory requirements, it is
converting to stock form primarily to structure itself in the form of
organization used by commercial banks and most other financial services
companies. For a discussion of management's business reasons for undertaking the
conversion, see "The Conversion--Reasons for the Conversion."
Following the conversion, the Board of Directors will have the
authority to adopt plans for repurchases of common stock that meet statutory and
regulatory requirements. Since PFSB Bancorp has not yet issued stock, there
currently is insufficient information upon which an intention to repurchase
stock could be based. The Board of Directors will consider many facts and
circumstances in determining whether to repurchase stock in the future. These
factors include market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the ability to improve PFSB Bancorp's
return on equity. The avoidance of dilution to stockholders by not having to
issue additional shares to cover the exercise of stock options or to fund
employee stock benefit plans is another factor that will be considered. The
Board of Directors will also consider any other circumstances in which
repurchases would be in the best interests of PFSB Bancorp and its stockholders.
Before any stock repurchases, the Board of Directors must determine that both
PFSB Bancorp and Palmyra Saving will be capitalized in excess of all applicable
regulatory requirements after any repurchases and that capital will be adequate,
taking into account, among other things, Palmyra Saving's level of nonperforming
and classified assets, PFSB Bancorp's and Palmyra Saving's current and projected
results of operations and asset/liability structure, the economic environment
and tax and other regulatory considerations. For a discussion of the regulatory
limitations applicable to stock repurchases, see "The Conversion--Restrictions
on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
PFSB Bancorp's Board of Directors intends to adopt a policy of paying
regular cash dividends after the conversion, but has not decided the amount that
may be paid or when the payments may begin. In addition, the Board of Directors
may declare and pay periodic special cash dividends in addition to, or in lieu
of, regular cash dividends. Declarations or payments of any dividends, whether
regular or special, will be determined by PFSB Bancorp's Board of Directors. The
Board of Directors will take into account the amount of the net proceeds
retained by PFSB Bancorp, PFSB Bancorp's financial condition, results of
operations, tax considerations, capital requirements, industry standards, and
economic conditions. The regulatory restrictions that affect the payment of
dividends by Palmyra Saving to PFSB Bancorp discussed below will also be
considered. Under Missouri law, PFSB Bancorp is prohibited from paying a cash
dividend when its net assets are less than its stated capital or when the
payment of the dividend would reduce its net assets below its stated capital. In
order to pay cash dividends, however, PFSB Bancorp must have available cash
either from the net proceeds raised in the conversion and retained by PFSB
Bancorp, borrowings by PFSB Bancorp, dividends received from Palmyra Saving or
earnings on Holding Company assets. No assurances can be given that any
dividends, either regular or special, will be declared or paid, if declared and
paid, what the amount of dividends will be or whether they will continue
uninterrupted.
21
<PAGE>
CURRENT RESTRICTIONS
Dividends from PFSB Bancorp may depend, in part, upon receipt of
dividends from Palmyra Saving because PFSB Bancorp initially will have no source
of income other than dividends from Palmyra Saving and earnings from the
investment of the net proceeds from the offering retained by PFSB Bancorp.
Office of Thrift Supervision regulations require Palmyra Saving to give the
Office of Thrift Supervision 30 days' advance notice of any proposed declaration
of dividends to PFSB Bancorp, and the Office of Thrift Supervision has the
authority under its supervisory powers to prohibit the payment of dividends to
PFSB Bancorp. The Office of Thrift Supervision imposes certain limitations on
the payment of dividends from Palmyra Saving to PFSB Bancorp which utilize a
three-tiered approach that permits various levels of distributions based
primarily upon a savings association's capital level. Palmyra Saving currently
meets the criteria to be designated a Tier 1 association and, consequently,
after prior notice to and no objection made by the Office of Thrift Supervision,
could distribute up to 100% of its net income during the calendar year plus 50%
of its surplus capital ratio at the beginning of the calendar year less any
distributions previously paid during the year. In addition, Palmyra Saving may
not declare or pay a cash dividend on its capital stock if the effect thereof
would be to reduce the regulatory capital of Palmyra Saving below the amount
required for the liquidation account to be established as required by Palmyra
Saving's plan of conversion. See "Regulation--Federal Regulation of Savings
Associations--Limitations on Capital Distributions," "The Conversion--Effects of
Conversion to Stock Form on Depositors and Borrowers of Palmyra
Saving--Liquidation Account" and Note M of the Notes to Consolidated Financial
Statements included in the back of this prospectus.
Additionally, PFSB Bancorp and Palmyra Saving have committed to the
Office of Thrift Supervision that during the one-year period following the
conversion, PFSB Bancorp will not take any action to declare an extraordinary
dividend to stockholders that would be treated by recipients as a tax-free
return of capital for federal income tax purposes.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of Palmyra Saving
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by Palmyra Saving to pay cash dividends to PFSB Bancorp without
the payment of federal income taxes by Palmyra Saving at the then current income
tax rate on the amount deemed distributed, which would include the amounts of
any federal income taxes attributable to the distribution. See
"Taxation--Federal Taxation" and Note I of the Notes to Consolidated Financial
Statements included in the back of this prospectus. PFSB Bancorp does not
contemplate any distribution by Palmyra Saving that would result in a recapture
of Palmyra Saving's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
Because PFSB Bancorp has never issued capital stock, there is no
existing market for the common stock. PFSB Bancorp intends to list the common
stock over-the-counter through either the National Daily Quotation System "Pink
Sheets" published by the National Quotation Bureau, Inc. or the OTC Bulletin
Board. Trident Securities has agreed to make a market in the common stock
following the conversion, although it has no obligation to do so. However, there
can be no assurance that timely and accurate quotations will be regularly
available. The development of a liquid public market depends on the existence of
willing buyers and sellers and their existence is not within the control of PFSB
Bancorp, Palmyra Saving or any market maker. Because of the small size of the
offering, it is highly unlikely that an active and liquid market for the common
stock will develop and the number of active buyers and sellers at any particular
time is expected to be limited. Under these circumstances, investors in the
common stock could have difficulty disposing of their shares on short notice and
should not view the common stock as a short-term investment. Furthermore, there
can be no assurance that purchasers will be able to sell their shares at or
above the $10.00 per share purchase price or that published quotations will be
regularly available.
22
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Palmyra
Saving at September 30, 1998, and the pro forma consolidated capitalization of
PFSB Bancorp after giving effect to the assumptions under "Pro Forma Data,"
based on the sale of the number of shares indicated in the table. The issuance
of 859,625 shares would require Office of Thrift Supervision approval of an
updated appraisal confirming that valuation. A CHANGE IN THE NUMBER OF SHARES TO
BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT PRO FORMA CONSOLIDATED
CAPITALIZATION.
<TABLE>
<CAPTION>
HOLDING COMPANY
PRO FORMA CONSOLIDATED CAPITALIZATION
BASED UPON THE SALE OF
-------------------------------------------------
552,500 650,000 747,500 859,625
CAPITALIZATION SHARES AT SHARES AT SHARES AT SHARES AT
AS OF $10.00 $10.00 $10.00 $10.00
SEPTEMBER 30, PER PER PER PER
1998 SHARE(1) SHARE(1) SHARE(1) SHARE(2)
------------------ ---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(3)........................................ $52,724 $ 52,724 $ 52,724 $ 52,724 $ 52,724
Federal Home Loan Bank of Des Moines
advances........................................ 500 500 500 500 500
------- -------- -------- -------- --------
Total deposits and borrowings...................... $53,224 $ 53,224 $ 53,224 $ 53,224 $ 53,224
======= ======== ======== ======== ========
PREFERRED STOCK:
1,000,000 shares, $.01 par value
per share, authorized; none issued
or outstanding............................ $ -- $ -- $ -- $ -- $ --
COMMON STOCK:
5,000,000 shares, $.01 par value
per share, authorized; specified
number of shares assumed to be
issued and outstanding(4)................. -- 6 7 7 9
Additional paid-in capital......................... -- 4,984 5,958 6,933 8,053
Retained earnings, substantially
restricted(5)................................... 6,017 6,017 6,017 6,017 6,017
Unrealized gain on securities, net of tax.......... 31 31 31 31 31
Less:
Common stock to be acquired by
employee stock ownership plan(6)............. -- (442) (520) (598) (688)
Common stock to be acquired
by management development and
recognition plan(7).......................... -- (221) (260) (299) (344)
------- -------- -------- -------- --------
Total stockholders' equity......................... $ 6,048 $ 10,375 $ 11,233 $ 12,091 $ 13,078
======= ======== ======== ======== ========
(footnotes on following page)
</TABLE>
23
<PAGE>
_____________________
(1) Does not reflect the possible increase in the Estimated Valuation Range
to reflect material changes in the financial condition or results of
operations of Palmyra Saving or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the stock option plan.
(2) This column represents the pro forma capitalization of PFSB Bancorp if
the aggregate number of shares of common stock issued in the conversion
is 15% above the maximum of the estimated valuation range. See footnote 1
to the table under "Pro Forma Data."
(3) Withdrawals from deposit accounts for the purchase of common stock are
not reflected. Withdrawals will reduce pro forma deposits by the amount
of the withdrawals.
(4) Palmyra Saving's authorized capital will consist solely of 1,000 shares
of common stock, par value $1.00 per share, 1,000 shares of which will be
issued to PFSB Bancorp, and 9,000 shares of preferred stock, $1.00 par
value per share, none of which will be issued in connection with the
conversion.
(5) Total equity is substantially restricted by applicable regulatory capital
requirements. Additionally, Palmyra Saving will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of
Palmyra Saving's eligible account holders and supplemental eligible
account holders at the time of the conversion and reduced as these
account holders reduce their balances or when they are no longer
depositors. See "The Conversion--Effects of Conversion to Stock Form on
Depositors and Borrowers of Palmyra Saving--Liquidation Account."
(6) Assumes that 8% of the common stock sold in the conversion will be
acquired by the employee stock ownership plan in the conversion with
funds borrowed from PFSB Bancorp. This would range between 44,200 shares,
assuming 552,500 shares are issued in the conversion, to 68,770 shares,
assuming 859,625 shares are issued in the conversion. The loan will be
repaid principally from Palmyra Saving's contributions to the employee
stock ownership plan and dividends payable on the common stock held by
the employee stock ownership plan over the anticipated 10-year term of
the loan. Under generally accepted accounting principles, the amount of
common stock to be purchased by the employee stock ownership plan
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As shares are released to employee stock ownership
plan participants' accounts, a corresponding reduction in the charge
against capital will occur. Since the funds are borrowed from PFSB
Bancorp, the borrowing will be eliminated in consolidation and no
liability or interest expense will be reflected in the consolidated
financial statements of PFSB Bancorp. See "Management of Palmyra
Saving--Benefits--Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at $10.00 per share of a number
of shares equal to 4% of the shares of common stock issued in the
conversion at the minimum, midpoint, maximum and 15% above the maximum of
the estimated valuation range. This would range between 22,100 shares,
assuming 552,500 shares are issued in the conversion, to 34,385 shares,
assuming 859,625 shares are issued in the conversion. The issuance of an
additional 4% of the shares of common stock for the management
development and recognition plan from authorized but unissued shares
would dilute the ownership interest of stockholders by 3.85%. The shares
are reflected as a reduction of stockholders' equity. See "Risk
Factors--Issuance of Shares for Benefit Programs May Lower Your Ownership
Interest," "Pro Forma Data" and "Management of Palmyra
Saving--Benefits--Management Recognition Plan." The management
development and recognition plan requires stockholder approval, which is
expected to be sought at a meeting to be held no earlier than six months
following the conversion.
24
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents Palmyra Saving's historical and pro forma
capital position relative to its capital requirements at September 30, 1998. The
amount of capital infused into Palmyra Saving for purposes of the following
table is 50% of the net proceeds of the offering. For purpose of the table
below, the amount expected to be borrowed by the employee stock ownership plan
and the cost of the shares expected to be acquired by the management development
and recognition plan are deducted from pro forma regulatory capital. For a
discussion of the assumptions underlying these pro forma capital calculations,
see "Use of Proceeds," "Capitalization" and "Pro Forma Data." The definitions of
the terms used in the table are those provided in the capital regulations issued
by the Office of Thrift Supervision. For a discussion of the capital standards
applicable to Palmyra Saving, see "Regulation--Federal Regulation of Savings
Associations--Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
---------------------------------------------------------
MINIMUM MIDPOINT
OF ESTIMATED OF ESTIMATED
VALUATION RANGE VALUATION RANGE
-------------------- --------------------
552,500 SHARES 650,000 SHARES
SEPTEMBER 30, 1998 AT $10.00 PER SHARE AT $10.00 PER SHARE
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
ADJUSTED ADJUSTED ADJUSTED
TOTAL TOTAL TOTAL
AMOUNT SHARES(1) AMOUNT SHARES(1) AMOUNT SHARES(1)
--------- ---------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Generally accepted accounting principles capital... $6,048 10.17% $7,880 12.76% $8,251 13.26%
====== ===== ====== ===== ====== =====
Tangible capital................................... $6,017 10.13% $7,849 12.72% $8,220 13.23%
Tangible capital requirement....................... 891 1.50 926 1.50 932 1.50
------ ----- ------ ----- ------ -----
Excess............................................. $5,126 8.63% $6,923 11.22% $7,288 11.73%
====== ===== ====== ===== ====== =====
Core capital....................................... $6,017 10.13% $7,849 12.72% $8,220 13.23%
Risk-based capital requirement(2).................. 1,783 3.00 1,851 3.00 1,865 3.00
------ ----- ------ ----- ------ -----
Excess............................................. $4,234 7.13% $5,998 9.72% $6,355 10.23%
====== ===== ====== ===== ====== =====
Total capital(3)................................... $6,297 22.30% $8,129 28.33% $8,500 29.53%
Risk-based capital requirement..................... 2,259 8.00 2,295 8.00 2,303 8.00
------ ----- ------ ----- ------ -----
Excess............................................. $4,038 14.30% $5,834 20.33% $6,197 21.53%
====== ===== ====== ===== ====== =====
<CAPTION>
-----------------------------------------
15% ABOVE
MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED
VALUATION RANGE VALUATION RANGE
-------------------- --------------------
747,500 SHARES 859,625 SHARES
AT $10.00 PER SHARE AT $10.00 PER SHARE
-------------------- --------------------
PERCENT PERCENT
OF OF
ADJUSTED ADJUSTED
TOTAL TOTAL
AMOUNT SHARES(1) AMOUNT SHARES(1)
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Generally accepted accounting principles capital... $8,624 13.76% $9,047 14.32%
====== ===== ====== =====
Tangible capital................................... $8,590 13.72% $9,016 14.29%
Tangible capital requirement....................... 939 1.50 947 1.50
------ ----- ------ -----
Excess............................................. $7,651 12.22% $8,069 12.79%
====== ===== ====== =====
Core capital....................................... $8,590 13.72% $9,016 14.29%
Risk-based capital requirement(2).................. 1,878 3.00 1,893 3.00
------ ----- ------ -----
Excess............................................. $6,712 10.72% $7,123 11.29%
====== ===== ====== =====
Total capital(3)................................... $8,870 30.72% $9,296 32.08%
Risk-based capital requirement..................... 2,310 8.00 2,318 8.00
------ ----- ------ -----
Excess............................................. $6,560 22.72% $6,978 24.08%
====== ===== ====== =====
</TABLE>
_____________________________
(1) Based upon total adjusted assets of $59.5 million at September 30, 1998 and
$61.7 million, $62.2 million, $62.6 million and $63.1 million at the
minimum, midpoint, maximum and maximum, as adjusted, of the estimated
valuation range, respectively, for purposes of the tangible and core
capital requirements, and upon risk-weighted assets of $28.2 million at
September 30, 1998 and $28.7 million, $28.8 million, $28.9 million and
$29.0 million at the minimum, midpoint, maximum, and maximum, as adjusted,
of the estimated valuation range, respectively, for purposes of the
risk-based capital requirement.
(2) The current Office of Thrift Supervision core capital requirement for
savings associations is 3% of total adjusted assets. The Office of Thrift
Supervision has proposed core capital requirements which would require a
core capital ratio of 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness and a core capital
ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
25
<PAGE>
PRO FORMA DATA
The plan of conversion requires that the common stock must be sold at a
price equal to the estimated market value of PFSB Bancorp and Palmyra Saving as
converted, based upon an independent valuation. The estimated valuation range as
of December 11, 1998, and updated as of January 22, 1999, is from a minimum of
$5,525,000 to a maximum of $7,475,000 with a midpoint of $6,500,000. At a price
per share of $10.00, this results in a minimum number of shares of 552,500, a
maximum number of shares of 747,500 and a midpoint number of shares of 650,000.
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds indicated on
the following table are based upon the following assumptions:
1. Trident Securities will receive a fixed management fee of
$135,000 as discussed under "The Conversion--Plan of Distribution
for the Subscription, Direct Community and Syndicated Community
Offerings";
2. all of the common stock will be sold in the subscription and
direct community offerings; and
3. conversion expenses, excluding the fixed management fee paid to
Trident Securities, will total approximately $400,000 regardless
of the number of shares sold in the conversion.
Actual expenses may vary from this estimate, and the fees paid will
depend upon the percentages and total number of shares sold in the subscription
offering, direct community offering and syndicated community offering and other
factors.
The pro forma data that follows was prepared by PFSB Bancorp and
Palmyra Savings with the assistance of RP Financial. The following table
summarizes the historical net income and retained earnings of Palmyra Saving and
the pro forma consolidated net income and stockholders' equity of PFSB Bancorp
at and for the year ended September 30, 1998. Pro forma consolidated net income
has been calculated as if the conversion were completed on October 1, 1997 and
the estimated net proceeds had been invested at 4.39% beginning on that date.
That percentage yield represents the one-year U.S. Treasury Bill yield as of
September 30, 1998. While Office of Thrift Supervision regulations call for the
use of a yield equal to the arithmetic average of the weighted average yield
earned by Palmyra Saving on its interest-earning assets and the rates paid on
its deposits, PFSB Bancorp believes that the one-year U.S. Treasury Bill yield
is a more realistic yield on the investment of the conversion proceeds.
A pro forma after-tax return of 2.77% is used for both PFSB Bancorp and
Palmyra Saving, after giving effect to an incremental combined federal and state
income tax rate of 37.0%. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the number of shares
of common stock indicated in the footnotes to the table. Per share amounts have
been computed as if the common stock had been outstanding at October 1, 1997 or
at September 30, 1998, but without any adjustment of historical or pro forma
stockholders' equity per share to reflect the earnings on the estimated net
proceeds.
PFSB Bancorp and Palmyra Saving did not figure into their calculations
the following four items:
1. the shares to be reserved for issuance under the stock option
plan, which is expected to be voted upon by stockholders at a
meeting to be held no earlier than six months following the
conversion;
2. withdrawals from deposit accounts to purchase common stock in the
conversion;
3. the issuance of shares from authorized but unissued shares to the
management development and recognition plan, which is expected to
be voted upon by stockholders at a meeting to be held no earlier
than six months following the conversion; or
26
<PAGE>
4. the liquidation account that Palmyra Saving will establish for
the benefit of eligible account holders and supplemental eligible
account holders. See "The Conversion--Effects of Conversion to
Stock Form on Deposits and Borrowers of Palmyra Saving--
Liquidation Account."
THE FOLLOWING PRO FORMA DATA, WHICH ARE BASED ON PALMYRA SAVING'S
RETAINED EARNINGS AT SEPTEMBER 30, 1998 AND NET INCOME FOR THE YEAR ENDED
SEPTEMBER 30, 1998, MAY NOT REPRESENT THE ACTUAL FINANCIAL EFFECTS OF THE
CONVERSION OR THE OPERATING RESULTS OF PFSB BANCORP AFTER THE CONVERSION. THE
PRO FORMA DATA RELY EXCLUSIVELY ON THE ASSUMPTIONS OUTLINED ABOVE. THE PRO FORMA
DATA DO NOT REPRESENT THE FAIR MARKET VALUE OF PFSB BANCORP'S COMMON STOCK, THE
CURRENT FAIR MARKET VALUE OF PALMYRA SAVING'S OR PFSB BANCORP'S ASSETS OR
LIABILITIES, OR THE AMOUNT OF MONEY THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
SHAREHOLDERS IF PFSB BANCORP IS LIQUIDATED.
27
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------
552,500 650,000 747,500 859,625
SHARES SHARES SOLD SHARES SOLD AT SHARES SOLD AT
SOLD AT $10.00 AT $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (1)
--------------- ---------------- --------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.............................................. $ 5,525 $ 6,500 $ 7,475 $ 8,596
Less: estimated underwriting commission and
other offering expenses.................................... (535) (535) (535) (535)
-------- -------- -------- --------
Estimated net proceeds...................................... 4,990 5,965 6,940 8,061
Less: Common stock acquired by employee
stock ownership plan................................... (442) (520) (598) (688)
Common stock to be acquired by management
development and recognition plan..................... (221) (260) (299) (344)
-------- -------- -------- --------
Net investable proceeds.................................... $ 4,327 $ 5,185 $ 6,043 $ 7,029
======== ======== ======== ========
Consolidated net income:
Historical................................................. $ 276 $ 276 $ 276 $ 276
Pro forma income on net proceeds(2)........................ 120 143 167 194
Pro forma employee stock ownership plan adjustments(3)..... (28) (33) (38) (43)
Pro forma management development and recognition
plan adjustments(4)....................................... (28) (33) (38) (43)
-------- -------- -------- --------
Pro forma net income..................................... $ 340 $ 353 $ 367 $ 384
======== ======== ======== ========
Consolidated net income per share(5)(6):
Historical................................................. $ 0.54 $ 0.46 $ 0.40 $ 0.35
Pro forma income on net proceeds........................... 0.24 0.24 0.24 0.24
Pro forma employee stock ownership plan adjustments(3)..... (0.05) (0.05) (0.05) (0.05)
Pro forma management development and recognition
plan adjustments(4)....................................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net income per share........................... $ 0.68 $ 0.60 $ 0.54 $ 0.49
======== ======== ======== ========
Consolidated stockholders' equity (book value):
Historical................................................. $ 6,048 $ 6,048 $ 6,048 $ 6,048
Estimated net proceeds..................................... 4,990 5,965 6,940 8,062
Less: Common stock acquired by employee stock
ownership plan......................................... (442) (520) (598) (688)
Less: Common stock to be acquired by management
development and recognition plan(4)................. (221) (260) (299) (344)
-------- -------- -------- --------
Pro forma stockholders' equity(7)..................... $ 10,375 $ 11,233 $ 12,091 $ 13,078
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6)........................................... $ 10.95 $ 9.30 $ 8.09 $ 7.04
Estimated net proceeds.................................. 9.03 9.18 9.28 9.38
Less: Common stock acquired by employee stock
ownership plan......................................... (0.80) (0.80) (0.80) (0.80)
Less: Common stock to be acquired by management
development and recognition plan(4).................. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9).............. $ 18.78 $ 17.28 $ 16.17 $ 15.22
======== ======== ======== ========
Purchase price as a percentage of pro forma
stockholders' equity per share............................. 53.25% 57.87% 61.84% 65.70%
======== ======== ======== ========
Purchase price as a multiple of pro forma
net income per share....................................... 14.71x 16.67x 18.52x 20.41x
======== ======== ======== ========
</TABLE>
(footnotes on following page)
28
<PAGE>
______________________________
(1) Gives effect to the sale of an additional 112,125 shares in the conversion,
which may be issued to cover an increase in the pro forma market value of
PFSB Bancorp and Palmyra Saving as converted, without the resolicitation of
subscribers or any right of cancellation. The issuance of additional shares
will be conditioned on a determination by RP Financial that the issuance is
compatible with its determination of the estimated pro forma market value of
PFSB Bancorp and Palmyra Saving as converted. See "The Conversion--Stock
Pricing and Number of Shares to Be Issued."
(2) No effect has been given to withdrawals from savings accounts to purchase
common stock in the conversion. Since funds on deposit at Palmyra Saving
may be withdrawn to purchase shares of common stock (which will reduce
deposits by the amount of the purchases), the net amount of funds available
to Palmyra Saving for investment following receipt of the net proceeds of
the conversion will be reduced by the amount of the withdrawals.
(3) The funds used to acquire these shares will be borrowed by the employee
stock ownership plan, at an interest rate equal to the prime rate as
published in The Wall Street Journal on the closing date of the conversion,
which rate is currently 7.75%, from the net proceeds from the conversion
retained by PFSB Bancorp. The amount of this borrowing has been reflected
as a reduction from gross proceeds to determine estimated net investable
proceeds. Palmyra Saving intends to make contributions to the employee
stock ownership plan in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. Palmyra Saving's payment of the employee stock ownership
plan debt is based upon equal installments of principal over a 10-year
period, assuming a combined federal and state income tax rate of 37.0%.
Interest income earned by PFSB Bancorp on the employee stock ownership plan
debt offsets the interest paid by Palmyra Saving on the employee stock
ownership plan loan. No reinvestment is assumed on proceeds contributed to
fund the employee stock ownership plan. Applicable accounting practices
require that compensation expense for the employee stock ownership plan be
based upon shares committed to be released and that unallocated shares be
excluded from earnings per share computations. The valuation of shares
committed to be released would be based upon the average market value of the
shares during the year, which, for purposes of this calculation, was assumed
to be equal to the $10.00 per share purchase price. See "Management of
Palmyra Saving--Benefits--Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the management development and
recognition plan, it is assumed that the required stockholder approval has
been received, that the shares were acquired at the beginning of the period
presented in open market purchases at the $10.00 per share purchase price,
that 20% of the amount contributed was an amortized expense during the
period, and that the combined federal and state income tax rate is 37.0%.
The issuance of authorized but unissued shares of the common stock instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.85% and pro forma net income per share would
be $0.65, $0.57, $0.52 and $0.47 at the minimum, midpoint, maximum and 15%
above the maximum of the estimated valuation range for the year ended
September 30, 1998, respectively, and pro forma stockholders' equity per
share would be $18.44, $17.00, $15.94 and $15.10 at the minimum, midpoint,
maximum and 15% above the maximum of the estimated valuation range at
September 30, 1998, respectively. Shares issued under the management
development and recognition plan vest 20% per year and for purposes of this
table compensation expense is recognized on a straight-line basis over each
vesting period. If the fair market value per share is greater than $10.00
per share on the date shares are awarded, total management development and
recognition plan expense would increase. The total estimated expense was
multiplied by 20% (the total percent of shares for which expense is
recognized in the first year) resulting in pre-tax expense of $44,200,
$52,000, $59,800 and $68,770 at the minimum, midpoint, maximum and 15% above
the maximum of the estimated valuation range for the year ended September
30, 1998, respectively. No effect has been given to the shares reserved for
issuance under the proposed stock option plan.
(5) Per share amounts are based upon shares outstanding of 512,720, 603,200,
693,680 and 797,732 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range for the year ended September 30,
1998, respectively, which includes the shares of common stock sold in the
conversion less the number of shares assumed to be held by the employee
stock ownership plan not committed to be released within the first year
following the conversion.
(6) Historical per share amounts have been computed as if the shares of common
stock expected to be issued in the conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
conversion, the additional employee stock ownership plan expense or the
proposed management development and recognition plan expense, as described
above.
(7) "Book value" represents the difference between the stated amounts of Palmyra
Saving's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of eligible
account holders and supplemental eligible account holders in the conversion,
or the federal income tax consequences of the restoration to income of
Palmyra Saving's special bad debt reserves for income tax purposes which
would be required in the unlikely event of liquidation. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers
of Palmyra Saving" and "Taxation." The amounts shown for book value do not
represent fair market values or amounts distributable to stockholders in the
unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 552,500, 650,000,
747,500 and 859,625 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range, respectively.
(9) Does not represent possible future price appreciation or depreciation of the
common stock.
29
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the approximate
purchases of common stock by each director and executive officer of Palmyra
Saving, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to these intended
purchases and, therefore, actual purchases could be more or less than indicated
below. Directors and officers of Palmyra Saving and their associates may not
purchase in excess of 35% of the shares sold in the conversion. For purposes of
the following table, it has been assumed that sufficient shares will be
available to satisfy subscriptions in all categories. Directors, officers,
their associates and employees will pay the same price as all other subscribers
for the shares for which they subscribe.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
ANTICIPATED SHARES AT SHARES AT
ANTICIPATED DOLLAR AMOUNT MINIMUM MAXIMUM
NAME AND NUMBER OF SHARES TO BE OF ESTIMATED OF ESTIMATED
POSITION TO BE PURCHASED PURCHASED VALUATION RANGE VALUATION RANGE
- -------------- ------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
L. Edward Schaeffer....................... 5,000 $ 50,000 0.9% 0.7%
Chairman of the Board
Eldon R. Mette............................ 4,000 40,000 0.7 0.5
President, Chief Executive
Officer and Director
Glenn J. Maddox........................... 5,000 50,000 0.9 0.7
Vice Chairman of the Board
Albert E. Davis........................... 10,000 100,000 1.8 1.3
Director
Robert M. Dearing......................... 2,700 27,000 0.5 0.4
Director
James D. Lovegreen........................ 4,000 40,000 0.7 0.5
Director
Donald L. Slavin.......................... 8,000 80,000 1.5 1.1
Director
Ronald L. Nelson.......................... 3,000 30,000 0.5 0.4
Vice President, Treasurer ------- -------- --- ---
and Secretary
Total............................... 41,700 $417,000 7.5% 5.6%
======= ======== === ===
</TABLE>
________________________________
(1) Does not include any shares to be awarded under the employee stock ownership
plan and management development and recognition plan or options to acquire
shares under the stock option plan.
30
<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Palmyra Saving and
Building Association, F.A. for the fiscal years ended September 30, 1998 and
1997 have been audited by Moore, Horton & Carlson, P.C., independent auditors.
The audit report is included in the back of this prospectus. These statements
should be read in conjunction with the Consolidated Financial Statements and
related Notes included in the back of this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
INTEREST INCOME:
Mortgage loans............................................................... $3,048,539 $2,927,976
Consumer and other loans..................................................... 34,982 36,057
Investment securities........................................................ 809,753 877,944
Mortgage-backed securities................................................... 193,808 219,819
Interest-bearing deposits.................................................... 76,791 70,977
---------- ----------
Total Interest Income..................................................... 4,163,873 4,132,773
INTEREST EXPENSE:
Deposits -- Note G........................................................... 2,669,858 2,619,925
Advances from FHLB........................................................... 15,337 5,853
---------- ----------
Total Interest Expense.................................................... 2,685,195 2,625,778
---------- ----------
Net Interest Income....................................................... 1,478,678 1,506,995
Provision for Loan Losses -- Note D............................................. 25,000 20,813
---------- ----------
Net Interest Income after provision for loan losses.......................... 1,453,678 1,486,182
NONINTEREST INCOME (LOSS):
Service charges and other fees............................................... 65,149 60,106
Loss on sale of investments.................................................. (2,056) (14,015)
Gain (loss) on disposal of premises and equipment............................ 1,205 (731)
Other........................................................................ 10,534 17,419
---------- ----------
Total Noninterest Income.................................................. 74,832 62,779
NONINTEREST EXPENSE:
Employee salaries and benefits............................................... 560,020 524,262
Occupancy costs.............................................................. 134,977 125,670
Advertising.................................................................. 36,611 29,737
Data processing.............................................................. 107,463 78,715
Federal insurance premiums................................................... 32,249 47,956
Other........................................................................ 232,636 228,727
---------- ----------
Total Noninterest Expense................................................. 1,103,956 1,035,067
---------- ----------
INCOME BEFORE INCOME TAXES...................................................... 424,554 513,894
Income taxes -- Note I.......................................................... 149,000 182,000
---------- ----------
NET INCOME...................................................................... $ 275,554 $ 331,894
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of Palmyra Saving. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes in the back of this prospectus, as well as the other
sections of this prospectus.
OPERATING STRATEGY
Palmyra Saving's business consists principally of attracting retail
deposits from the general public and using these funds to originate and purchase
mortgage loans secured by one- to four-family residences generally located in
Missouri. To a lesser extent, Palmyra Saving also originates and purchases
multi-family loans and originates commercial real estate loans, land loans,
residential construction loans and loans secured by savings accounts. Palmyra
Saving funds its assets primarily with retail deposits, although it occasionally
uses advances from the Federal Home Loan Bank of Des Moines as a supplemental
source of funds.
Palmyra Saving's business strategy is to operate as a traditional,
community-oriented savings association dedicated to financing home ownership and
providing quality customer service. Historically, Palmyra Saving has emphasized
the origination and purchase of loans secured by real estate and has retained
for its portfolio all of the loans that it has originated. To supplement loan
demand in its primary market area, Palmyra Saving purchases participation
interests in one- to four-family mortgage loans, primarily non-owner-occupied
duplex properties, multi-family loans and commercial real estate loans generally
secured by properties located in Missouri. Historically, virtually all of the
mortgage loans originated by Palmyra Saving have been three- and five-year
balloon loans based on an interest rate established by Palmyra Saving and that
is fixed during the balloon term. Palmyra Saving funds its loan originations
primarily with deposits, although advances from the Federal Home Loan Bank of
Des Moines are used as a supplemental source of funds. Palmyra Saving does not
intend to change its business materially after the conversion. However, in order
to offer more product variety to its customers, Palmyra Saving intends to
explore offering traditional adjustable rate mortgage loans with an interest
rate tied to a nationally recognized index such as the U.S. Treasury Bill rate,
fixed-rate residential mortgage loans and, to a limited extent, direct mobile
home loans without the security of the underlying property. Implementation of
these planned new loan programs will be gradual so that personnel can be trained
adequately and the necessary delivery systems can be implemented.
The conversion will increase the consolidated capital of PFSB Bancorp by
the amount of the net proceeds. Funds withdrawn from deposit accounts will
decrease interest-bearing liabilities, and new funds used to purchase shares
will increase interest-earning assets. While PFSB Bancorp expects these changes
to increase its net interest income, PFSB Bancorp also expects that the adoption
of the management development and recognition plan and the additional costs of
operating as a public company will increase its noninterest expenses. For
additional information regarding the effects of this offering, see "Risk
Factors--Implementation of Benefit Plan Will Increase Future Compensation
Expense and May Lower Palmyra Saving's Net Income" and "Pro Forma Data."
32
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
At September 30, 1998, total assets were $59.5 million compared to $58.4
million at September 30, 1997. This increase is primarily the result of a $2.1
million increase in loans, which was offset by declines in investment securities
and mortgage-backed securities. The increase in loans primarily reflected
residential mortgage loan refinancing in the current low interest rate
environment, rather than new loan originations. The current low interest rate
environment also contributed to the decline in investment securities and
mortgage-backed securities as a result of prepayments.
Premises and equipment increased from $491,000 at September 30, 1997 to
$562,000 at September 30, 1998 as a result of a decrease in building and
improvements from $581,000 to $569,000, offset by an increase in furniture and
equipment from $354,000 to $380,000. Building and improvements decreased from
$581,000 to $569,000 due to the write-off of a remodeling study of the Kahoka
branch office calling for Palmyra Saving to occupy the entire building. Rather
than occupying the entire building, Palmyra Saving sold and leasebacked the
office in December 1998. It will lease the office until a new branch building is
constructed. See "Recent Developments" and "Business of Palmyra Saving--
Properties" for further information. Furniture and equipment increased due to
the purchase of new computer systems for each office.
At September 30, 1998, deposits were $52.7 million compared to $51.4
million at September 30, 1997. Management attributes the increase, which
occurred primarily in certificates of deposit, to normal growth.
Total equity increased from $5.7 million at September 30, 1997 to $6.0
million at September 30, 1998 as a result of retained earnings and a prior
period adjustment of $87,000 for deferred income taxes relating to the allowance
for loan losses. See Note O to the Notes to Consolidated Financial Statements
in the back of this prospectus for further discussion of this prior period
adjustment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME. Net income was $276,000 in 1998 compared to $332,000 in 1997.
Lower net interest income after provision for loan losses and higher noninterest
expense in 1998 compared to 1997 were the primary reasons for the decline in net
income.
NET INTEREST INCOME. Net interest income was unchanged at $1.5 million for
both years. Total interest income increased from $4.1 million in 1997 to $4.2
million in 1998 primarily as a result of a higher average balance of loans,
which offset lower average balances of investments and mortgage-backed
securities caused by repayments and maturities. Total interest expense
increased from $2.6 million in 1997 to $2.7 million in 1998 primarily as a
result of higher average deposit balances. Interest expense on Federal Home
Loan Bank of Des Moines advances was $15,000 in 1998 compared to $6,000 in 1997,
primarily as a result of higher average rates paid on advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. The provision for loan
losses was $25,000 in 1998 compared to $21,000 in 1997. The provision was
increased primarily because of the increased risk of loss associated with the
growth in the loan portfolio. There were no charge-offs or recoveries in either
1998 or 1997. The allowance for loan losses was $280,000 at September 30, 1998
and $255,000 at September 30, 1997. Management deemed the allowance as adequate
at both dates. Although management uses the best information available, future
adjustments to the allowance may be necessary due to changes in economic,
operating, regulatory and other conditions that may be beyond Palmyra Saving's
control. While Palmyra Saving maintains its allowance for loan losses at a
level which it considers to be adequate to provide for estimated losses, there
can be no assurance that further additions will not be made to the allowance for
loan
33
<PAGE>
losses and that actual losses will not exceed the estimated amounts. See
"Business of Palmyra Saving--Lending Activities--Allowance for Loan Losses" for
further information.
NONINTEREST INCOME. Noninterest income increased from $63,000 in 1997 to
$75,000 in 1998. Service charges and other fees increased primarily as a result
of higher numbers of loans outstanding and deposit accounts. Other noninterest
income, which decreased from $17,000 in 1997 to $11,000 in 1998, consists
primarily of miscellaneous operating income, commissions on credit life
insurance policies that Palmyra Saving's service corporation sells to Palmyra
Saving's borrowers, and safe deposit box rental fees. Other noninterest income
decreased primarily as a result of the absence of $5,000 of dividend income in
1998 from Palmyra Saving's former data processing provider. The data processing
provider, a business cooperative of which Palmyra Saving was a member, was sold
to another company in 1997.
NONINTEREST EXPENSE. Noninterest expense increased from $1.0 million in
1997 to $1.1 million in 1998. Employee salaries and benefits increased as a
result of a part-time employee converting to full-time status and the hiring of
three new employees. Occupancy costs increased primarily as a result of higher
depreciation expense associated with new computer equipment. Advertising expense
increased due to increased advertising to promote savings growth. Data
processing expenses increased as a result of the purchase of teller station
software that is charged based on the number of teller stations rather than as a
flat fee. Federal deposit insurance premiums decreased due to the lower premium
rates implemented after the recapitalization of the Savings Association
Insurance Fund in 1996. Other noninterest expenses consists primarily of fees
paid to directors, Office of Thrift Supervision assessment fees, professional
fees, stationary and printing expenses, insurance costs, telephone and postage
and other miscellaneous items. The increase in other noninterest expenses
between 1998 and 1997 is primarily the result of normal inflationary increases.
In addition, other noninterest expenses in 1997 included a $19,000 expense
associated with obsolete architectural plans for a new Kahoka branch office
building. These plans were several years old and Palmyra Saving decided in 1997
that these plans would never be used. This expense was absent in 1998.
INCOME TAXES. Income taxes decreased between 1997 and 1998 as a result of
lower income before income taxes in 1998.
34
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average yields and costs.
The yields and costs for the periods indicated are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
periods presented. Average balances were derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
balances causes any material differences in the information presented.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST
------------ ----------- ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1).................... $39,233 $3,084 7.86% $37,525 $2,964 7.90%
Investment securities....................... 12,544 780 6.22 13,277 844 6.36
Mortgage-backed securities.................. 2,804 194 6.91 3,053 220 7.20
FHLB stock.................................. 431 29 6.82 480 34 7.00
Interest-bearing deposits................... 1,495 77 5.14 1,461 71 4.86
------- ------ ------- ------
Total interest-earning assets.............. 56,507 4,164 7.37 55,796 4,133 7.41
Noninterest-earning assets.................. 2,185 1,973
------- -------
Total average assets....................... $58,692 $57,769
======= =======
INTEREST-BEARING LIABILITIES:
Savings accounts............................ $11,271 329 2.92 $11,694 342 2.93
Certificates of deposit..................... 40,844 2,341 5.73 40,007 2,278 5.69
------- ------ ------- ------
Total average deposits..................... 52,115 2,670 5.12 51,701 2,620 5.07
FHLB advances............................... 269 15 5.70 123 6 4.76
------- ------ ------- ------
Total interest-bearing liabilities......... 52,384 2,685 5.13 51,824 2,626 5.07
------ ------
Noninterest-bearing liabilities................ 366 366
------- -------
Total average liabilities.................. 52,750 52,190
Average total equity........................... 5,942 5,579
------- -------
Total liabilities and retained earnings.... $58,692 $57,769
======= =======
Net interest income............................ $1,479 $1,507
====== ======
Interest rate spread........................... 2.24% 2.34%
==== ====
Net interest margin............................ 2.62% 2.70%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 107.87% 107.66%
======= =======
</TABLE>
________________________
(1) Average loans receivable includes nonperforming loans. Interest income does
not include interest on loans 90 days or more past due.
35
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth at the date and for the periods indicated
the weighted average yields earned on Palmyra Saving's assets and the weighted
average interest rates paid on Palmyra Saving's liabilities, together with
Palmyra Saving's interest rate spread and net interest margin.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, AT SEPTEMBER 30,
--------------------------------------- ----------------
1998 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Weighted average yield earned on:
Loans receivable, net.................................. 7.86% 7.90% 7.85%
Investment securities.................................. 6.22 6.36 6.18
Mortgage-backed securities............................. 6.91 7.20 6.98
FHLB stock............................................. 6.82 7.00 6.81
Interest-earning deposits.............................. 5.14 4.86 5.18
Total interest-earning assets....................... 7.37 7.41 7.39
Weighted average rate paid on:
Savings accounts....................................... 2.92 2.93 3.05
Certificates of deposit................................ 5.73 5.69 5.56
Total average deposits.............................. 5.12 5.07 5.02
FHLB advances.......................................... 5.70 4.76 5.74
Total interest-bearing liabilities.................. 5.13 5.07 5.02
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities)................................... 2.24 2.34 2.37
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)............................... 2.62 2.70 N/A
</TABLE>
36
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of Palmyra Saving. The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume). The volume column shows the effects attributable to changes in
volume (changes in volume multiplied by prior rate). The rate/volume column
shows the effects attributable to changes in rate and volume (changes in rate
multiplied by changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,1998
COMPARED TO
YEAR ENDED SEPTEMBER 30, 1997
INCREASE (DECREASE)
DUE TO
----------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net.................................................. $(14) $135 $(1) $120
Investment securities.................................................. (18) (47) 1 (64)
Mortgage-backed securities............................................. (9) (18) 1 (26)
FHLB stock............................................................. (2) (3) -- (5)
Interest-earning deposits.............................................. 4 2 -- 6
---- ---- --- ----
Total net change in income
on interest-earning assets......................................... (39) 69 1 31
Interest-bearing liabilities:
Savings accounts....................................................... (1) (12) -- (13)
Certificates of deposits............................................... 15 48 -- 63
---- ---- --- ----
Total average deposits............................................... 14 36 -- 50
FHLB advances.......................................................... 1 7 1 9
---- ---- --- ----
Total net change in expense
on interest-bearing liabilities.................................... 15 43 1 59
---- ---- --- ----
Net change in net interest income....................................... $(54) $ 26 $-- $(28)
==== ==== === ====
</TABLE>
MARKET RISK ANALYSIS
GENERAL. Palmyra Saving's profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings. Net interest income is also affected by the
relative amounts of interest-earning assets and interest-bearing liabilities.
When interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Palmyra
Saving's profitability is also affected by the level of income and expenses.
Noninterest income includes service charges and fees and gain on sale of
investments. Noninterest expenses primarily include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums and data processing
expenses. Palmyra Saving's results of operations are also significantly affected
by general economic and competitive conditions, particularly changes in market
interest rates, government legislation and regulation and monetary and fiscal
policies.
37
<PAGE>
QUANTITATIVE ASPECTS OF MARKET RISK. Palmyra Saving does not maintain a
trading account for any class of financial instrument nor does it engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
Palmyra Saving has no foreign currency exchange rate risk or commodity price
risk. For information regarding the sensitivity to interest rate risk of Palmyra
Saving's interest-earning assets and interest-bearing liabilities, see the
tables under "Business of Palmyra Saving--Lending Activities--Maturity of Loan
Portfolio," "--Investment Activities" and "--Deposit Activities and Other
Sources of Funds--Deposit Accounts--Time Deposits by Maturities."
QUALITATIVE ASPECTS OF MARKET RISK. Palmyra Saving has sought to reduce
the exposure of its earnings to changes in market interest rates by attempting
to manage the mismatch between asset and liability maturities and interest
rates. The principal element in achieving this objective is to increase the
interest rate sensitivity of Palmyra Saving's interest-earning assets by
originating for its portfolio loans with interest rates that periodically adjust
to market conditions. Palmyra Saving relies on retail deposits as its primary
source of funds. Management believes retail deposits, compared to brokered
deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
In order to encourage institutions to reduce their interest rate risk, the
Office of Thrift Supervision adopted a rule incorporating an interest rate risk
component into the risk-based capital rules. Using data compiled by the Office
of Thrift Supervision, Palmyra Saving receives a report which measures interest
rate risk by modeling the change in net portfolio value over a variety of
interest rate scenarios. This procedure for measuring interest rate risk was
developed by the Office of Thrift Supervision to replace the "gap" analysis,
which is the difference between interest-earning assets and interest-bearing
liabilities that mature or reprice within a specific time period. Net portfolio
value is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The calculation is intended to illustrate the
change in net portfolio value that will occur upon an immediate change in
interest rates of at least 200 basis points with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
Under Office of Thrift Supervision regulations, an institution with a greater
than "normal" level of interest rate risk take a deduction from total capital
for purposes of calculating its risk-based capital. The Office of Thrift
Supervision, however, has delayed the implementation of this regulation. An
institution with a "normal" level of interest rate risk is defined as one whose
"measured interest rate risk" is less than 2.0%. Institutions with assets of
less than $300 million and a risk-based capital ratio of more than 12.0% are
exempt. Palmyra Saving is exempt because of its asset size. Based on Palmyra
Saving's regulatory capital levels at September 30, 1998, Palmyra Saving
believes that, if the proposed regulation was implemented at that date, Palmyra
Saving's level of interest rate risk would have caused it to be treated as an
institution with greater than "normal" interest rate risk.
38
<PAGE>
The following table is provided by the Office of Thrift Supervision and
sets forth the change in Palmyra Saving's net portfolio value at September 30,
1998, based on Office of Thrift Supervision assumptions, that would occur upon
an immediate change in interest rates, with no effect given to any steps that
management might take to counteract that change.
<TABLE>
<CAPTION>
NET PORTFOLIO AS % OF
NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
--------------------------------------------------------- ------------------------------------
BASIS POINT ("BP") NET PORTFOLIO CHANGE
CHANGE IN RATES $ AMOUNT $ CHANGE (1) % CHANGE VALUE RATIO (2) (BP) (3)
- ---------------- --------------------------------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $6,845 $562 9% 11.57% 112
300 6,742 459 7 11.34 90
200 6,605 322 5 11.07 62
100 6,412 129 2 10.71 26
0 6,283 -- -- 10.45 --
(100) 6,295 12 -- 10.39 (5)
(200) 6,358 75 1 10.41 (4)
(300) 6,418 135 2 10.42 (2)
(400) 6,440 158 3 10.38 (7)
</TABLE>
- ---------------
(1) Represents the increase of the estimated net portfolio value at the
indicated change in interest rates compared to the net portfolio value
assuming no change in interest rates.
(2) Calculated as the estimated net portfolio value divided by the portfolio
value of total assets.
(3) Calculated as the increase (decrease) of the net portfolio value ratio
assuming the indicated change in interest rates over the estimated net
portfolio value ratio, assuming no change in interest rates.
The following table, provided by the Office of Thrift Supervision, is based
on the calculations in the above table. It sets forth the interest rate risk
capital component that will be deducted from risk-based capital in determining
the level of risk-based capital. At September 30, 1998, the change in net
portfolio value as a percentage of portfolio value of total assets is positive
1.2%, which is less than 2.0%, indicating that Palmyra Saving has a "normal"
level of interest rate risk.
<TABLE>
<CAPTION>
AT AT AT
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1998 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
RISK MEASURES: 200 BP RATE SHOCK:
Pre-shock net portfolio value ratio:
net portfolio value as % of portfolio value of assets............. 10.45% 11.62% 12.40%
Exposure measure: post-shock net portfolio value ratio............. 10.41 11.49 11.79
Sensitivity measure: change in net portfolio value ratio........... 4bp 13bp 61bp
</TABLE>
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the
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<PAGE>
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest
rates change, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in calculating the
table.
LIQUIDITY AND CAPITAL RESOURCES
Palmyra Saving's primary sources of funds are maturities and prepayments of
investment securities, customer deposits, proceeds from principal and interest
payments on loans and Federal Home Loan Bank of Des Moines advances. While
investment securities maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows, investment securities prepayments
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
Palmyra Saving must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. Palmyra Saving generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At September 30,
1998, cash and interest-bearing deposits totaled $2.3 million, or 3.8% of total
assets, and investment securities classified as available-for-sale totaled $7.1
million. At September 30, 1998, Palmyra Saving had outstanding advances of
$500,000 under an available credit line of $16.7 million with the Federal Home
Loan Bank of Des Moines.
Office of Thrift Supervision regulations require savings institutions to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4.0% of the average daily balance of its net
withdrawals deposits and short-term borrowings. Palmyra Saving's actual
liquidity ratio at September 30, 1998 was 13.4%. See "--Comparison of Financial
Condition at September 30, 1998 and 1997" and "Business of Palmyra Saving--
Investment Activities."
Palmyra Saving's primary investing activity is the origination and purchase
of one- to four-family mortgage loans. During the years ended September 30, 1998
and 1997, Palmyra Saving originated $8.7 million and $9.4 million of these
loans, respectively, and purchased $2.7 million and $1.0 million, respectively.
At September 30, 1998, Palmyra Saving had loan commitments, including
undisbursed portions of mortgage loans, totaling $1.3 million. Palmyra Saving
anticipates that it will have sufficient funds available to meet current loan
commitments. Certificates of deposit that are scheduled to mature in less than
one year from September 30, 1998 totaled $22.3 million. Historically, Palmyra
Saving has been able to retain a significant amount of its deposits as they
mature. In addition, management of Palmyra Saving believes that it can adjust
the offering rates of certificates of deposit to retain deposits in changing
interest rate environments. In the event that a significant portion of these
deposits are not retained by Palmyra Saving, Palmyra Saving would be able to
utilize Federal Home Loan Bank of Des Moines advances to fund deposit
withdrawals, which would result in an increase in interest expense to the extent
that the average rate paid on advances exceeds the average rate paid on deposits
of similar duration.
Office of Thrift Supervision regulations require Palmyra Saving to maintain
specific amounts of regulatory capital. As of September 30, 1998, Palmyra Saving
complied with all regulatory capital requirements as of that date with tangible,
core and risk-based capital ratios of 10.1%, 10.1% and 22.3%, respectively. For
a detailed discussion of regulatory capital requirements, see "Regulation--
Federal Regulation of Savings Associations--Capital Requirements." See also
"Historical And Pro Forma Regulatory Capital Compliance."
YEAR 2000 ISSUES
Palmyra Saving is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000 issue.
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-
40
<PAGE>
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
Palmyra Saving's year 2000 committee consists of the entire Board of
Directors and Ronald L. Nelson, Palmyra Saving's Vice President and Treasurer,
who is chairman of the committee. Mr. Nelson makes a monthly progress report to
the Board of Directors. The committee has developed and is implementing a
comprehensive plan to make all information and non-information technology assets
year 2000 compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of Palmyra Saving's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. Palmyra Saving analyzed the
operation of all date-sensitive computer systems and identified in
writing all third-party vendors and service providers associated with
these systems. This phase was completed as of December 31, 1998.
3. Renovation - Review of vendor and service providers responses to
Palmyra Saving's year 2000 inquiries and development of a follow-up
plan and timeline. This phase was completed as of December 31, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. Palmyra Saving is currently in this phase of its plan.
Palmyra Saving has replaced all in-house equipment, such as teller
station equipment, with year 2000 compliant equipment. A third-party
service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant. Palmyra Saving is
relying on the results of proxy testing by its third-party service
bureau. The proxy testing, which involved five financial institutions,
not including Palmyra Saving, tested the results of transactions at
various different test dates before and after the year 2000 date
change and cover all of the applications used by Palmyra Saving. This
proxy testing was completed in November 1998. With the completion of
the proxy testing, Palmyra Saving will conduct connectivity testing
during February 1999. Connectivity testing, which is scheduled to last
approximately two to three days, involves Palmyra Saving and its
third-party service bureau each rolling forward their computer systems
to the year 2000 so that Palmyra Saving may process its own data files
under simulated year 2000 conditions using all applications. If
connectivity testing reveals that the third-party systems are not year
2000 compliant, Palmyra Saving's service bureau intends to either
transfer Palmyra Saving to other systems that are year 2000 compliant
or provide additional remedial resources. Other parties whose year
2000 compliance may effect Palmyra Saving include the Federal Home
Loan Bank of Des Moines, brokerage firms, the operator of Palmyra
Saving's automated teller machines network and Palmyra Saving's
pension plan administrator. These third parties have indicated their
compliance or intended compliance. Where it is possible to do so,
Palmyra Saving has scheduled testing with these third parties. Where
testing is not possible, Palmyra Saving will rely on certifications
from vendors and service providers.
5. Implementation - Replacement or repair of non-compliant technology. As
Palmyra Saving progresses through the validation phase, Palmyra Saving
expects to determine necessary remedial actions and provide for their
implementation. Palmyra Saving has already implemented a new year 2000
compliant computerized teller system and has verified the year 2000
compliance of its computer hardware and other equipment containing
embedded microprocessors. Palmyra Saving's plan provides for year 2000
readiness to be completed by June 30, 1999.
41
<PAGE>
Substantially all of Palmyra Saving's multi-family and commercial loans are
participation interests in loans originated by other financial institutions.
Palmyra Saving has contacted, in writing, each financial institution from which
it purchases loan interests asking them to report to it regarding their year
2000 readiness plan and status. The institutions have all responded and
indicated intended year 2000 compliance. Palmyra Saving's consideration of year
2000 compliance of potential borrowers is generally limited to these activities.
Palmyra Saving believes that year 2000 compliance issues do not affect
individuals, who represent virtually all of its borrowers, to nearly the same
degree as commercial borrowers.
Palmyra Saving estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors that
were not year 2000 compliant to be approximately $82,000, of which approximately
$66,000 has been incurred as of September 30, 1998. System maintenance or
modification costs are charged to expense as incurred, while the cost of new
hardware, software or other equipment is capitalized and amortized over their
estimated useful lives. Palmyra Saving does not separately track the internal
costs and time that its own employees spend on year 2000 issues, which are
principally payroll costs.
Because Palmyra Saving depends substantially on its computer systems and
those of third parties, the failure of these systems to be year 2000 compliant
could cause substantial disruption of Palmyra Saving's business and could have a
material adverse financial impact on Palmyra Saving. Failure to resolve year
2000 issues presents the following risks to Palmyra Saving, which it believes
reflects its most reasonably likely worst-case scenario:
1. Palmyra Saving could lose customers to other financial institutions,
resulting in a loss of revenue, if Palmyra Saving's third-party service bureau
is unable to properly process customer transactions;
2. Governmental agencies, such as the Federal Home Loan Bank of Des
Moines, and correspondent institutions could fail to provide funds to Palmyra
Saving, which could materially impair Palmyra Saving's liquidity and affect
Palmyra Saving's ability to fund loans and deposit withdrawals;
3. Concern on the part of depositors that year 2000 issues could impair
access to their deposit account balances could result in Palmyra Saving
experiencing deposit outflows prior to December 31, 1999; and
4. Palmyra Saving could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed.
Management believes that it is impossible to estimate the potential lost
revenue due to the year 2000 issue, as the extent and longevity of any potential
problem cannot be predicted. Because substantially all of Palmyra Saving's loan
portfolio consists of loans to individuals rather than commercial enterprises,
management believes that year 2000 issues will not impair the ability of Palmyra
Saving's borrowers to repay their debt.
There can be no assurances that Palmyra Saving's year 2000 plan will
effectively address the year 2000 issue, that Palmyra Saving's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of Palmyra Saving or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse effect on
Palmyra Saving's business, financial condition or results of operations.
Palmyra Saving has a business resumption contingency plan for year 2000
compliance. If there is a computer systems failure in less than all of its
branch offices, all data processing would be transferred to and performed at the
unaffected office. If all computer systems fail, Palmyra Saving would resort to
manual processing of transactions until the computer systems resume operation.
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<PAGE>
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards for stock-based employee
compensation plans. This statement encourages all entities to adopt a new method
of accounting to measure compensation cost of all employee stock compensation
plans based on the estimated fair value of the award at the date it is granted.
Companies are, however, allowed to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting method are required
to disclose in a footnote to the financial statements pro forma net income and,
if presented, earnings per share, as if this statement had been adopted. The
accounting requirements of this statement are effective for transactions entered
into in fiscal years that begin after December 15, 1995; however, companies are
required to disclose information for awards granted in their first fiscal year
beginning after December 15, 1994. Management expects to use the financial
statement footnote disclosure option after the conversion and the adoption of
stock based benefit plans.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES. Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application is
not permitted.
This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. The
standards are based on consistent application of a financial-components approach
that focuses on a control period. Under the approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Adoption of this statement on January 1, 1997 did not have a material impact on
Palmyra Saving's financial position or results of operations.
EARNINGS PER SHARE. Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," issued in February 1997, establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share and requires the dual presentation of basic and diluted earnings per
share on the face of the income statement. This statement is effective for
financial statements issued for periods after December 15, 1997 including
interim periods; earlier applications are not permitted. This statement requires
restatement of all prior period earnings per share data presented.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. Statement of Financial
Accounting Standards No. 129, "Disclosure of Information About Capital
Structure," establishes standards for disclosing information about an entity's
capital structure and applies to all entities. This statement continues the
previous requirements to disclose certain information about an entity's capital
structure found in Accounting Principles Board Opinions No. 10, "Omnibus Opinion
- - 1966," and No. 15, "Earnings Per Share," and Statement of Financial Accounting
Standards No. 47, "Disclosure of Long-Term Obligations," for entities that were
required to follow those standards. Statement of Financial Accounting Standards
No. 129 is effective for financial statements for periods ending after December
15, 1997. Statement of Financial Accounting Standards No. 129 contains no change
in disclosure requirements for entities that were previously required to follow
the requirements of APB Opinion Nos. 10 and 15 and Statement of Financial
Accounting Standards No. 47.
COMPREHENSIVE INCOME. Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," issued in July 1997, establishes standards for
reporting and presenting of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is presented with the same prominence as other
43
<PAGE>
financial statements. The statement requires that companies classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. The statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comprehensive purposes is required.
DISCLOSURE ABOUT SEGMENTS. Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information,"
issued in June 1997, establishes standards for disclosure about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The statement
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." The statement becomes
effective for Palmyra Saving's fiscal year ending September 30, 1999, and
requires that comparative information from earlier years be restated to conform
to its requirements.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," issued in February 1998,
standardizes disclosure requirements for pensions and other postretirement
benefits and requires additional disclosure on changes in benefit obligations
and fair values of plan assets in order to facilitate financial analysis. The
statement is effective for fiscal years beginning after December 15, 1997, with
earlier application encouraged. Its adoption will have no impact on Palmyra
Saving's results of operations and financial condition as this statement relates
to disclosure requirements. Palmyra Saving adopted Statement of Financial
Accounting Standards No. 132 on October 1, 1998, and its adoption did not
significantly affect Palmyra Saving's financial reporting.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998, standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. The Statement requires entities to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value, gains and losses, of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reasons for holding it. If certain conditions
are met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair value, cash flows or foreign currencies. See Note A
of the Notes to Consolidated Financial Statements for further information. The
Statement is effective for financial statements issued for periods beginning
after June 15, 1999. Currently, Palmyra Saving is evaluating the effects of the
statement.
Accounting for Mortgage-Backed Securities Retained After the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," issued in October 1998, amends Statement of
Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities," and Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," for years
beginning after December 15, 1998. Currently, neither PFSB Bancorp nor Palmyra
Saving conduct any mortgage banking activities.
EFFECT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of Palmyra Saving's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
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<PAGE>
BUSINESS OF PFSB BANCORP
GENERAL
PFSB Bancorp was organized as a Missouri business corporation at the
direction of Palmyra Saving in November 1998 to become the Holding Company for
Palmyra Saving upon completion of the conversion. As a result of the conversion,
Palmyra Saving will be a wholly owned subsidiary of PFSB Bancorp and all of the
issued and outstanding capital stock of Palmyra Saving will be owned by PFSB
Bancorp.
BUSINESS
Before the completion of the conversion, PFSB Bancorp will not engage in
any significant activities other than of an organizational nature. Upon
completion of the conversion, PFSB Bancorp's sole business activity will be the
ownership of the outstanding capital stock of Palmyra Saving. In the future,
PFSB Bancorp may acquire or organize other operating subsidiaries, although
there are no current plans, arrangements, agreements or understandings, written
or oral, to do so.
Initially, PFSB Bancorp will neither own nor lease any property but will
instead use the premises, equipment and furniture of Palmyra Saving with the
payment of appropriate rental fees, as required by applicable law and
regulations.
Since PFSB Bancorp will only hold the outstanding capital stock of Palmyra
Saving after the conversion, the competitive conditions applicable to PFSB
Bancorp will be the same as those confronting Palmyra Saving. See "Business of
Palmyra Saving--Competition."
BUSINESS OF PALMYRA SAVING
GENERAL
Palmyra Saving was founded in 1887 as a state-chartered mutual savings
association and converted to a federal mutual savings association charter
effective June 1, 1995. Palmyra Saving is regulated by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. Palmyra Saving's
deposits have been federally insured since 1938 and are currently insured by the
Federal Deposit Insurance Corporation under the Savings Association Insurance
Fund. Palmyra Saving has been a member of the Federal Home Loan Bank System
since 1937.
Palmyra Saving operates as a traditional savings association, specializing
in single-family residential mortgage lending and savings deposits. Palmyra
Saving's business consists primarily of attracting retail deposits from the
general public and using those funds to originate and purchase real estate
loans. Palmyra Saving holds its loans for long-term investment purposes. See "--
Lending Activities."
As discussed below under "--Market Area" Palmyra Saving primarily operates
in a small, low-growth market area, which significantly limits its ability to
grow its primary business of making residential mortgage loans and attracting
savings deposits. Consequently, Palmyra Saving's core earnings from lending,
investment and deposit activities is below that of its peers. See "Risk Factors-
- -Palmyra Saving's Business Depends Heavily on Economic Condition of its Primary
Market Area and Weak Market Area Demographics Has Hurt Core Earnings and Limits
Growth Prospects" for further discussion. With the capital raised in this stock
offering, Palmyra Saving believes that it will be able to offer new competitive
lending products to residents of its primary market area. After the conversion,
Palmyra Saving plans to implement a program for offering longer term fixed-rate
mortgage loans and traditional adjustable rate mortgage loans with interest
rates tied to a nationally recognized index such as the U.S.
45
<PAGE>
Treasury Bill rate. To a limited extent, Palmyra Saving also intends to begin
engaging in direct mobile home lending without the security of the underlying
real estate. See "--Lending Activities" for a further discussion.
MARKET AREA
Palmyra Saving conducts business from its main office in Palmyra (Marion
County) and two branch offices located in Canton (Lewis County) and Kahoka
(Clark County). Substantially all of Palmyra Saving's depositors live in Lewis,
Clark and Marion Counties and most of Palmyra Saving's loans are secured by
properties located in these counties. Lewis, Clark and Marion Counties are rural
counties that historically have had higher unemployment and lower income than
the rest of Missouri and the U.S. Service industries represent the largest group
of employers in Lewis and Marion Counties, while farm-related businesses were
the largest employers in Clark County. Manufacturing employment is most
significant in Marion County. Industries located in the region include
chemicals, automobile parts, electric utilities, and state and local government.
Palmyra Saving focuses on serving customers in the rural northeastern
Missouri counties of Marion, Lewis and Clark, which currently have an aggregate
population of approximately 45,000 distributed among approximately 18,000
households. The average unemployment rate for these three counties was
approximately 5.1% in July 1998, which exceeded both the Missouri rate of 4.4%
and the U.S. rate of 4.7%. The average median household income for the three
counties was approximately $31,000, which is less than the Missouri average of
approximately $36,100 and the U.S. average of approximately $38,100.
Furthermore, the average per capita income for the three counties was
approximately $14,000, which is also less than the Missouri average of
approximately $17,300 and the U.S. average of approximately $18,400.
COMPETITION
Palmyra Saving faces intense competition in its primary market area for the
attraction of deposits and in the origination of loans. Its most direct
competition for deposits has historically come from the several commercial banks
operating in Palmyra Saving's primary market area and, to a lesser extent, from
other financial institutions, such as brokerage firms and insurance companies.
Particularly in times of high interest rates, Palmyra Saving has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. Palmyra
Saving's competition for loans comes primarily from the commercial banks
operating in its primary market area. Competition for deposits and the
origination of loans may limit Palmyra Saving's growth in the future. See "Risk
Factors--Competition Has Hurt Palmyra Saving's Net Interest Income."
LENDING ACTIVITIES
GENERAL. At September 30, 1998, Palmyra Saving's net loans receivable
totaled $40.5 million, or 68.1% of total assets. Palmyra Saving has concentrated
its lending activities on one- to four-family mortgage loans, with these loans
amounting to 88.9% of loans at September 30, 1998. Palmyra Saving also
originates multi-family, commercial real estate, land and residential
construction loans, as well as loans secured by savings accounts. In addition,
Palmyra Saving purchases participation interests in residential mortgage loans
that are primarily secured by non-owner-occupied duplex properties, multi-family
and commercial real estate loans. Purchased loan interests amounted to $8.6
million, or 21.2% of net loans, at September 30, 1998. A substantial portion of
Palmyra Saving's mortgage loan portfolio is secured by real estate located in
Missouri.
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LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of Palmyra Saving's loan portfolio at the dates indicated. Palmyra Saving had no
concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------
1998 1997
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............................................ $36,801 88.91% $34,580 87.42%
Multi-family................................................... 806 1.95 958 2.42
Commercial..................................................... 2,073 5.01 1,834 4.64
Construction................................................... 876 2.12 1,452 3.67
Land........................................................... 420 1.01 290 0.74
-------- -------- -------- --------
Total mortgage loans........................................ 40,976 99.00 39,114 98.89
Consumer loans:
Education loans................................................ 98 0.24 124 0.31
Savings account loans.......................................... 305 0.74 304 0.77
Other.......................................................... 10 0.02 13 0.03
-------- -------- -------- --------
Total consumer loans........................................ 413 1.00 441 1.11
-------- -------- -------- --------
Total loans, gross.......................................... 41,389 100.00% 39,555 100.00%
======== ========
Less:
Undisbursed loan funds......................................... 592 899
Allowance for loan losses...................................... 280 255
Deferred loan fees............................................. 4 7
-------- --------
Loan receivable, net........................................ $40,513 $38,394
======== ========
</TABLE>
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. Palmyra Saving's primary lending
activity is the origination of loans secured by one- to four-family residences
located in its market area. Palmyra Saving also purchases participation
interests in one- to four-family mortgage loans that are primarily secured by
non-owner-occupied duplex properties located in other areas of Missouri. At
September 30, 1998, $36.8 million, or 88.9%, of Palmyra Saving's total loans
consisted of one- to four-family loans, of which $6.9 million were purchased
loans. All one- to four-family mortgage loans are held in Palmyra Saving's
portfolio for long-term investment.
Palmyra Saving's residential mortgage loans are structured as either
three- or five-year balloon loans with terms up to 30 years, or 20 years for
non-owner occupied properties. The interest rate, fixed for the balloon term, is
established by Palmyra Saving after an assessment of rates offered by
competitors. The borrower is notified in writing 30 days before the end of the
balloon term of the new interest rate that will be effective at the maturity of
the balloon term. If the borrower accepts the new rate, a modification agreement
is executed for another balloon term with an amortization schedule equal to the
original amortization term less the prior balloon term(s). Palmyra Saving's
residential mortgage loans do not have any annual interest rate adjustment
limits, but have a lifetime interest rate adjustment limit of 6%. Palmyra Saving
charges a prepayment penalty of 2% of the outstanding principal balance if a
loan that has been outstanding five years or less is paid off before maturity.
Missouri law prohibits Palmyra Saving from charging a prepayment penalty on a
loan that has been outstanding for more than five years. Palmyra Saving's
residential mortgage loans are generally underwritten, but not documented,
according to secondary market guidelines.
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To a limited extent, Palmyra Saving originates mortgage loans secured
by non-owner-occupied residential properties. Most of these loans are secured by
second residences located on or near a recreational lake in southern Clark
County, Missouri, which is located approximately 12 miles northwest of Canton,
Missouri. These loans are made on the same general terms as loans secured by
owner-occupied properties, except that loan-to-value ratios are limited to up to
65% and the terms are limited to up to 20 years.
The retention of balloon loans in Palmyra Saving's loan portfolio,
which through the use of modification agreements function like adjustable rate
mortgage loans, helps reduce Palmyra Saving's exposure to changes in interest
rates. There are, however, unquantifiable credit risks resulting from the
potential of increased costs due to changed rates to be paid by the borrower. It
is possible that during periods of rising interest rates the risk of default on
adjustable rate mortgage loans may increase as a result of repricing and the
increased payments required by the borrower. In addition, although adjustable
rate mortgage loans allow Palmyra Saving to increase the sensitivity of its
asset base to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations Palmyra Saving has no assurance that yields on
adjustable rate mortgage loans will be sufficient to offset increases in Palmyra
Saving's cost of funds. Palmyra Saving believes these risks, which have not had
a material adverse effect on Palmyra Saving to date, generally are less than the
risks associated with holding fixed-rate loans in portfolio during a rising
interest rate environment.
Palmyra Saving generally requires an acceptable attorney's opinion on
the status of its lien on all loans where real estate is the primary source of
security. Palmyra Saving also requires that fire and casualty insurance and, if
appropriate, flood insurance be maintained in an amount at least equal to the
outstanding loan balance.
Palmyra Saving's one- to four-family residential mortgage loans
typically do not exceed 80% of the appraised value of the security property.
According to underwriting guidelines adopted by Palmyra Saving's Board of
Directors, Palmyra Saving can lend up to 95% of the appraised value of the
property securing a one- to four-family residential loan. Generally, Palmyra
Saving self insures the portion of the principal amount between 80% and 90% of
the appraised value of the security property and requires private mortgage
insurance on the portion of the principal amount that exceeds 90% of the
appraised value of the security property. An independent certified appraiser
appraises all non-owner-occupied properties and properties located outside of
Palmyra Saving's primary market area. Otherwise appraisals are performed by
either Eldon R. Mette, Palmyra Saving's President and Chief Executive Officer,
or L. Edward Schaeffer, Palmyra Saving's Chairman of the Board. Only Mr.
Schaeffer is a certified appraiser. If Mr. Mette or Mr. Schaeffer performs the
property appraisal, he will abstain from voting on the loan application.
Currently, Palmyra Saving does not offer fixed-rate residential
mortgage loans. Palmyra Saving originates only adjustable rate mortgage loans
and most of the residential mortgage loans that it purchases are also adjustable
rate mortgage loans. After the conversion, Palmyra Saving plans to implement a
program for offering longer term fixed-rate mortgage loans as well as
traditional adjustable rate mortgage loans with interest rates tied to a
nationally recognized index such as the U.S. Treasury Bill rate. Palmyra Saving
intends to hold fixed-rate mortgage loans for long-term investment.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. Palmyra Saving
occasionally originates and purchases mortgage loans for the acquisition and
refinancing of multi-family and commercial real estate properties. At September
30, 1998, $806,000, or 2.0%, of Palmyra Saving's total loans consisted of loans
secured by multi-family residential property, all of which are purchased
participation interests secured by properties located in Missouri, and $2.1
million, or 5.0%, of Palmyra Saving's total loans consisted of loans secured by
commercial real estate, $863,000 of which are purchased participation interests.
All purchased participation interests are underwritten according to the same
standards that Palmyra Saving would use if it were originating the underlying
loans. Palmyra Saving has no written or oral commitments with any institution to
purchase a predetermined number or type of participation interests.
48
<PAGE>
At September 30, 1998, Palmyra Saving's commercial real estate loans
are secured by churches, storefronts and a restaurant, all located in Missouri,
and a strip shopping center located in Florida. At September 30, 1998, Palmyra
Saving's largest multi-family or commercial real estate loan that Palmyra Saving
originated was $119,000 and is secured by a restaurant. The largest purchased
multi-family or commercial real estate participation interest had an outstanding
balance of $414,000 at September 30, 1998 and is secured by a strip shopping
center located in Port Richey, Florida. At September 30, 1998, this loan was
designated "special mention." See "--Asset Classification" for further
information.
All multi-family loans and commercial real estate loans originated by
Palmyra Saving are three- or five-year adjustable rate balloon loans with terms
of up to 20 years. Multi-family loans and commercial real estate loans purchased
by Palmyra Saving are also adjustable rate loan generally indexed to the prime
rate and with terms of up to 25 years. Palmyra Saving requires appraisals of all
properties securing multi-family loans and commercial real estate loans. If the
property is located outside of Palmyra Saving's primary market area, appraisals
are performed by an independent appraiser designated by Palmyra Saving, all of
which are reviewed by management. Otherwise, appraisals are prepared by either
Mr. Mette or Mr. Schaeffer as described above.
Multi-family and commercial real estate lending affords Palmyra Saving
an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. However, loans secured
by these properties usually are greater in amount and are more difficult to
evaluate and monitor and, therefore, involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
income producing properties are often dependent on the successful operation and
management of the properties, repayment of these loans may be affected by
adverse conditions in the real estate market or the economy. Palmyra Saving
seeks to minimize these risks by limiting the maximum loan-to-value ratio to up
to 80% for multi-family loans (75% for commercial real estate loans) and
strictly scrutinizing the financial condition of the borrower, the cash flow of
the project, the quality of the collateral and the management of the property
securing the loan. Palmyra Saving also obtains loan guarantees from financially
capable parties based on a review of personal financial statements.
RESIDENTIAL CONSTRUCTION LOANS. Palmyra Saving originates residential
construction loans to local home builders and to individuals for the
construction and acquisition of their personal residence. At September 30, 1998,
residential construction loans amounted to $876,000, or 2.1% of Palmyra Saving's
total loans.
Palmyra Saving's construction loans to builders generally have fixed
interest rates and are for a term of six months. Loans to builders are typically
made with a maximum loan to value ratio of 80%. These loans are usually made to
the builder before there is an identified buyer for the completed home. Palmyra
Saving lends to approximately eight builders with whom it has long standing
relationships and limits each builder to no more than three homes under
construction at a time. At September 30, 1998, the largest amount of
construction loans outstanding to one builder was $102,000, all of which was for
speculative construction. Construction loans to individuals are made on the same
terms as Palmyra Saving's one- to four-family mortgage loans, but provide for
the payment of interest only during the construction phase, which is usually six
months. At the end of the construction phase, the loan converts to a permanent
mortgage loan.
Prior to making a commitment to fund a construction loan, Palmyra
Saving requires an appraisal of the property by a staff appraiser. Palmyra
Saving also reviews and inspects each project prior to disbursement of funds
during the term of the construction loan. Loan proceeds are disbursed after
inspection of the project based on percentage of completion.
Construction lending affords Palmyra Saving the opportunity to earn
higher interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. These loans are generally more difficult to evaluate and monitor. If
the estimate of construction cost proves
49
<PAGE>
to be inaccurate, Palmyra Saving may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value upon completion proves to be inaccurate, Palmyra Saving may be
confronted with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. Loans to builders to
construct homes for which no purchaser has been identified carry more risk
because the payoff for the loan is dependent on the builder's ability to sell
the property prior to the time that the construction loan is due.
Palmyra Saving has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to residential properties. It is
also Palmyra Saving's general policy to obtain regular financial statements from
builders so that it can monitor their financial strength.
LAND LOANS. Palmyra Saving occasionally originates loans secured by
unimproved land, including small residential subdivisions in Palmyra Saving's
primary market area. These loans have terms of three to 20 years and generally
have adjustable interest rates. At September 30, 1998, land loans totaled
$420,000, or 1.0% of total loans. The largest land loan at that date was
$101,000.
CONSUMER LOANS. Historically, Palmyra Saving's consumer lending
activities have been limited to guaranteed education loans and savings account
loans. At September 30, 1998, consumer loans amounted to $413,000, or 1.0% of
total loans. Palmyra Saving does not expect to become an active consumer lender,
but intends to begin engaging, to a limited extent, in direct mobile home
lending without the security of the underlying real estate. Currently, Palmyra
Saving engages in a limited amount of direct mobile home lending but only with
the security of the underlying real estate.
Palmyra Saving originates insured education loans to out-of-state
residents attending school in Missouri or to Missouri residents attending school
outside of Missouri under federally sponsored programs. Palmyra Saving receives
quarterly interest payments from the U.S. government on the outstanding loan
while the borrower is attending school. When the borrower is required to repay
the loan after graduation, Palmyra Saving sells the loan at par to the Missouri
Higher Education Loan Authority.
Palmyra Saving also offers loans secured by savings deposits at Palmyra
Saving. Generally, these loans are made at an interest rate that is 3% above the
account rate for up to 90% of the account balance and for a term of up to five
years. If the loan is secured by a certificate of deposit, the loan term is
generally matched with the remaining term on the certificate.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
LOANS TO ONE BORROWER. The maximum amount that Palmyra Saving may lend
to one borrower is limited by federal regulations. At September 30, 1998,
Palmyra Saving's regulatory limit on loans to one borrower was $944,000. At that
date, Palmyra Saving's largest amount of loans to one borrower, including the
borrower's related interests, was $582,000 and consisted of residential mortgage
loans. These loans were performing according to their original terms at
September 30, 1998.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at September 30, 1998 regarding the dollar amount of loans maturing
in Palmyra Saving's portfolio based on their contractual terms to maturity, but
does not include potential prepayments. Demand loans, loans having no stated
schedule of repayments
50
<PAGE>
and no stated maturity, and overdrafts are reported as becoming due within one
year. Loan balances do not include undisbursed loan proceeds, unearned
discounts, unearned income and allowance for loans losses. For purposes of the
table, the contractual maturities of Palmyra Saving's three-and five-year
balloon mortgage loans are reported over their respective amortization periods
up to 30 years rather than as maturing at the end of the 3-year or 5-year
balloon term. Given Palmyra Saving's experience with its borrowers, Palmyra
Saving believes this presentation is appropriate.
<TABLE>
<CAPTION>
AFTER AFTER AFTER
ONE YEAR 3 YEARS 5 YEARS
WITHIN THROUGH THROUGH THROUGH BEYOND
ONE YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
--------- ---------- --------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...................... $1,768 $3,189 $3,195 $8,095 $20,554 $36,801
Multi-family............................. 25 58 68 225 430 806
Commercial............................... 237 460 208 492 676 2,073
Construction............................. 876 -- -- -- -- 876
Land..................................... 256 22 20 45 77 420
Consumer loans:
Education................................ 65 33 -- -- -- 98
Savings account loans.................... 144 49 38 31 43 305
Other.................................... 3 6 1 -- -- 10
--------- --------- --------- -------- ---------- -----------
Total........................... $3,374 $3,817 $3,530 $8,888 $21,780 $41,389
========= ========= ========= ======== ========== ===========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING-
OR
FIXED- ADJUSTABLE-
RATE RATES
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
One- to four-family...................... $382 $34,651
Multi-family............................. -- 780
Commercial............................... 274 1,563
Land..................................... 2 162
Consumer loans:
Education................................ 33 --
Savings account loans.................... 161 --
Other.................................... 7 --
------ --------
Total........................... $859 $37,156
====== ========
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of the loans. The average life of a loan is substantially less than
its contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give Palmyra Saving the right to declare loans immediately due
and payable in the event, among other things, that the borrower sells the real
property with the mortgage and the loan is not repaid. The average life of a
mortgage loan tends to increase, however, when current mortgage loan market
rates are substantially higher than rates on existing mortgage loans and,
conversely, tends to decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
51
<PAGE>
LOAN SOLICITATION AND PROCESSING. Palmyra Saving's lending activities
follow written, non-discriminatory, underwriting standards and loan origination
procedures established by Palmyra Saving's Board of Directors and management.
Loan originations come from a number of sources. The customary sources of loan
originations are realtors, referrals and existing customers. Palmyra Saving does
not utilize mortgage brokers or other third-party originators. All loans are
approved by Palmyra Saving's Board of Directors except for savings account loans
which may be approved by a branch manager.
LOAN ORIGINATIONS, PURCHASES AND SALES. Palmyra Saving primarily
originates three- and five-year balloon mortgage loans with amortization terms
of up to 30 years. Occasionally, Palmyra Saving originates fully amortizing
fixed rate loans with terms of less than five years.
Palmyra Saving generally retains for its portfolio all of the loans
that it originates and purchases. Occasionally, Palmyra Saving purchases
participation interests in one- to four-family mortgage loans that are primarily
secured by non-owner-occupied duplex properties, multi-family loans and
commercial real estate loans. Generally, Palmyra Saving limits its participation
interest in a loan to up to 80%. In the case of participations in one- to
four-family mortgage loans, Palmyra Saving participates 80% and the lead lender
retains the servicing rights. Palmyra Saving pays no fee on the loans it
purchases.
Palmyra Saving holds all loans for long-term investment purposes,
except for government guaranteed student loans which are sold to the Missouri
Higher Education Loan Authority at par when the borrower is required to begin
repaying the loan.
52
<PAGE>
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Total loans receivable, net, at beginning of period....................................... $ 38,394 $ 37,259
Loans originated:
Mortgage loans:
One- to four-family...................................................................... $ 8,742 $ 9,367
Commercial............................................................................... 408 206
Construction............................................................................. 1,010 1,778
Land..................................................................................... 192 48
-------- --------
Total mortgage loans.................................................................... 10,352 11,399
Consumer loans:
Education................................................................................ 89 73
Savings account.......................................................................... 181 171
Other.................................................................................... 13 20
-------- --------
Total consumer loans.................................................................... 283 264
-------- --------
Total loans originated................................................................. 10,635 11,663
Loans purchased:
One- to four-family...................................................................... 2,654 925
Multi-family............................................................................. 83 --
Construction............................................................................. 51 179
-------- --------
Total loans purchased................................................................... 2,788 1,104
Loans sold:
Education............................................................................... (114) (124)
Principal repayments...................................................................... (11,475) (11,001)
Increase (decrease) in other items, net................................................... 285 (507)
-------- --------
Net increase (decrease) in loans receivable, net.......................................... 2,119 1,135
-------- --------
Total loans receivable, net, at end of period............................................. $ 40,513 $ 38,394
======== ========
</TABLE>
The relatively high level of loan principal repayments in 1998 and 1997
reflects the high loan refinancing activity associated with low market interest
rates. As a result of borrowers refinancing at lower interest rates, Palmyra
Saving's interest rate spread decreased from 2.34% in 1997 to 2.24% in 1998 and
its interest rate margin deceased from 2.70% in 1997 to 2.62% in 1998.
LOAN COMMITMENTS. Palmyra Saving issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Commitments are made in
writing on specified terms and conditions and are honored for up to 30 days from
approval. At September 30, 1998, Palmyra Saving had loan commitments totaling
$630,000, not including undisbursed portions of mortgage loans and consumer
loans of $620,000. See Note L of the Notes to Consolidated Financial Statements
included in the back of this prospectus.
53
<PAGE>
LOAN FEES. In addition to interest earned on loans, Palmyra Saving
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
Palmyra Saving charges loan origination fees for fixed-rate loans which
are calculated as a percentage of the amount borrowed. In accordance with
applicable accounting procedures, loan origination fees and discount points in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. At September 30, 1998, Palmyra Saving had $4,000 of deferred loan fees.
Palmyra Saving recognized $3,000 and $3,600 of deferred loan fees during the
years ended September 30, 1998 and 1997, respectively, in connection with loan
refinancings, payoffs, sales and ongoing amortization of outstanding loans.
NONPERFORMING ASSETS AND DELINQUENCIES. All loan payments are due on
the first day of each month. When a borrowers fails to make a required loan
payment, Palmyra Saving attempts to cure the deficiency by contacting the
borrower and seeking the payment. A late notice is mailed on the fifth day of
the month and a second late notice is mailed on the 15th day of the month. In
most cases, deficiencies are cured promptly. If a delinquency continues beyond
the 25th day of the month, additional contact is made either through additional
notices or other means and Palmyra Saving will attempt to work out a payment
schedule. While Palmyra Saving generally prefers to work with borrowers to
resolve the problems, Palmyra Saving will institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Palmyra Saving's Board of Directors is informed monthly of the amounts
of loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by Palmyra Saving.
Palmyra Saving ceases accruing interest on mortgage loans when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. Palmyra Saving does not accrue
interest on mortgage loans past due 90 days or more when the estimated value of
collateral and collection efforts are deemed insufficient to ensure full
recovery. In the case of consumer loans, Palmyra Saving continues to accrue
interest even if the loan is past due 90 days or more as the risk of loss to
Palmyra Saving is minimal because Palmyra Saving's consumer loan portfolio
consists primarily of government guaranteed education loans and savings account
loans.
The following table sets forth information with respect to Palmyra
Saving's nonperforming assets at the dates indicated. Palmyra Saving had no
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15 at the dates indicated.
54
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------
1998 1997
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family........................................................................ $ 196 $ 181
Commercial................................................................................. 23 --
----- -----
Total mortgage loans...................................................................... 219 181
Consumer loans.............................................................................. -- --
----- -----
Total...................................................................................... 219 181
Accruing loans contractually past due 90 days or more....................................... -- --
----- -----
Total of nonaccrual and 90 days past due loans.............................................. 219 181
Real estate owned........................................................................... -- --
----- -----
Total nonperforming assets............................................................... $ 219 $ 181
===== =====
Nonaccrual and 90 days or more past due loans as a percentage
of loans receivable, net................................................................. 0.54% 0.47%
Nonaccrual and 90 days or more past due loans as a percentage of total assets............... 0.37% 0.31%
Nonperforming assets as a percentage of total assets........................................ 0.37% 0.31%
</TABLE>
Interest income that would have been recorded for 1998 had nonaccruing
loans been current in accordance with their original terms amounted to
approximately $22,000. The amount of interest included in interest income in
1998 on these loans amounted to approximately $7,000.
REAL ESTATE OWNED. Real estate acquired by Palmyra Saving as a result
of foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at fair market value
at the date of foreclosure. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At September 30, 1998, Palmyra Saving had no real estate owned.
Asset Classification. The Office of Thrift Supervision has adopted
various regulations regarding problem assets of savings institutions. The
regulations require that each insured institution review and classify its assets
on a regular basis. In addition, in connection with examinations of insured
institutions, Office of Thrift Supervision examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful can be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by Palmyra Saving.
55
<PAGE>
The aggregate amounts of Palmyra Saving's classified and special
mention assets at the dates indicated were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------
1998 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Classified assets:
Loss............................................................................. $ -- $ --
Doubtful......................................................................... -- --
Substandard...................................................................... 219 181
Special mention.................................................................. 432 459
----- -----
$ 651 $ 640
===== =====
</TABLE>
At September 30, 1998, assets designated substandard consisted of eight
one- to four-family mortgage loans totalling $196,000 and one commercial real
estate loan for $23,000, and assets designated as special mention consisted of a
one- to four-family mortgage loan for $17,000 and a purchased commercial real
estate loan participation interest for $415,000.
ALLOWANCE FOR LOAN LOSSES. In originating loans, Palmyra Saving
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions.
At September 30, 1998, Palmyra Saving had an allowance for loan losses
of $280,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations. Furthermore, while Palmyra
Saving believes it has established its existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing Palmyra Saving's loan portfolio, will
not request Palmyra Saving to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect Palmyra Saving's financial condition and results of operations.
56
<PAGE>
The following table sets forth an analysis of Palmyra Saving's allowance
for loan losses.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1997
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance at beginning of period................................................... $ 225 $ 234
Provision for loan losses.......................................................... 25 21
Recoveries......................................................................... -- --
Charge-offs........................................................................ -- --
------- -------
Allowance at end of period......................................................... $ 280 $ 255
======= =======
Allowance for loan losses as a percentage of total loans outstanding
at the end of the period........................................................ 0.68% 0.64%
Net charge offs (recoveries) as a percentage of average loans outstanding
during the period............................................................... -- --
Allowance for loan losses as a percentage of nonperforming loans
at the end of the period........................................................ 127.85% 140.88%
</TABLE>
For additional discussion regarding the provisions for loan losses in
recent periods, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Comparison of Operating Results for the Years Ended
September 30, 1998 and 1997--Provision for Loan Losses."
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
1998 1997
----------------------------- ---------------------------
PERCENT PERCENT
OF LOANS IN OF LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------------ ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..................................... $ 145 88.91% $ 134 87.42%
Multi-family............................................ 8 1.95 10 2.42
Commercial.............................................. 38 5.01 35 4.64
Construction............................................ 2 2.12 3 3.67
Land.................................................... 2 1.01 2 0.74
Consumer................................................... -- 1.00 -- 1.11
Unallocated................................................ 85 -- 71 --
----- ------ ----- ------
Total allowance for loan losses...................... $ 280 100.00% $ 255 100.00%
===== ====== ===== ======
</TABLE>
57
<PAGE>
INVESTMENT ACTIVITIES
Palmyra Saving is permitted under federal law to invest in various types of
liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the Federal
Home Loan Bank of Des Moines, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Within certain
regulatory limits, Palmyra Saving may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like
Palmyra Saving are also required to maintain an investment in FHLB stock.
Palmyra Saving is required under federal regulations to maintain a minimum
amount of liquid assets. See "Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Palmyra Saving does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
All of Palmyra Saving's investment securities carry market risk insofar as
increases in market rates of interest may cause a decrease in their market
value. They also carry prepayment risk insofar as they may be called prior to
maturity in times of low market interest rates, so that Palmyra Saving may have
to invest the funds at a lower interest rate. Palmyra Saving's investment policy
does not permit engaging directly in hedging activities or purchasing high risk
mortgage derivative products. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, Palmyra Saving's liquidity position, and anticipated
cash needs and sources. The effect that the proposed investment would have on
Palmyra Saving's credit and interest rate risk and risk-based capital is also
considered. Palmyra Saving purchases investment securities to provide necessary
liquidity for day-to-day operations. Palmyra Saving also purchases investment
securities when investable funds exceed loan demand.
58
<PAGE>
The following table sets forth the amortized cost and fair value of Palmyra
Saving 's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------
1998 1997
--------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
AVAILABLE FOR SALE:
U.S. Government agency securities....................... $ 7,087 $ 7,087 $ 8,509 $ 8,509
------- ------- ------- -------
Total available for sale............................. 7,087 7,087 8,509 8,509
------- ------- ------- -------
HELD TO MATURITY:
U.S. Government agency securities....................... 4,959 4,995 4,403 4,405
Municipal............................................... 630 645 690 702
Mortgage-backed securities.............................. 2,584 2,624 2,828 2,871
------- ------- ------- -------
Total held to maturity............................... 8,173 8,264 7,921 7,978
------- ------- ------- -------
Total................................................ $15,260 $15,351 $16,430 $16,487
======= ======= ======= =======
</TABLE>
Palmyra Saving purchases mortgage-backed securities when investable funds
exceed loan demand. All of Palmyra Saving's mortgage-backed securities are
issued or guaranteed by agencies of the U.S. Government. Accordingly, they carry
lower credit risk than mortgage-backed securities of a private issuer. However,
mortgage-backed securities carry market risk, the risk that increases in market
interest rates may cause a decrease in market value, and prepayment risk, the
risk that the securities will be repaid prior to maturity and that Palmyra
Saving will have to reinvest the funds at a lower interest rate.
Occasionally, Palmyra Saving invests in municipal obligations of local
entities, such as the water authority, school districts, firehouses and jail.
Generally, these obligations are not rated by a nationally recognized credit
rating service.
At September 30, 1998, Palmyra Saving did not own any securities, other
than U.S. Government and agency securities, which had an aggregate book value in
excess of 10% of Palmyra Saving's retained earnings at that date.
59
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of Palmyra
Saving's debt securities at September 30, 1998, all of which are available for
sale. Certain U.S. Government agency obligations and municipal obligations are
exempt from state taxation, but their yields have not been computed on a tax
equivalent basis for purposes of the table.
<TABLE>
<CAPTION>
LESS THAN ONE TO AFTER FIVE TO AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTALS
--------------------- ------------------ -------------------- ------------------------ ---------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD AMOUNT VALUE VALUE YIELD VALUE YIELD VALUE
--------------------- ------------------ -------------------- ------------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency
securities................. $635 5.60% $4,317 6.01% $7,094 6.42% $ -- --% $12,046
Municipal..................... 60 4.60 365 5.06 205 5.55 -- -- 630
Mortgage-backed securities.... -- -- 337 6.65 23 8.90 2,224 7.02 2,584
---- ------ ------ ------ -------
Total................ $695 5.52 $5,019 5.98 $7,322 6.41 $2,224 7.02 $15,260
==== ====== ====== ====== =======
<CAPTION>
<S> <C>
U.S. Government agency
securities................. 6.23%
Municipal..................... 5.18
Mortgage-backed securities.... 6.98
Total................ 6.31
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for Palmyra Saving's
lending and other investment activities. In addition, Palmyra Saving also
generates funds internally from loan principal repayments and prepayments and
maturing investment securities. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and money market
conditions. Palmyra Saving may use borrowings from the Federal Home Loan Bank of
Des Moines to compensate for reductions in the availability of funds from other
sources. Presently, Palmyra Saving has no other borrowing arrangements.
DEPOSIT ACCOUNTS. Nearly all of Palmyra Saving's depositors reside in
Missouri. Palmyra Saving's deposit products include money market accounts,
passbook accounts, and term certificate accounts. Deposit account terms vary
with the principal difference being the minimum balance deposit, early
withdrawal penalties and the interest rate. Palmyra Saving reviews its deposit
mix and pricing weekly. Palmyra Saving does not utilize brokered deposits, nor
has it aggressively sought jumbo certificates of deposit.
Palmyra Saving believes it is competitive in the interest rates it offers on
its deposit products. Palmyra Saving determines the rates paid based on a number
of factors, including rates paid by competitors, Palmyra Saving's need for funds
and cost of funds, borrowing costs and movements of market interest rates.
In the unlikely event Palmyra Saving is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to PFSB Bancorp as the sole stockholder of Palmyra Saving.
60
<PAGE>
The following table sets forth information concerning Palmyra Saving's time
deposits and other interest-bearing deposits at September 30, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PERCENTAGE
INTEREST MINIMUM OF TOTAL
RATE TERM CATEGORY AMOUNT BALANCE DEPOSITS
- -------- ------------ -------------------------------- ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
3.03% None Passbook accounts $ 10 $ 8,422 15.97%
2.53 None NOW accounts 300 1,792 3.40
3.91 None Money market deposit accounts 1,000 1,275 2.42
Certificates of Deposit
-----------------------
4.48 90 days Fixed-term, fixed-rate 500 551 1.04
4.96 182 days Fixed-term, fixed-rate 1,000 5,040 9.56
5.30 365 days Fixed-term, fixed-rate 1,000 113 0.21
5.35 12 months Fixed-term, fixed-rate 1,000 12,834 24.34
5.25 18 months Fixed-term, fixed-rate 1,000 3 0.01
5.56 30 months Fixed-term, fixed-rate 1,000 7,053 13.38
6.15 60 months Fixed-term, fixed-rate 1,000 15,641 29.67
------- ------
$52,724 100.00%
======= ======
</TABLE>
The following table indicates the amount of Palmyra Saving's jumbo
certificate accounts by time remaining until maturity as of September 30, 1998.
Jumbo certificate accounts have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
- --------------- ---------------
(IN THOUSANDS)
<S> <C>
Three months or less....................................... $ 442
Over three through six months.............................. 213
Over six through twelve months............................. 113
Over twelve months......................................... 1,398
------
Total..................................................... $2,166
======
</TABLE>
61
<PAGE>
DEPOSIT FLOW. The following table sets forth the balances, with interest
credited, and changes in dollar amounts of deposits in the various types of
accounts offered by Palmyra Saving between the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997
------------------------------------------- --------------------------
PERCENT PERCENT
OF INCREASE OF
AMOUNT TOTAL (DECREASE) AMOUNT TOTAL
------------ ------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Passbook accounts.............................. $ 8,422 15.97% $ 220 $ 8,202 15.95%
NOW accounts................................... 1,792 3.40 (90) 1,882 3.66
Money market deposits.......................... 1,275 2.42 246 1,029 2.00
Fixed-rate certificates maturing:
Within 1 year................................. 22,269 42.24 (1,917) 24,186 47.05
After 1 year, but within 2 years.............. 5,930 11.25 2,157 3,773 7.34
After 2 years, but within 5 years............. 13,036 24.72 696 12,340 24.00
------- ------ ------- ------- ------
Total....................................... $52,724 100.00% $ 1,312 $51,412 100.00%
======= ====== ======= ======= ======
</TABLE>
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount of
time deposits in Palmyra Saving categorized by maturities at September 30, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------------------------------------
LESS THAN 1 - 2 2 - 3 3 - 4 AFTER
ONE YEAR YEARS YEARS YEARS 4 YEARS TOTAL
------------ ----------- ----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
4.00 - 4.99%................................. $ 3,148 $ -- $ -- $ -- $ -- $ 3,148
5.00 - 5.99%................................. 19,109 3,685 5,725 1,039 1,251 30,809
6.00 - 6.99%................................. 12 2,245 2,028 1,364 1,629 7,278
------- ------ ------ ------ ------ -------
Total....................................... $22,269 $5,930 $7,753 $2,403 $2,880 $41,235
======= ====== ====== ====== ====== =======
</TABLE>
TIME DEPOSITS BY RATES. The following table sets forth the time deposits in
Palmyra Saving classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
4.00 - 4.99%................................... $ 3,148 $ 444
5.00 - 5.99%................................... 30,809 24,478
6.00 - 6.99%................................... 7,278 15,377
------- -------
Total....................................... $41,235 $40,299
======= =======
</TABLE>
62
<PAGE>
DEPOSIT ACTIVITY. The following table sets forth the deposit activity
of Palmyra Saving for the periods indicated.
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Beginning balance............................... $51,412 $51,391
Net withdrawals
before interest credited....................... (613) (1,974)
Interest credited............................... 1,925 1,995
--------- ---------
Net increase in deposits........................ 1,312 21
--------- ---------
Ending balance $52,724 $51,412
========= =========
BORROWINGS. Palmyra Saving has the ability to use advances from the
Federal Home Loan Bank of Des Moines to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Des
Moines functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
Federal Home Loan Bank of Des Moines, Palmyra Saving is required to own capital
stock in the Federal Home Loan Bank of Des Moines and is authorized to apply for
advances on the security of the capital stock and certain of its mortgage loans
and other assets, principally securities that are obligations of, or guaranteed
by, the U.S. Government or its agencies, provided certain creditworthiness
standards have been met. Advances are made under several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. At September 30, 1998, Palmyra Saving had an
available credit line of $16.7 million from the Federal Home Loan Bank of Des
Moines under which Palmyra Saving had outstanding advances of $500,000.
The following tables set forth certain information regarding Palmyra
Saving's use of Federal Home Loan Bank of Des Moines advances during the periods
and at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum amount of advances outstanding at any month end......................... $1,000 $1,000
Approximate average short-term advances outstanding............................. 269 123
Approximate weighted average rate paid on advances.............................. 5.70% 4.76%
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance outstanding at end of period............................................ $500 $1,000
Weighted average rate paid on advances.......................................... 5.74% 6.10%
</TABLE>
63
<PAGE>
SUBSIDIARY ACTIVITIES
Under Office of Thrift Supervision regulations, Palmyra Saving
generally may invest up to 3% of its assets in service corporations, provided
that at least one-half of investment in excess of 1% is used primarily for
community, inner-city and community development projects. In 1981 Palmyra Saving
formed PSA Service Corporation as a wholly owned subsidiary to sell mortgage
life insurance to Palmyra Saving's borrowers. The corporation also offers safe
deposit box services in Palmyra Saving's Canton branch office.
PROPERTIES
The following table sets forth information relating to Palmyra Saving's
offices as of September 30, 1998.
<TABLE>
<CAPTION>
YEAR NET BOOK OWNED/ APPROXIMATE
LOCATION OPENED VALUE(1) LEASED SQUARE FOOTAGE
- ------------------------------------ --------- ------------ ---------- ------------------
<S> <C> <C> <C> <C>
Main Office
- -----------
123 W. Lafayette Street
Palmyra, Missouri 1975 $208,500 Owned 2,816
Branch Offices
- --------------
600 Washington Street(2)
Canton, Missouri 1992 243,700 Owned 2,904
103 E. Commercial Street
Kahoka, Missouri 1976 108,500 Owned(3) 4,096(3)
</TABLE>
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by Palmyra Saving.
(2) Location of an automated teller machine.
(3) The Kahoka branch office occupies approximately 1,696 square feet of the
building located at 103 E. Commercial Street. The remaining space is vacant.
Palmyra Saving closed the sale on the branch in December 1998 and now leases
the branch under a 3-year lease at $500 per month. The lease provides for
one-year renewal options. The lease term began on December 14, 1998. Palmyra
Saving plans to lease the existing facility until a new branch office is
constructed on real estate that Palmyra Saving owns located at the corner of
Johnson and Exchange Streets in Kahoka. Currently, Palmyra Saving does not
have any definitive plans or timetable for beginning construction.
PERSONNEL
As of September 30, 1998, Palmyra Saving had 17 full-time employees and
four part-time employees, none of whom is represented by a collective bargaining
unit. Palmyra Saving believes its relationship with its employees is good.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving
Palmyra Saving, such as claims to enforce liens, condemnation proceedings on
properties in which Palmyra Saving holds security interests, claims involving
the making and servicing of real property loans and other issues incident to
Palmyra Saving's business. Palmyra Saving is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of Palmyra Saving.
64
<PAGE>
MANAGEMENT OF PFSB BANCORP
Directors shall be elected by the stockholders of PFSB Bancorp for
staggered three-year terms, or until their successors are elected and qualified.
PFSB Bancorp's Board of Directors consists of seven persons divided into three
classes, each of which contains approximately one third of the Board. One class,
consisting of James D. Lovegreen, Eldon R. Mette and Donald L. Slavin, has a
term of office expiring at the first annual meeting of stockholders after their
initial election by stockholders; a second class, consisting of L. Edward
Schaeffer and Robert M. Dearing, has a term of office expiring at the second
annual meeting of stockholders after their initial election by stockholders; and
a third class, consisting of Glenn J. Maddox and Albert E. Davis, has a term of
office expiring at the third annual meeting of stockholders after their initial
election by stockholders. PFSB Bancorp anticipates that its first annual meeting
of stockholders will be held in January 2000.
The executive officers of PFSB Bancorp are elected annually and serve at
the Board's discretion. The executive officers of PFSB Bancorp are:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
L. Edward Schaeffer................. Chairman of the Board
Glenn J. Maddox..................... Vice Chairman of the Board
Eldon R. Mette...................... President and Chief Executive Officer
Ronald L. Nelson.................... Vice President, Treasurer and Secretary
</TABLE>
MANAGEMENT OF PALMYRA SAVING
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Palmyra Saving is presently composed of seven
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of Palmyra Saving. The
executive officers of Palmyra Saving are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the directors and executive officers of Palmyra
Saving.
DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION HELD WITH PALMYRA SAVING SINCE EXPIRES
- ---- ------ --------------------------------- -------- ---------
<S> <C> <C> <C> <C>
L. Edward Schaeffer............. 68 Chairman of the Board 1964 2001
Eldon R. Mette.................. 62 President, Chief Executive Officer and Director 1988 2000
Glenn J. Maddox................. 72 Vice Chairman of the Board 1978 1999
Albert E. Davis................. 62 Director 1990 1999
Robert M. Dearing............... 49 Director 1977 2001
James D. Lovegreen.............. 65 Director 1971 2000
Donald L. Slavin................ 72 Director 1962 2000
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
NAME AGE(1) POSITION HELD WITH PALMYRA SAVING
- ----- ------ --------------------------------
Ronald L. Nelson................ 45 Vice President, Treasurer and
Secretary
_______________________________
(1) As of September 30, 1998.
65
<PAGE>
BIOGRAPHICAL INFORMATION
Below is certain information regarding the Directors and executive officers
of Palmyra Saving. Unless otherwise stated, each director and executive officer
has held his current occupation for the last five years. There are no family
relationships among or between the directors or executive officers.
L. Edward Schaeffer is a blacksmith.
Eldon R. Mette has been employed with Palmyra Saving since 1969. He became
President in January 1999. Before then, he served as Executive Vice President
since September 1969.
Glenn J. Maddox is a retired supermarket proprietor.
Albert E. Davis is a retired manufacturing firm executive.
Robert M. Dearing is a farmer and stockman.
James D. Lovegreen owns an automobile dealership.
Donald L. Slavin is a retired Chief Engineer of an electric utility.
Ronald L. Nelson has been employed with Palmyra Saving since 1973. He has
served as Vice President and Treasurer since 1978.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of Palmyra Saving is conducted through meetings and activities
of the Board of Directors and its committees. During the fiscal year ended
September 30, 1998, the Board of Directors held 24 regular meetings and one
special meeting. No director attended fewer than 75% of the total meetings of
the Board of Directors and committees on which the director served.
The full Board of Directors acts as an Audit Committee to receive and
review all reports prepared by Palmyra Saving's external auditor. The Board of
Directors met once in its capacity as Audit Committee during 1998.
The full Board of Directors acts as a Budget Review Committee to review
Palmyra Saving's annual operating budget. The Board of Directors met once in its
capacity as Budget Review Committee in 1998.
The full Board of Directors acts as a Nominating Committee for the annual
selection of management's nominees for election as directors. The Board of
Directors met once in its capacity as Nominating Committee during 1998.
DIRECTORS' COMPENSATION
Each director of Palmyra Saving, other than the Chairman of the Board of
Palmyra Saving, receives a monthly fee of $265 plus $200 per meeting attended.
The President receives a monthly fee of $265 and $210 per meeting attended.
Following the conversion, directors' fees will continue to be paid by Palmyra
Saving and, initially, no separate fees are expected to be paid for service on
PFSB Bancorp's Board of Directors.
66
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for Mr.
Mette for the year ended September 30, 1998. No executive officer of Palmyra
Saving received salary and bonus of $100,000 or more during the year ended
September 30, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-----------------------------------
NAME AND OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- --------- ------------ ---------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Eldon R. Mette 1998 $ 74,450 $ 3,572 $ 13,129(2) $ 6,087(3)
President, Chief Executive
Officer and Director
</TABLE>
____________________
(1) Compensation information for the years ended September 30, 1997 and 1996 has
been omitted as Palmyra Saving was neither a public company nor a subsidiary
of a public company at that time.
(2) Consists of directors' fees of $7,785 and appraisal fees of $5,344. Does not
include the aggregate amount of perquisites and other personal benefits,
which was less than 10% of the total annual salary and bonus reported.
(3) Consists of employer 401(k) contribution of $1,489, employer paid medical
insurance premiums of $4,064, employer paid disability insurance premiums of
$519 and employer paid term life insurance premiums of $15.
EMPLOYMENT AGREEMENTS. PFSB Bancorp and Palmyra Saving plan to enter into
three-year employment agreements with Eldon R. Mette and Ronald L. Nelson. Under
the employment agreements, the initial salary levels for Messrs. Mette and
Nelson will be $77,250 and $51,500, respectively, which amounts will be paid by
Palmyra Saving and may be increased at the discretion of the Board of Directors
or an authorized committee of the Board. On each anniversary after the starting
date of the employment agreements, the term of the agreements may be extended
for an additional year at the discretion of the Board. The agreements may be
terminated by the Employers at any time, by the executive if he is assigned
duties inconsistent with his initial position, duties, responsibilities and
status, or upon the occurrence of certain events specified by federal
regulations. If the executive's employment is terminated without cause or upon
the executive's voluntary termination following the occurrence of an event
described in the preceding sentence, Palmyra Saving would be required to honor
the terms of the agreement through the expiration of the current term, including
payment of current cash compensation and continuation of employee benefits.
The employment agreements also provide for a severance payment and other
benefits upon involuntary termination of employment in connection with any
change in control of PFSB Bancorp and Palmyra Saving. A severance payment also
will be paid on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, the executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to a change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, a person
other than PFSB Bancorp purchases shares of PFSB Bancorp's common stock under a
tender or exchange offer for the shares; any person (as that term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of PFSB
Bancorp representing 25% or more of the combined voting power of PFSB Bancorp's
then outstanding securities; the membership of the Board of Directors changes as
the result of a contested election; or shareholders of PFSB Bancorp approve a
merger, consolidation, sale or disposition of all or substantially all of PFSB
Bancorp's assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the employment agreement
is 2.99 times the executive's average annual compensation during the five-year
period preceding the effective date of the change in control. The employment
agreements provide that the value of the maximum benefit may be distributed, at
the executive's election, in the form of a lump sum cash payment equal to 2.99
times the executive's average annual compensation for the five years preceding
the effective date of the change in control, or a combination of a cash
67
<PAGE>
payment and continued coverage under the PFSB Bancorp's and Palmyra Saving's
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the executive's
average annual compensation for the five years preceding the effective date of
the change in control. Assuming that a change in control had occurred at
September 30, 1998 and that Messrs. Mette and Nelson each elected to receive a
lump sum cash payment, Mr. Mette would have been entitled to payments of
approximately $214,000 and Mr. Nelson would have been entitled to approximately
$142,000. The Internal Revenue Code provides that severance payments that equal
or exceed three times the individual's base amount are deemed to be "excess
parachute payments" if they are contingent upon a change in control. Individuals
receiving excess parachute payments must pay a 20% excise tax on the amount of
excess payments, and their employers would not be entitled to deduct the amount
of the excess payments.
The employment agreements restrict the executive's right to compete against
Palmyra Bancorp and Palmyra Saving for a period of one year from the date of
termination of the agreement if he voluntarily terminates employment, except
upon a change in control.
EMPLOYEE SEVERANCE COMPENSATION PLAN. Palmyra Saving's Board of Directors
intends to adopt the Palmyra Savings Employee Severance Compensation Plan to
provide benefits to eligible employees upon a change in control of PFSB Bancorp
or Palmyra Saving. Eligible employees are those with a minimum of two years of
service with Palmyra Saving. Generally, all eligible employees, other than
officers who will enter into separate employment agreements with PFSB Bancorp
and Palmyra Saving, will be eligible to participate in the severance plan. Under
the severance plan, if a change in control of PFSB Bancorp or Palmyra Saving
occurs, eligible employees who are terminated or who terminate employment, but
only upon the occurrence of events specified in the severance plan, within 12
months of the effective date of a change in control will be entitled to a
payment based on years of service with Palmyra Saving with a maximum payment
equal to 26 weeks of compensation, which would be earned after 13 years of
service. In addition, eligible officers and branch managers of Palmyra Saving,
(3 persons) would be eligible to receive a minimum severance payment equal to 12
months of their current compensation. Assuming that a change in control had
occurred at September 30, 1998, and the termination of all eligible employees,
the maximum aggregate payment due under the severance plan would be
approximately $197,000.
BENEFITS
GENERAL. Palmyra Saving currently pays 75% of the premiums for medical,
dental, life and disability insurance benefits for full-time employees, after
the employees pay certain deductibles.
401(K) PLAN. Palmyra Saving maintains a an Employees' Savings and Profit
Sharing Plan and Trust for the benefit of eligible employees of Palmyra Saving.
The plan is intended to be a tax-qualified plan under the Internal Revenue Code.
Employees of Palmyra Saving who have completed one year of service and who have
attained age 21 are eligible to participate in the plan on the January 1 next
following the date these requirements are satisfied. Participants may contribute
up to the applicable Internal Revenue Service limits to the plan through a
salary reduction election. This limit is $10,000 for the 1999 calendar year.
Palmyra Saving matches participant contributions at the rate of 50% of the first
4% of the participant's annual contributions.
In addition to employer matching contributions, Palmyra Saving may
contribute a discretionary amount to the plan in any plan year which is
allocated to individual participants in the proportion that their annual compen-
sation bears to the total compensation of all participants during the plan year.
Participants are at all times 100% vested in all salary reduction contributions.
Employer matching and profit-sharing contributions vest at the rate of 100% per
year beginning with the completion of three years of service. For the year ended
September 30, 1998, Palmyra Saving incurred total contribution-related expenses
of $9,000 in connection with the plan.
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Generally, the investment of plan assets is directed by plan participants.
In connection with the conversion, the investment options available to
participants will be expanded to include the opportunity to direct the
investment of up to 100% of their plan account balance to purchase shares of
PFSB Bancorp's common stock. A participant in the plan who elects to purchase
common stock in the conversion through the plan will receive the same
subscription priority and will be bound by the same individual purchase
limitations as if the participant had elected to purchase stock using other
funds. See "The Conversion--Limitations on Purchases of Shares."
EMPLOYEE STOCK OWNERSHIP PLAN. Palmyra Saving's Board of Directors has
authorized the adoption of an employee stock ownership plan for employees of
Palmyra Saving to become effective upon the completion of the conversion. Full-
time employees of PFSB Bancorp and Palmyra Saving who have been credited with at
least 1,000 hours of service during a 12-month period and who have attained age
21 will be eligible to participate in the employee stock ownership plan.
The employee stock ownership plan intends to purchase 8% of the shares
issued in the conversion. This would range between 44,200 shares, assuming
552,500 shares are issued in the conversion, and 68,770 shares assuming 859,625
shares are issued in the conversion. It is anticipated that the employee stock
ownership plan will borrow funds from PFSB Bancorp to purchase stock in the
conversion. The loan will equal 100% of the aggregate purchase price of the
common stock. The loan to the employee stock ownership plan will be repaid
principally from Palmyra Saving's contributions to the employee stock ownership
plan and dividends payable on common stock held by the employee stock ownership
plan over the anticipated 10-year term of the loan. The interest rate for the
employee stock ownership plan loan is expected to be the prime rate as published
in The Wall Street Journal on the closing date of the conversion. See "Pro Forma
Data." To the extent that the employee stock ownership plan is unable to acquire
8% of the common stock sold in the offering, it is anticipated that these
additional shares may be acquired following the conversion through open market
purchases.
In any plan year, Palmyra Saving may make additional discretionary
contributions to the employee stock ownership plan for the benefit of plan
participants in either cash or shares of common stock, which may be acquired
through the purchase of outstanding shares in the market or from individual
stockholders or which constitute authorized but unissued shares or shares held
in treasury by PFSB Bancorp. The timing, amount, and manner of discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the employee stock ownership plan with the proceeds of
the loan will be held in a suspense account and released on a pro rata basis as
the loan is repaid. Discretionary contributions to the employee stock ownership
plan and shares released from the suspense account will be allocated among
participants on the basis of each participant's proportional share of total
compensation. Forfeitures will be reallocated among the remaining plan
participants.
Participants will vest in their accrued benefits under the employee stock
ownership plan at the rate of 20% per year, beginning upon the completion of two
years of service. A participant is fully vested at retirement, upon death or
disability or upon termination of the employee stock ownership plan. Benefits
are distributable upon a participant's retirement, early retirement, death,
disability, or termination of employment. Palmyra Saving's contributions to the
employee stock ownership plan are not fixed, so benefits payable under the
employee stock ownership plan cannot be estimated.
It is anticipated that members of Palmyra Saving's Board of Directors will
serve as trustees of the employee stock ownership plan. The trustees must vote
all allocated shares held in the employee stock ownership plan in accordance
with the instructions of plan participants and unallocated shares and allocated
shares for which no instructions are received must be voted in the same ratio on
any matter as those shares for which instructions are given.
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Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan must meet the requirements of the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
of the Internal Revenue Service and the Department of Labor. Palmyra Saving
intends to request a determination letter from the IRS regarding the tax-
qualified status of the employee stock ownership plan. Palmyra Saving expects,
but cannot guarantee, that a favorable determination letter will be received by
the employee stock ownership plan.
STOCK OPTION PLAN. The Board of Directors of PFSB Bancorp intends to adopt
the stock option plan and to submit the it to the stockholders for approval at a
meeting held no earlier than six months following the conversion. Under current
Office of Thrift Supervision regulations, the approval of a majority vote of
PFSB Bancorp's outstanding shares is required for implementation of the stock
option plan within one year after the conversion. The stock option plan will
comply with all applicable regulatory requirements. However, the stock option
plan will not be approved or endorsed by the Office of Thrift Supervision.
The stock option plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide officers, key
employees and nonemployee directors with a proprietary interest in PFSB Bancorp
as an incentive to contribute to the success of PFSB Bancorp and Palmyra Saving,
and to reward officers and key employees for outstanding performance. The stock
option plan will provide for the grant of incentive stock options intended to
comply with the requirements of the Internal Revenue Code and for nonqualified
stock options. Upon receipt of stockholder approval of the stock option plan,
stock options may be granted to key employees of PFSB Bancorp and its
subsidiaries, including Palmyra Saving. The stock option plan will continue in
effect for a period of ten years from the date the stock option plan is approved
by stockholders, unless terminated earlier.
A number of authorized shares of common stock equal to 10% of the number of
shares of common stock issued with the conversion will be reserved for future
issuance under the stock option plan. This would range from 55,250 shares,
assuming 552,500 shares are issued in the conversion, to 85,962 shares, assuming
859,625 shares are issued in the conversion. Shares acquired upon exercise of
options will be authorized but unissued shares or treasury shares. If a stock
split, reverse stock split, stock dividend, or similar event occurs, the number
of shares of common stock under the stock option plan, the number of shares to
which any award relates and the exercise price per share under any option may be
adjusted by the stock option plan committee to reflect the increase or decrease
in the total number of shares of common stock outstanding.
The stock option plan will be administered and interpreted by a committee
of the Board of Directors of PFSB Bancorp. According to applicable Office of
Thrift Supervision regulations, the committee will determine which nonemployee
directors, officers and key employees will be granted options, whether, in the
case of officers and employees, the number of shares represented by each option,
and the exercisability of options. All options granted to nonemployee directors
will be nonqualified stock options. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of common stock on
the date the option is granted.
Under current Office of Thrift Supervision regulations, if the stock option
plan is implemented within one year of the conversion, no officer or employees
could receive an award of options covering in excess of 25%, no nonemployee
director could receive in excess of 5%, and nonemployee directors, as a group,
could not receive in excess of 30% of the number of shares reserved for issuance
under the stock option plan.
It is anticipated that all options will be granted according to a vesting
schedule so that the options become exercisable over a specified period
following the date of grant. Under Office of Thrift Supervision regulations, if
the stock option plan is implemented within the first year following the
conversion the minimum vesting period will be five years. All unvested options
will be immediately exercisable upon the recipient's death or disability.
Unvested
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options also will be exercisable following a change in control, as defined in
the stock option plan, of PFSB Bancorp or Palmyra Saving to the extent
authorized or not prohibited by applicable law or regulations. Under current
Office of Thrift Supervision regulations, if the stock option plan is
implemented prior to the first anniversary of the conversion, vesting may not be
accelerated upon a change in control of PFSB Bancorp or Palmyra Saving.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment, or one year if the optionee's
termination results from death or disability, unless the stock option committee
extends the time period. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant, or one year or two years upon a nonemployee
director's death or disability, following the termination of a nonemployee
director's service on the Board. All stock options are nontransferable except by
will or the laws of descent or distribution.
Under current provisions of the Internal Revenue Code, the federal tax
treatment of incentive stock options and nonqualified stock options is
different. For incentive stock options, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of common stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the common stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to PFSB Bancorp as a result of the grant or exercise of an
incentive stock option, unless the optionee fails to satisfy the holding period
requirements. For nonqualified stock options, the grant generally is not a
taxable event for the optionee and no tax deduction will be available to PFSB
Bancorp. However, upon exercise, the difference between the fair market value of
the common stock on the date of exercise and the option exercise price generally
will be treated as compensation to the optionee upon exercise, and PFSB Bancorp
will be entitled to a compensation expense deduction in the amount of income
realized by the optionee.
Under generally accepted accounting principles, compensation expense is
generally not recognized upon the award of options to officers and employees of
PFSB Bancorp and its subsidiaries. However, the Financial Accounting Standards
Board recently indicated that it would propose rules during 1999 that would
generally require recognition of compensation expense with respect to awards
made to nonemployees, including nonemployee directors of PFSB Bancorp, and that
the proposed changes would apply to awards made after December 15, 1998.
Although no specific award determinations have been made at this time, PFSB
Bancorp and Palmyra Saving anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations. The size of
individual awards will be determined prior to submitting the stock option plan
for stockholder approval, and disclosure of anticipated awards will be included
in the proxy materials for the meeting.
MANAGEMENT RECOGNITION PLAN. The Board of Directors of PFSB Bancorp intends
to adopt the PFSB Bancorp, Inc. Management Development and Recognition Plan, a
restricted stock plan, for officers, employees, and nonemployee directors of
PFSB Bancorp and Palmyra Saving, and to submit it to the stockholders for
approval at a meeting held no earlier than six months following the conversion.
The plan will enable PFSB Bancorp and Palmyra Saving to provide participants
with a proprietary interest in PFSB Bancorp as an incentive to contribute to the
success of PFSB Bancorp and Palmyra Saving. Persons who are awarded stock under
the plan will not have to pay for the stock. Furthermore, some or all of the
persons who receive awards under the management development and recognition plan
will also be granted options under the stock option plan. The plan will comply
with all applicable regulatory requirements. However, the plan will not be
approved or endorsed by the Office of Thrift Supervision. Under current Office
of Thrift Supervision regulations, the approval of a majority vote of PFSB
Bancorp's outstanding shares is required for implementation of the plan within
one year after the conversion.
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The plan intends to acquire a number of shares of PFSB Bancorp's common
stock equal to 4% of the common stock issued in the conversion. This would range
from 22,100 shares, assuming 552,500 shares are issued in the conversion, to
34,385 shares, assuming 859,625 shares are issued in the conversion. The shares
will be acquired on the open market, if available, with funds contributed by
PFSB Bancorp or Palmyra Saving to a trust which PFSB Bancorp may establish in
conjunction with the plan or from authorized but unissued shares or treasury
shares of PFSB Bancorp.
A committee of the Board of Directors of PFSB Bancorp will administer the
management development and recognition plan, the members of which will also
serve as trustees for the plan, if a trust is formed. The trustees will be
responsible for the investment of all funds contributed by PFSB Bancorp or
Palmyra Saving to the trust. The Board of Directors of PFSB Bancorp may
terminate the plan at any time and, upon termination, all unallocated shares of
common stock will revert to PFSB Bancorp.
Shares of common stock granted under the plan will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by PFSB Bancorp or by the plan. Under Office of Thrift Supervision
regulations, if the management development and recognition plan is implemented
within the first year following the conversion, the minimum vesting period will
be five years. All unvested awards will vest upon the recipient's death or
disability. Unvested management development and recognition plan awards will
also vest following a change in control, as defined in the plan, of PFSB Bancorp
or Palmyra Saving to the extent authorized or not prohibited by applicable law
or regulations. Office of Thrift Supervision regulations currently provide that,
if the management development and recognition plan is implemented prior to the
first anniversary of the conversion, vesting may not be accelerated upon a
change in control of PFSB Bancorp or Palmyra Saving.
A recipient of a plan award in the form of restricted stock generally will
not recognize income upon an award of shares of common stock, and PFSB Bancorp
will not be entitled to a federal income tax deduction, until the termination of
the restrictions. Upon termination, the recipient will recognize ordinary income
in an amount equal to the fair market value of the common stock at the time and
PFSB Bancorp will be entitled to a deduction in the same amount after satisfying
federal income tax withholding requirements. However, the recipient may elect to
recognize ordinary income in the year the restricted stock is granted in an
amount equal to the fair market value of the shares at that time, determined
without regard to the restrictions. In that event, PFSB Bancorp will be entitled
to a deduction in that year and in the same amount. Any gain or loss recognized
by the recipient upon subsequent disposition of the stock will be either a
capital gain or capital loss.
Although no specific award determinations have been made at this time, PFSB
Bancorp and Palmyra Saving anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations. Under
current Office of Thrift Supervision regulations, if the plan is implemented
within one year after the conversion, no officer or employees could receive an
award covering in excess of 25%, no nonemployee director could receive in excess
of 5% and nonemployee directors, as a group, could not receive in excess of 30%
of the number of shares reserved for issuance under the plan. The size of
individual awards will be determined prior to submitting the plan for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for the meeting.
TRANSACTIONS WITH PALMYRA SAVING
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee, and must not involve more than the normal risk of repayment or present
other unfavorable features. Palmyra Saving's policy is not to make any new loans
or extensions of credit to Palmyra Saving's executive officers and directors at
different rates or terms than those offered to the general public. In addition,
loans made to a director
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or executive officer in an amount that, when aggregated with the amount of all
other loans to the person and his related interests, are in excess of the
greater of $25,000 or 5% of Palmyra Saving's capital and surplus, up to a
maximum of $500,000, must be approved in advance by a majority of the
disinterested members of the Board of Directors. See "Regulation--Federal
Regulation of Savings Associations--Transactions with Affiliates." The aggregate
amount of loans by Palmyra Saving to its executive officers and directors was
$59,000 at September 30, 1998, or approximately 0.5% of pro forma stockholders'
equity assuming that 747,500 shares are issued in the conversion. These loans
were performing according to their original terms at September 30, 1998.
REGULATION
GENERAL
Palmyra Saving is regulated, examined and supervised by the Office of
Thrift Supervision, as its chartering agency, and the Federal Deposit Insurance
Corporation, as the insurer of its deposits. The activities of federal savings
institutions are governed by the Home Owners' Loan Act, as amended and, in
certain respects, the Federal Deposit Insurance Act and the regulations issued
by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which federal savings associations
may engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, Palmyra Saving's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in matters such as the ownership of deposit accounts and the
form and content of Palmyra Saving's mortgage documents. Palmyra Saving must
file reports with the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation to review Palmyra
Saving's compliance with various regulatory requirements. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in policies, whether by the Office of Thrift Supervision, the Federal
Deposit Insurance Corporation or Congress, could have a material adverse impact
on Palmyra Saving and its operations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
Office Of ThrifT Supervision. The Office of Thrift Supervision is an office
in the Department of the Treasury. It generally possesses the supervisory and
regulatory duties and responsibilities formerly vested in the Federal Home Loan
Bank Board. Among other functions, the Office of Thrift Supervision issues and
enforces regulations affecting federally insured savings associations and
regularly examines these institutions.
Federal Home Loan Bank System. The Federal Home Loan Bank System,
consisting of 12 banks, is under the jurisdiction of the Federal Housing Finance
Board. Palmyra Saving, as a member of the Federal Home Loan Bank of Des Moines,
is required to acquire and hold shares of capital stock in the Federal Home Loan
Bank of Des Moines in an amount equal to the greater of 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 1/20 of its
borrowings from the Federal Home Loan Bank of Des Moines. Palmyra Saving is in
compliance with this requirement with an investment in Federal Home Loan Bank of
Des Moines stock of $373,500 at September 30, 1998. Among other benefits, the
Federal Home Loan Bank of Des Moines provides a central credit facility
primarily for member institutions.
Federal Deposit Insurance Corporation. The Federal Deposit Insurance
Corporation is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of depository institutions. The Federal Deposit
Insurance Corporation currently maintains two separate insurance funds: the Bank
Insurance Fund and the
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Savings Association Insurance Fund. As insurer of Palmyra Saving's deposits, the
Federal Deposit Insurance Corporation has examination, supervisory and
enforcement authority over Palmyra Saving.
Palmyra Saving's accounts are insured by the Savings Association Insurance
Fund to the maximum extent permitted by law. Palmyra Saving pays deposit
insurance premiums based on a risk-based assessment system established by the
Federal Deposit Insurance Corporation. Under applicable regulations,
institutions are assigned to one of three capital groups that are based solely
on the level of an institution's capital -- "well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory concern.
The matrix so created results in nine assessment risk classifications, with
rates that until September 30, 1996 ranged from 0.23% for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the
Savings Association Insurance Fund unless effective corrective action is taken.
Under the Deposit Insurance Funds Act, which was enacted on September 30,
1996, the Federal Deposit Insurance Corporation imposed a special assessment on
each depository institution with Savings Association Insurance Fund-assessable
deposits which resulted in the Savings Association Insurance Fund achieving its
designated reserve ratio. As a result, the Federal Deposit Insurance Corporation
reduced the assessment schedule for Savings Association Insurance Fund members,
effective January 1, 1997, to a range of 0% to 0.27%, with most institutions,
including Palmyra Saving, paying 0%. This assessment schedule is the same as
that for the Bank Insurance Fund, which reached its designated reserve ratio in
1995. In addition, since January 1, 1997, Savings Association Insurance Fund
members are charged an assessment of .065% of Savings Association Insurance
Fund-assessable deposits to pay interest on the obligations issued by the
Financing Corporation in the 1980s to help fund the thrift industry cleanup.
Bank Insurance Fund-assessable deposits will be charged an assessment to help
pay interest on the Financing Corporation bonds at a rate of approximately .013%
until the earlier of December 31, 1999 or the date upon which the last savings
association ceases to exist, after which time the assessment will be the same
for all insured deposits.
The Deposit Insurance Funds Act also contemplates the development of a
common charter for all federally chartered depository institutions and the
abolition of separate charters for national banks and federal savings
associations. It is not known what form the common charter may take and what
effect, if any, the adoption of a new charter would have on the operation of
Palmyra Saving.
The Federal Deposit Insurance Corporation may terminate the deposit
insurance of any insured depository institution if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the Federal Deposit Insurance Corporation. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of accounts
is terminated, the accounts at the institution at the time of termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the Federal Deposit Insurance Corporation.
Management is aware of no existing circumstances that could result in
termination of the deposit insurance of Palmyra Saving.
Liquidity Requirements. Under Office of Thrift Supervision regulations,
each savings institution is required to maintain an average daily balance of
liquid assets, such as cash, certain time deposits and savings accounts,
bankers' acceptances, and specified U.S. Government, state or federal agency
obligations and certain other investments, equal to a monthly average of not
less than a specified percentage of its net withdrawable accounts plus short-
term borrowings. The current percentage is 4%. Monetary penalties may be imposed
for failure to meet liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be "well capitalized" if it has a
total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not required
to meet and maintain a specific capital level for any capital measure;
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, has a Tier I risk-based capital ratio of 4.0% or more, has a leverage
ratio of 4.0% or more, or 3.0% under certain circumstances, and does not meet
the definition of "well capitalized"; "undercapitalized" if it has a total risk-
based capital ratio that is less than 8.0%, has a Tier I risk-based capital
ratio that is less than 4.0% or has a leverage ratio that is less than 4.0%, or
3.0% under certain circumstances; "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, has a Tier I risk-based
capital ratio that is less than 3.0% or has a leverage ratio that is less than
3.0%; and "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The Office of
Thrift Supervision may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall face various mandatory and discretionary restrictions on its
operations.
At September 30, 1998, Palmyra Saving was categorized as "well capitalized"
under the prompt corrective action regulations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory agencies
have adopted regulatory guidelines for all insured depository institutions
relating to internal controls, information systems and internal audit systems;
loan documentation; credit underwriting; interest rate risk exposure; asset
growth; asset quality; earnings; and compensation, fees and benefits. The
guidelines outline the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the Office of Thrift Supervision determines
that Palmyra Saving fails to meet any standard prescribed by the guidelines, it
may require Palmyra Saving to submit to the agency an acceptable plan to achieve
compliance with the standard. Office of Thrift Supervision regulations establish
deadlines for the submission and review of safety and soundness compliance
plans.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a qualified
thrift lender shall either convert to a national bank charter or face the
following restrictions on its operations. These restrictions are: the
association may not make any new investment or engage in activities that would
not be permissible for national banks; the association may not establish any new
branch office where a national bank located in the savings institution's home
state would not be able to establish a branch office; the association shall be
ineligible to obtain new advances from any Federal Home Loan Bank; and the
payment of dividends by the association shall be under the rules regarding the
statutory and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a qualified thrift lender, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any outstanding
advances to any Federal Home Loan Bank. In addition, within one year of the date
on which a savings association controlled by a company ceases to be a
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qualified thrift lender, the company must register as a bank holding company and
follow the rules applicable to bank holding companies. A savings institution may
requalify as a qualified thrift lender if it thereafter complies with the test.
Currently, the qualified thrift lender test requires that either an
institution qualify as a domestic building and loan association under the
Internal Revenue Code or that 65% of an institution's "portfolio assets" consist
of certain housing and consumer-related assets on a monthly average basis in
nine out of every 12 months. Assets that qualify without limit for inclusion as
part of the 65% requirement are loans made to purchase, refinance, construct,
improve or repair domestic residential housing and manufactured housing; home
equity loans; mortgage-backed securities where the mortgages are secured by
domestic residential housing or manufactured housing; Federal Home Loan Bank
stock; direct or indirect obligations of the Federal Deposit Insurance
Corporation; and loans for educational purposes, loans to small businesses and
loans made through credit cards. In addition, the following assets, among
others, may be included in meeting the test based on an overall limit of 20% of
the savings institution's portfolio assets: 50% of residential mortgage loans
originated and sold within 90 days of origination; 100% of consumer loans; and
stock issued by Freddie Mac or Fannie Mae. Portfolio assets consist of total
assets minus the sum of goodwill and other intangible assets, property used by
the savings institution to conduct its business, and liquid assets up to 20% of
the institution's total assets. At September 30, 1998, Palmyra Saving was in
compliance with the qualified thrift lender test.
Capital Requirements. Federal regulations require a savings association
must satisfy three minimum capital requirements: core capital, tangible capital
and risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
Office of Thrift Supervision capital regulations establish a 3% core
capital or leverage ratio (defined as the ratio of core capital to adjusted
total assets). Core capital is defined to include common stockholders' equity,
noncumulative perpetual preferred stock and any related surplus, and minority
interests in equity accounts of consolidated subsidiaries, less any intangible
assets, except for certain qualifying intangible assets; certain mortgage
servicing rights; and equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the
Office of Thrift Supervision a capital plan that details the steps they will
take to reach compliance. In addition, the Office of Thrift Supervision's prompt
corrective action regulation provides that a savings institution that has a
leverage ratio of less than 4%, or 3% in the case of institutions receiving the
highest CAMELS examination rating, will be deemed to be "undercapitalized" and
may face certain restrictions. See "--Federal Regulation of Savings
Associations--Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of Palmyra Saving's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt,
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, based on an
amortization schedule, and general valuation loan and lease loss allowances up
to 1.25% of risk-weighted assets.
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The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating risk-
weighted assets. The categories range from 0% for cash and securities that are
backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans, including multi-family mortgage loans, are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor from 0% to 100% assigned to that category.
These products are then totaled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The Office of Thrift Supervision has incorporated an interest rate risk
component into its regulatory capital rule. Under the rule, savings associations
with "above normal" interest rate risk exposure would face a deduction from
total capital for purposes of calculating their risk-based capital requirements.
A savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets, or the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts,
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines of the Office
of Thrift Supervision. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted from
an association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for the
new capital requirement based on that data. A savings association with assets of
less than $300 million and risk-based capital ratios in excess of 12% is exempt
from the interest rate risk component, unless the Office of Thrift Supervision
determines otherwise. The rule also provides that the Office of Thrift
Supervision may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the calculated interest rate risk component, as calculated by the Office of
Thrift Supervision, overstates its interest rate risk exposure. In addition,
certain "well-capitalized" institutions may obtain authorization to use their
own interest rate risk model to calculate their interest rate risk component in
lieu of the amount as calculated by the Office of Thrift Supervision. The Office
of Thrift Supervision has postponed the date that the component will first be
deducted from an institution's total capital.
See "Historical And Pro Forma Regulatory Capital Compliance" for a table
that sets forth in terms of dollars and percentages the tangible, core and risk-
based capital requirements, Palmyra Saving's historical amounts and percentages
at September 30, 1998 and pro forma amounts and percentages based upon the
stated assumptions.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. Federal regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, Federal regulations require Palmyra Saving to give the
Office of Thrift Supervision 30 days' advance notice of any proposed declaration
of dividends, and the Office of Thrift Supervision has the authority under its
supervisory powers to prohibit the payment of dividends. The regulation utilizes
a three-tiered approach which permits various levels of distributions based
primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement both before and after the proposed capital distribution. A
Tier 1 savings association may make, without application but upon prior notice
to, and no objection made by, the Office of Thrift Supervision, capital
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus one-half its surplus capital ratio at the beginning of
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the calendar year or the amount authorized for a Tier 2 association. Capital
distributions in excess of that amount require advance notice to the Office of
Thrift Supervision. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in capital
requirement, both before and after the proposed capital distribution. Tier 2
associations may make without application capital distributions up to an amount
equal to 75% of its net income during the previous four quarters depending on
how close the association is to meeting its fully phased-in capital requirement.
Capital distributions exceeding this amount require prior Office of Thrift
Supervision approval. Tier 3 associations are savings associations with capital
below the minimum capital requirement, either before or after the proposed
capital distribution. Tier 3 associations may not make any capital distributions
without prior approval from the Office of Thrift Supervision.
Palmyra Saving currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the Office of Thrift Supervision) distribute up to 100% of
its net income during the calendar year plus 50% of its surplus capital ratio at
the beginning of the calendar year less any distributions previously paid during
the year.
LOANS TO ONE BORROWER. Savings institutions are generally required to
follow the national bank limit on loans to one borrower. Generally, this limit
is 15% of its unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which is defined to include certain financial instruments and
bullion. The Office of Thrift Supervision by regulation has amended the loans to
one borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. See "Business of Palmyra Saving--Lending Activities--
Loans to One Borrower" for further information.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and may establish service corporation
subsidiaries to engage in certain preapproved activities or, with approval of
the Office of Thrift Supervision, other activities reasonably related to the
activities of financial institutions. When a savings association establishes or
acquires a subsidiary or elects to conduct any new activity through a subsidiary
that the association controls, the savings association must notify the Federal
Deposit Insurance Corporation and the Office of Thrift Supervision 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The Office of Thrift Supervision may determine that the continuation by a
savings association of its ownership control of, or its relationship to, the
subsidiary constitutes a serious risk to the safety, soundness or stability of
the association or is inconsistent with sound banking practices. Based upon that
determination, the Federal Deposit Insurance Corporation or the Office of Thrift
Supervision has the authority to order the savings association to divest itself
of control of the subsidiary. The Federal Deposit Insurance Corporation also may
determine by regulation or order that any specific activity poses a serious
threat to the Savings Association Insurance Fund. If so, it may require that no
Savings Association Insurance Fund member engage in that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the Home
Owners Loan Act. Generally, Sections 23A and 23B limit the extent to which the
insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of the institution's
capital and surplus and place an aggregate limit on all transactions with
affiliates to an amount equal to 20% of capital and surplus, and require that
all transactions be on terms substantially the same, or at least as favorable to
the institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions.
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Any loan or extension of credit by Palmyra Saving to an affiliate must be
secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations. First, a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies. Second, a savings association may not purchase or invest in
securities issued by an affiliate, other than securities of a subsidiary. Third,
the Office of Thrift Supervision may, for reasons of safety and soundness,
impose more stringent restrictions on savings associations but may not exempt
transactions from or otherwise abridge Section 23A or 23B. Exemptions from
Section 23A or 23B may be granted only by the Federal Reserve, as is currently
the case with respect to all Federal Deposit Insurance Corporation-insured
banks.
Palmyra Saving's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by those persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
Palmyra Saving may make to those persons based, in part, on Palmyra Saving's
capital position, and requires certain board approval procedures to be followed.
The Office of Thrift Supervision regulations, with certain minor variances,
apply Regulation O to savings institutions.
COMMUNITY REINVESTMENT ACT. Savings associations are required to follow the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the savings association's record
in meeting the credit needs of the community serviced by the savings
associations, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, an assessment is required of any savings associations which has
applied, among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. Palmyra Saving received a "satisfactory" rating as a result of its
most recent examination.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. Federal law and regulation generally prohibit
a savings and loan holding company, without prior Office of Thrift Supervision
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of PFSB Bancorp, from acquiring control of any
savings association not a subsidiary of a savings and loan holding company,
unless the acquisition is approved by the Office of Thrift Supervision.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company,
PFSB Bancorp generally has no activity restrictions under federal law. If PFSB
Bancorp acquires control of another savings association as a separate subsidiary
other than in a supervisory acquisition, it would become a multiple savings and
loan holding company. There generally are more restrictions on the activities of
a multiple savings and loan holding company than on those of a unitary savings
and loan holding company. Federal law provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not an
insured association shall begin or continue for more than two years after
becoming a multiple savings and loan association holding company or subsidiary
thereof, any business activity other than furnishing or performing management
services for a subsidiary insured institution; conducting an insurance agency or
escrow business; holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution; holding or managing properties used or
occupied by a subsidiary insured institution, acting as trustee under deeds of
trust; those activities previously directly authorized by regulation as of March
5, 1987 to be engaged in by multiple holding companies; or those activities
authorized by the
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Federal Reserve Board as permissible for bank holding companies, unless the
Office of Thrift Supervision by regulation, prohibits or limits these activities
for savings and loan holding companies.
The activities authorized by the Federal Reserve Board as permissible for
bank holding companies also must be approved by the Office of Thrift Supervision
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. Federal law provides that any savings and
loan holding company that controls a savings association that fails the
qualified thrift lender test, as explained under "--Federal Regulation of
Savings Associations--Qualified Thrift Lender Test," must, within one year after
the date on which the association ceases to be a qualified thrift lender,
register as and be deemed a bank holding company under all applicable laws and
regulations.
TAXATION
FEDERAL TAXATION
GENERAL. PFSB Bancorp and Palmyra Saving will report their income using the
accrual method of accounting and will be taxed under federal income tax laws in
the same manner as other corporations with some exceptions, including
particularly Palmyra Saving's reserve for bad debts discussed below. PFSB
Bancorp's and Palmyra Saving's tax year will end on September 30 of each year.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
Palmyra Saving or PFSB Bancorp.
BAD DEBT RESERVE. Historically, savings institutions such as Palmyra Saving
which met certain definitional tests primarily related to their assets and the
nature of their business were permitted to establish a reserve for bad debts and
to make annual additions thereto, which may have been deducted in arriving at
their taxable income. Palmyra Saving's deductions with respect to "qualifying
real property loans," which are generally loans secured by certain interest in
real property, were computed using an amount based on Palmyra Saving's actual
loss experience, or a percentage equal to 8% of Palmyra Saving's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. Due to Palmyra Saving's loss
experience, Palmyra Saving generally recognized a bad debt deduction equal to 8%
of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a portion
of their bad debt reserves added since the base year, defined as the last
taxable year beginning before January 1, 1988. Palmyra Saving has no post-1987
reserves that would be recaptured. For taxable years beginning after December
31, 1995, Palmyra Saving's bad debt deduction will be determined under the
experience method using a formula based on actual bad debt experience over a
period of years. The unrecaptured base year reserves will not be recaptured as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be treated
under the provisions of present law referred to below that require recapture in
the case of certain excess distributions to shareholders.
DISTRIBUTIONS. To the extent that Palmyra Saving makes "nondividend
distributions" to PFSB Bancorp, the distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987, or a lesser amount if Palmyra Saving's loan portfolio decreased since
December 31, 1987, and then from the supplemental reserve for losses on loans.
An amount based on the supplemental reserve for loan losses will be included in
Palmyra Saving's taxable income. Nondividend distributions include distributions
in excess of Palmyra Saving's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Palmyra Saving's current or
accumulated earnings
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and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from Palmyra Saving's bad debt reserve.
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if, after the conversion, Palmyra Saving
makes a "nondividend distribution," then approximately one and one-half times
the amount based on the supplemental reserve for loan losses would be includable
in gross income for federal income tax purposes, assuming a 34% corporate
federal income tax rate. See "Regulation" and "Dividend Policy" for limits on
the payment of dividends by Palmyra Saving. Palmyra Saving does not intend to
pay dividends that would result in a recapture of any portion of its tax bad
debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a tax
on alternative minimum taxable income at a rate of 20%. The excess of the tax
bad debt reserve deduction using the percentage of taxable income method over
the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the alternative minimum
taxable income. In addition, only 90% of alternative minimum taxable income can
be offset by net operating loss carry-overs. Alternative minimum taxable income
is increased by an amount equal to 75% of the amount by which Palmyra Saving's
adjusted current earnings exceeds its alternative minimum taxable income
determined without regard to this preference and prior to reduction for net
operating losses. For taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of
alternative minimum taxable income (with certain modification) over $2.0 million
is imposed on corporations, including Palmyra Saving, whether or not an
alternative minimum tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. PFSB Bancorp may exclude from its income 100%
of dividends received from Palmyra Saving as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
PFSB Bancorp and Palmyra Saving will not file a consolidated tax return, except
that if PFSB Bancorp or Palmyra Saving owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
AUDITS. The IRS has not audited Palmyra Saving's federal income tax returns
for the past five years.
MISSOURI TAXATION
Missouri-based thrift institutions, like Palmyra Saving, pay a special
financial institutions tax at the rate of 7% of net income, without regard to
net operating loss carryforwards. This tax is in lieu of certain other state
taxes on thrift institutions, on their property, capital or income, except taxes
on tangible personal property owned by Palmyra Saving and held for lease or
rental to others and on real estate, contributions paid to the Unemployment
Compensation Law of Missouri, social security taxes, sales taxes and use taxes.
In addition, Palmyra Saving is entitled to a credit against this tax for all
taxes paid to the State of Missouri or any political subdivision, except taxes
on tangible personal property owned by Palmyra Saving and held for lease or
rental to others and on real estate, contributions paid under the Unemployment
Compensation Law of Missouri, social security taxes, sales and use taxes, and
taxes imposed by the Missouri Financial Institutions Tax Law. Missouri thrift
institutions do not pay the regular corporate income tax. Palmyra Saving's state
income tax returns have not been audited for the past five years.
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THE CONVERSION
THE OFFICE OF THRIFT SUPERVISION HAS APPROVED THE PLAN OF CONVERSION WITH
THE CONDITION THAT IT IS APPROVED BY THE MEMBERS OF PALMYRA SAVING ENTITLED TO
VOTE AND TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OFFICE
OF THRIFT SUPERVISION IN ITS APPROVAL. OFFICE OF THRIFT SUPERVISION APPROVAL IS
NOT A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On September 24, 1998, the Board of Directors of Palmyra Saving unanimously
adopted the plan of conversion, under which Palmyra Saving will be converted
from a federally chartered mutual savings and loan association to a federally
chartered stock savings bank to be held as a wholly owned subsidiary of PFSB
Bancorp, a newly formed Missouri corporation. The Board of Directors unanimously
amended the plan of conversion on January 21, 1999. THE FOLLOWING DISCUSSION OF
THE PLAN OF CONVERSION CONTAINS ALL MATERIAL TERMS ABOUT THE CONVERSION.
NEVERTHELESS, READERS ARE URGED TO READ CAREFULLY THE PLAN OF CONVERSION, WHICH
ACCOMPANIES PALMYRA SAVING'S PROXY STATEMENT AND IS AVAILABLE TO MEMBERS OF
PALMYRA SAVING UPON REQUEST. The plan of conversion is also filed as an exhibit
to the registration statement that PFSB Bancorp has filed with the Securities
and Exchange Commission. See "Where You Can Find More Information." The Office
of Thrift Supervision has approved the plan of conversion with the condition
that it is approved by the members of Palmyra Saving entitled to vote on the
matter at a special meeting on March 22, 1999 and conditioned on the
satisfaction of certain other conditions imposed by the Office of Thrift
Supervision in its approval.
The conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by Palmyra Saving.
As part of the conversion, Palmyra Saving will issue all of its newly issued
capital stock, or 1,000 shares of common stock, to PFSB Bancorp in exchange for
50% of the net proceeds from the sale of common stock by PFSB Bancorp.
The plan of conversion provides generally that: Palmyra Saving will convert
from a federally chartered mutual savings and loan association to a federally
chartered stock savings bank; the common stock will be offered by PFSB Bancorp
in the subscription offering to persons having subscription rights; if
necessary, shares of common stock not subscribed for in the subscription
offering will be offered in a direct community offering to certain members of
the general public, with preference given to natural persons and trusts of
natural persons residing in Marion, Lewis and Clark Counties of Missouri, and
then to certain members of the general public in a syndicated community offering
through a syndicate of registered broker-dealers under selected dealers
agreements; and PFSB Bancorp will purchase all of the capital stock of Palmyra
Saving to be issued in the conversion. The conversion will be completed only
upon the sale of at least $5,525,000 of common stock to be issued under the plan
of conversion.
As part of the conversion, PFSB Bancorp is making a subscription offering
of its common stock to holders of subscription rights in the following order of
priority. First, depositors of Palmyra Saving with $50.00 or more on deposit as
of June 30, 1997. Second, Palmyra Saving's employee stock ownership plan. Third,
depositors of Palmyra Saving with $50.00 or more on deposit as of December 31,
1998. Finally, depositors of Palmyra Saving as of January 31, 1999 and borrowers
of Palmyra Saving with loans outstanding as of June 1, 1995 which continue to be
outstanding as of January 31, 1999.
Shares of common stock not subscribed for in the subscription offering may
be offered for sale in the direct community offering. The direct community
offering, if one is held, is expected to begin immediately after the expiration
of the subscription offering, but may begin at any time during the subscription
offering. Shares of common stock not sold in the subscription and direct
community offerings may be offered in the syndicated community offering.
Regulations require that the Direct Community and syndicated community offerings
be completed within 45 days after completion of the fully extended subscription
offering unless extended by Palmyra Saving or PFSB Bancorp with the approval of
the regulatory authorities. If the syndicated community offering is determined
not to be feasible, the Board of Directors of Palmyra Saving will consult with
the regulatory authorities
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to determine an appropriate alternative method for selling the unsubscribed
shares of common stock. The plan of conversion provides that the conversion must
be completed within 24 months after the date of the approval of the plan of
conversion by the members of Palmyra Saving.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering unless the
plan of conversion is approved by the members of Palmyra Saving.
The completion of the offering, however, depends on market conditions and
other factors beyond Palmyra Saving's control. No assurance can be given as to
the length of time after approval of the plan of conversion at the special
meeting that will be required to complete the Direct Community or syndicated
community offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of PFSB Bancorp and Palmyra Saving as converted, together with
corresponding changes in the net proceeds realized by PFSB Bancorp from the sale
of the common stock. If the conversion is terminated, Palmyra Saving would be
required to charge all conversion expenses against current income.
Orders for shares of common stock will not be filled until at least 552,500
shares of common stock have been subscribed for or sold and the Office of Thrift
Supervision approves the final valuation and the conversion closes. If the
conversion is not completed within 45 days after the last day of the fully
extended subscription offering and the Office of Thrift Supervision consents to
an extension of time to complete the conversion, subscribers will be given the
right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at Palmyra Saving's passbook rate from the date payment is
received until the funds are returned to the subscriber. If the period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at Palmyra Saving's passbook rate from the date
payment is received until the conversion is terminated.
REASONS FOR THE CONVERSION
The Board of Directors and management believe that the conversion is in the
best interests of Palmyra Saving, its members and the communities it serves.
Palmyra Saving's Board of Directors has formed PFSB Bancorp to serve as a
holding company, with Palmyra Saving as its subsidiary, after the conversion. By
converting to the stock form of organization, PFSB Bancorp and Palmyra Saving
will be structured in the form used by holding companies of commercial banks,
most business entities and by a growing number of savings institutions.
Management of Palmyra Saving believes that the conversion offers a number of
advantages which will be important to the future growth and performance of
Palmyra Saving. The capital raised in the conversion is intended to support
Palmyra Saving's current lending and investment activities and may also support
possible future expansion and diversification of operations, although there are
no current specific plans, arrangements or understandings, written or oral,
regarding any expansion or diversification. The conversion is also expected to
afford Palmyra Saving's management, members and others the opportunity to become
stockholders of PFSB Bancorp and participate more directly in, and contribute
to, any future growth of PFSB Bancorp and Palmyra Saving. The conversion will
also enable PFSB Bancorp and Palmyra Saving to raise additional capital in the
public equity or debt markets should the need arise, although there are no
current specific plans, arrangements or understandings, written or oral,
regarding any financing activities. Palmyra Saving, as a mutual savings and loan
association, does not have the authority to issue capital stock or debt
instruments, other than by accepting deposits.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF PALMYRA
SAVING
VOTING RIGHTS. Savings members and borrowers will have no voting rights in
the converted association or PFSB Bancorp and therefore will not be able to
elect directors of Palmyra Saving or PFSB Bancorp or to control their affairs.
Currently, these rights are accorded to savings members of Palmyra Saving.
Subsequent to the
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conversion, voting rights will be vested exclusively in PFSB Bancorp with
respect to Palmyra Saving and the holders of the common stock as to matters
pertaining to PFSB Bancorp. Each holder of common stock shall be entitled to
vote on any matter to be considered by the stockholders of PFSB Bancorp. A
stockholder will be entitled to one vote for each share of common stock owned.
SAVINGS ACCOUNTS AND LOANS. Palmyra Saving's savings accounts, account
balances and existing Federal Deposit Insurance Corporation insurance coverage
of savings accounts will not be affected by the conversion. Furthermore, the
conversion will not affect the loan accounts, loan balances or obligations of
borrowers under their individual contractual arrangements with Palmyra Saving.
TAX EFFECTS. Palmyra Saving has received an opinion from Muldoon, Murphy &
Faucette LLP, Washington, D.C., that the conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code. Among
other things, the opinion states that:
1. no gain or loss will be recognized to Palmyra Saving in its mutual or
stock form by reason of the conversion;
2. no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in Palmyra Saving immediately after the
conversion, in the same dollar amounts and on the same terms and
conditions as their accounts at Palmyra Saving in its mutual form plus
interest in the liquidation account;
3. the tax basis of account holders' accounts in Palmyra Saving
immediately after the conversion will be the same as the tax basis of
their accounts immediately prior to conversion;
4. the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
5. the tax basis of the common stock purchased in the conversion will be
the amount paid and the holding period for the stock will begin on the
date of purchase; and
6. no gain or loss will be recognized to account holders upon the receipt
or exercise of subscription rights in the conversion, except to the
extent subscription rights are deemed to have value as discussed
below.
Unlike a private letter ruling issued by the Internal Revenue Service, an
opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached in the
opinion. If there is a disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the Internal Revenue Service.
Based upon past rulings issued by the Internal Revenue Service, the opinion
provides that the receipt of subscription rights by eligible account holders,
supplemental eligible account holders and other members under the plan of
conversion will be taxable to the extent, if any, that the subscription rights
are deemed to have a fair market value. RP Financial, a financial consulting
firm retained by Palmyra Saving, whose findings are not binding on the Internal
Revenue Service, has issued a letter indicating that the subscription rights do
not have any value, based on the fact that the rights are acquired by the
recipients without cost, are nontransferable and of short duration and afford
the recipients the right only to purchase shares of the common stock at a price
equal to its estimated fair market value, which will be the same price paid by
purchasers in the direct community offering for unsubscribed shares of common
stock. If the subscription rights are deemed to have a fair market value, the
receipt of the rights may only be taxable to those persons who exercise their
subscription rights. Palmyra Saving could also recognize a gain on the
distribution of subscription rights. Holders of subscription rights are
encouraged to consult with their
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own tax advisors as to the tax consequences in the event the subscription rights
are deemed to have a fair market value.
Palmyra Saving has also received an opinion from Moore, Horton & Carlson,
P.C., Mexico, Missouri, that, assuming the conversion does not result in any
federal income tax liability to Palmyra Saving, its account holders, or PFSB
Bancorp, implementation of the plan of conversion will not result in any
Missouri income tax liability to those entities or persons.
The opinions of Muldoon, Murphy & Faucette LLP and Moore, Horton & Carlson,
P.C. and the letter from RP Financial are filed as exhibits to the registration
statement that PFSB Bancorp has filed with the Securities and Exchange
Commission. See "Where You Can Find More Information."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
Palmyra Saving, each depositor in Palmyra Saving would receive a pro rata share
of any assets of Palmyra Saving remaining after payment of claims of all
creditors, including the claims of all depositors up to the withdrawal value of
their accounts. Each depositor's pro rata share of the remaining assets would be
in the same proportion as the value of his or her deposit account to the total
value of all deposit accounts in Palmyra Saving at the time of liquidation.
After the conversion, holders of withdrawals deposit(s) in Palmyra Saving,
including certificates of deposit, shall not be entitled to share in any
residual assets upon liquidation of Palmyra Saving. However, under Office of
Thrift Supervision regulations, Palmyra Saving shall, at the time of the
conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
in the final prospectus relating to the conversion.
The liquidation account shall be maintained by Palmyra Saving subsequent to
the conversion for the benefit of eligible account holders and supplemental
eligible account holders who retain their savings accounts in Palmyra Saving.
Each eligible account holder and supplemental eligible account holder shall,
with respect to each savings account held, have a related inchoate interest in a
sub-account portion of the liquidation account balance.
The initial subaccount balance for a savings account held by an eligible
account holder or a supplemental eligible account holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the holder's "qualifying deposit" in the
savings account and the denominator is the total amount of the "qualifying
deposits" of all eligible account holders. The initial subaccount balance shall
not be increased, and it shall be decreased as provided below.
If the deposit balance in any savings account of an eligible account holder
or supplemental eligible account holder at the close of business on any annual
closing day of Palmyra Saving subsequent to June 30, 1997, or December 31, 1998
is less than the lesser of the deposit balance in a savings account at the close
of business on any other annual closing date subsequent to June 30, 1997 or
December 31, 1998, or the amount of the "qualifying deposit" in a savings
account on June 30, 1997 or December 31, 1998, then the subaccount balance for a
savings account shall be adjusted by reducing the subaccount balance in an
amount proportionate to the reduction in the deposit balance. Once reduced, the
subaccount balance shall not be subsequently increased, notwithstanding any
increase in the deposit balance of the related savings account. If any savings
account is closed, the related subaccount balance shall be reduced to zero.
Only upon a complete liquidation of Palmyra Saving each eligible account
holder and supplemental eligible account holder shall be entitled to receive a
liquidation distribution from the liquidation account in the amount of the then
current adjusted subaccount balance(s) for savings account(s) then held by the
holder before any liquidation distribution may be made to stockholders. No
merger, consolidation, bulk purchase of assets with
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assumptions of savings account and other liabilities or similar transactions
with another federally insured institution in which Palmyra Saving is not the
surviving institution shall be considered to be a complete liquidation. In any
of these transaction the liquidation account shall be assumed by the surviving
institution.
In the unlikely event Palmyra Saving is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to PFSB Bancorp as the sole stockholder of Palmyra Saving.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories described in
the plan of conversion. Subscription priorities have been established for the
allocation of stock to the extent that the common stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more on
deposit at Palmyra Saving as of June 30, 1997 will receive nontransferable
subscription rights to subscribe for up to the greater of $60,000 of common
stock, which equals 6,000 shares, one-tenth of one percent of the total offering
of common stock or 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common stock to be issued
by a fraction of which the numerator is the amount of qualifying deposit of the
eligible account holder and the denominator is the total amount of qualifying
deposits of all eligible account holders. If the exercise of subscription rights
in this category results in an oversubscription, shares of common stock will be
allocated among subscribing eligible account holders so as to permit each one,
to the extent possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated proportionately, based on the amount of their respective qualifying
deposits as compared to total qualifying deposits of all subscribing eligible
account holders. Subscription rights received by officers and directors in this
category based on their increased deposits in Palmyra Saving in the one year
period preceding June 30, 1997 are subordinated to the subscription rights of
other eligible account holders.
Category 2: Employee Stock Ownership Plan. The plan of conversion provides
that the employee stock ownership plan shall receive nontransferable
subscription rights to purchase up to 8% of the shares of common stock issued in
the conversion. The plan intends to purchase 8% of the shares of common stock
issued in the conversion. In the event the number of shares offered in the
conversion is increased, the plan shall have a priority right to purchase any
shares exceeding that amount up to 8% of the common stock. If the plan's
subscription is not filled in its entirety, the employee stock ownership plan
may purchase shares in the open market or may purchase shares directly from PFSB
Bancorp.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of December 31, 1998 will receive nontransferable
subscription rights to subscribe for up to the greater of $60,000 of common
stock, which equals 6,000 shares, one-tenth of one percent of the total offering
of common stock or 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common stock to be issued
by a fraction of which the numerator is the amount of qualifying deposits of the
supplemental eligible account holder and the denominator is the total amount of
qualifying deposits of all supplemental eligible account holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing supplemental eligible
account holders so as to permit each supplemental eligible account holder, to
the extent possible, to purchase a number of shares sufficient to make his or
her total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing supplemental eligible account
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holders proportionately, based on the amount of their respective qualifying
deposits as compared to total qualifying deposits of all subscribing
supplemental eligible account holders.
Category 4: Other Members. Each depositor of Palmyra Saving as of January
31, 1999 and each borrower with a loan outstanding on June 1, 1995 which
continues to be outstanding as of January 31, 1999 will receive nontransferable
subscription rights to purchase up to $60,000 of common stock, which equals
6,000 shares, in the conversion to the extent shares are available following
subscriptions by eligible account holders, Palmyra Saving's employee stock
ownership plan and supplemental eligible account holders. If there is an
oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON MAY FORFEIT
THOSE RIGHTS AND MAY FACE POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY
THE OFFICE OF THRIFT SUPERVISION OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH
PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE
IS PURCHASING SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE HAS NO
AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER OF THE
SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT
OF PALMYRA SAVING AND PFSB BANCORP.
PFSB Bancorp and Palmyra Saving will make reasonable attempts to provide a
prospectus and related offering materials to holders of subscription rights.
However, the subscription offering and all subscription rights under the plan of
conversion will expire at 12:00 Noon, Central Time, on the March 16, 1999,
whether or not Palmyra Saving has been able to locate each person entitled to
subscription rights. ORDERS FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING
RECEIVED IN HAND BY PALMYRA SAVING AFTER THAT TIME WILL NOT BE ACCEPTED. The
subscription offering may be extended by PFSB Bancorp and Palmyra Saving up to
April 5, 1999 without the regulatory's approval. Office of Thrift Supervision
regulations require that PFSB Bancorp complete the sale of common stock within
45 days after the close of the subscription offering. If the direct community
offering and the syndicated community offerings are not completed within that
period all funds received will be promptly returned with interest at Palmyra
Saving's passbook rate and all withdrawal authorizations will be canceled. If
regulatory approval of an extension of the time period has been granted, all
subscribers will be notified of the extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by PFSB Bancorp from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest, or withdrawal authorizations will be canceled. No single
extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Any shares of common stock which remain
unsubscribed for in the subscription offering will be offered by PFSB Bancorp to
certain members of the general public in a direct community offering, with
preference given to natural persons and trusts of natural persons residing in
Marion, Lewis and Clark Counties, Missouri. Purchasers in the direct community
offering are eligible to purchase up to $60,000 of common stock, which equals
6,000 shares. If not enough shares are available to fill orders in the direct
community offering, the available shares will be allocated on a pro rata basis
determined by the amount of the respective orders. The direct community
offering, if held, may be concurrent with, during or promptly after the
subscription offering. The direct community offering may terminate on or at any
time subsequent to 12 Noon, Central Time, on March 16, 1999, but no later than
45 days after the close of the subscription offering, unless extended by PFSB
Bancorp and Palmyra Saving, with approval of the Office of Thrift Supervision.
If regulatory approval of an extension of the time period has been granted, all
subscribers will be notified of the extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by PFSB Bancorp from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest. PFSB BANCORP AND PALMYRA SAVING HAVE THE ABSOLUTE RIGHT
TO ACCEPT OR REJECT IN WHOLE OR IN PART ANY ORDERS TO PURCHASE SHARES IN THE
DIRECT COMMUNITY OFFERING. IF AN ORDER IS REJECTED IN PART, THE PURCHASER DOES
NOT HAVE THE RIGHT
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TO CANCEL THE REMAINDER OF THE ORDER. PFSB BANCORP PRESENTLY INTENDS TO
TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR
ALL SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
SYNDICATED COMMUNITY OFFERING. The plan of conversion provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and direct community offering, if any, may be offered for sale to certain
members of the general public in a syndicated community offering through a
syndicate of registered broker-dealers to be formed and managed by Trident
Securities acting as agent of PFSB Bancorp. PFSB BANCORP AND PALMYRA SAVING HAVE
THE RIGHT TO REJECT ORDERS, IN WHOLE OR PART, IN THEIR SOLE DISCRETION IN THE
SYNDICATED COMMUNITY OFFERING. Neither Trident Securities nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
common stock in the syndicated community offering; however, Trident Securities
has agreed to use its best efforts in the sale of shares in the syndicated
community offering.
Stock sold in the syndicated community offering also will be sold at the
$10.00 purchase price. See "--Stock Pricing and Number of Shares to Be Issued."
No person will be permitted to subscribe in the syndicated community offering
for shares of common stock with an aggregate purchase price of more than $60,000
of common stock, which equals 6,000 shares. See "--Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings" for a
description of the commission to be paid to the selected dealers and to Trident
Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with PFSB Bancorp as of a certain
date for the purchase of shares. When and if Trident Securities and PFSB Bancorp
believe that enough indications of interest and orders have been received in the
subscription offering, the direct community offering and the syndicated
community offering to consummate the conversion, Trident Securities will
request, as of that certain date, selected dealers to submit orders to purchase
shares for which they have received indications of interest from their
customers. Selected dealers will send confirmations to customers on the next
business day after that certain date. Selected dealers may settle the trade by
debiting the accounts of their customers on a date which will be three business
days from that certain date. Customers who authorize selected dealers to debit
their brokerage accounts are required to have the funds for payment in their
account on but not before the settlement date. On the settlement date, selected
dealers will remit funds to the account that PFSB Bancorp established for each
selected dealer. Each customer's funds so forwarded to PFSB Bancorp, along with
all other accounts held in the same title, will be insured by the Federal
Deposit Insurance Corporation up to the applicable $100,000 legal limit. After
payment has been received by PFSB Bancorp from selected dealers, funds will earn
interest at Palmyra Saving's passbook rate until the completion of the offering.
At the completion of the conversion, the funds received will be used to purchase
the shares of common stock ordered. The shares issued in the conversion cannot
and will not be insured by the Federal Deposit Insurance Corporation or any
other government agency. If the conversion is not completed, funds with interest
will be returned promptly to the selected dealers, who, in turn, will promptly
credit their customers' brokerage accounts.
The syndicated community offering may terminate no more than 45 days after
the expiration of the subscription offering, unless extended by PFSB Bancorp and
Palmyra Saving, with approval of the Office of Thrift Supervision.
If Palmyra Saving is unable to find purchasers from the general public for
all unsubscribed shares, other purchase arrangements will be made by the Board
of Directors of Palmyra Saving, if feasible. Any other arrangements must be
approved by the Office of Thrift Supervision. The Office of Thrift Supervision
may grant one or more extensions of the offering period, provided that no single
extension exceeds 90 days, subscribers are given the right to increase, decrease
or rescind their subscriptions during the extension period, and the extensions
do not go more than two years beyond the date on which the members approved the
plan of conversion. If the conversion
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is not completed within 45 days after the close of the subscription offering,
either all funds received will be returned with interest, and withdrawal
authorizations canceled, or, if the Office of Thrift Supervision has granted an
extension of time, all subscribers will be given the right to increase, decrease
or rescind their subscriptions at any time prior to 20 days before the end of
the extension period. If an extension of time is obtained, all subscribers will
be notified of the extension and of their rights to modify their orders. If an
affirmative response to any resolicitation is not received by PFSB Bancorp from
a subscriber, the subscriber's order will be rescinded and all funds received
will be promptly returned with interest or withdrawal authorizations will be
canceled.
PERSONS IN NON-QUALIFIED STATES. PFSB Bancorp and Palmyra Saving will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock under the plan of
conversion reside. However, PFSB Bancorp and Palmyra Saving are not required to
offer stock in the subscription offering to any person who resides in a foreign
country or resides in a state of the United States with respect to which a small
number of persons otherwise eligible to subscribe for shares of common stock
reside in the state or PFSB Bancorp or Palmyra Saving determines that compliance
with the securities laws of the state would be impracticable for reasons of cost
or otherwise, including but not limited to a request or requirement that PFSB
Bancorp and Palmyra Saving or their officers, directors or trustees register as
a broker, dealer, salesman or selling agent, under the securities laws of the
state, or a request or requirement to register or otherwise qualify the
subscription rights or common stock for sale or submit any filing in the state.
Where the number of persons eligible to subscribe for shares in one state is
small, PFSB Bancorp and Palmyra Saving will base their decision as to whether or
not to offer the common stock in the state on a number of factors, including the
size of accounts held by account holders in the state, the cost of reviewing the
registration and qualification requirements of the state, and of actually
registering or qualifying the shares, or the need to register PFSB Bancorp, its
officers, directors or employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
Palmyra Saving and PFSB Bancorp have retained Trident Securities to consult
with and advise Palmyra Saving and to assist Palmyra Saving and PFSB Bancorp, on
a best efforts basis, in the distribution of shares in the offering. Trident
Securities is a broker-dealer registered with the Securities and Exchange
Commission and a member of the National Association of Securities Dealers, Inc.
Trident Securities will assist Palmyra Saving in the conversion by acting as
marketing advisor with respect to the subscription offering and will represent
Palmyra Saving as placement agent on a best efforts basis in the sale of the
common stock in the direct community offering if one is held; conducting
training sessions with directors, officers and employees of Palmyra Saving
regarding the conversion process; and assisting in the establishment and
supervision of Palmyra Saving's stock information center and, with management's
input, will train Palmyra Saving's staff to record properly and tabulate orders
for the purchase of common stock and to respond appropriately to customer
inquiries.
Based upon negotiations between Trident Securities on the one hand and PFSB
Bancorp and Palmyra Saving on the other hand concerning fee structure, Trident
Securities will receive a fixed management fee of $135,000. Trident Securities
and selected dealers participating in the syndicated community offering may
receive a commission in the syndicated community offering in a maximum amount to
be agreed upon by PFSB Bancorp and Palmyra Saving to reflect market requirements
at the time of the allocation of shares in the syndicated community offering.
Fees and commissions paid to Trident Securities and to any selected dealers may
be deemed to be underwriting fees, and Trident Securities and the selected
dealers may be deemed to be underwriters. Trident Securities will also be
reimbursed for its reasonable out-of-pocket expenses not to exceed $12,500 and
its legal fees not to exceed $30,000. Trident Securities has received an advance
of $10,000 towards its reimbursable expenses. For additional information, see "-
- -Stock Pricing and Number of Shares to Be Issued" and "Use of Proceeds."
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With certain limitations, PFSB Bancorp and Palmyra Saving have also agreed
to indemnify Trident Securities against liabilities and expenses, including
legal fees, incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
material for the common stock or with regard to allocations of shares if there
is an oversubscription, or determinations of eligibility to purchase shares.
DESCRIPTION OF SALES ACTIVITIES
The common stock will be offered in the subscription offering and direct
community offering principally by the distribution of this prospectus and
through activities conducted at Palmyra Saving's stock information center at its
main office facility. The stock information center is expected to operate during
normal business hours throughout the subscription offering and direct community
offering. It is expected that at any particular time one or more Trident
Securities employees will be working at the stock information center. Employees
of Trident Securities will be responsible for mailing materials relating to the
offering, responding to questions regarding the conversion and the offering and
processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of Palmyra Saving may participate in
the offering in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution of
the order form. Management of Palmyra Saving may answer questions regarding the
business of Palmyra Saving when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability
or nature of the investment, will be directed to registered representatives. The
management and employees of PFSB Bancorp and Palmyra Saving have been instructed
not to solicit offers to purchase common stock or provide advice regarding the
purchase of common stock.
No officer, director or employee of Palmyra Saving or PFSB Bancorp will be
compensated, directly or indirectly, for any activities in connection with the
offer or sale of securities issued in the conversion.
None of Palmyra Saving's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
Palmyra Saving's personnel will assist in the above-described sales activities
under an exemption from registration as a broker or dealer provided by Rule 3a4-
1 promulgated under the Securities Exchange Act of 1934, as amended. Rule 3a4-1
generally provides that an "associated person of an issuer" of securities shall
not be deemed a broker solely by reason of participation in the sale of
securities of the issuer if the associated person meets certain conditions.
These conditions include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that the person not be
associated with a broker or dealer and that the person observe certain
limitations on his or her participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERINGS
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with Palmyra Saving, must be
received by Palmyra Saving by 12:00 Noon, Central Time, on March 16, 1999. Order
forms that are not received by that time or are executed defectively or are
received without full payment or without appropriate withdrawal instructions are
not required to be accepted. PFSB Bancorp and Palmyra Saving have the right to
waive or permit the correction of incomplete or improperly executed order forms,
but do not represent that they will do so. Under the plan of conversion, the
interpretation by PFSB Bancorp and Palmyra Saving of the terms and conditions of
the plan of conversion and of the order form will be final. In order to purchase
shares in the direct community offering, the order form, accompanied by the
required
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payment for each share subscribed for, must be received by Palmyra Saving prior
to the time the direct community offering terminates, which may be on or at any
time subsequent to the Expiration Date. Once received, an executed order form
may not be modified, amended or rescinded without the consent of Palmyra Saving
unless the conversion has not been completed within 45 days after the end of the
subscription offering, unless extended.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the order form giving all names in each account, the account number and the
approximate account balance as of the appropriate eligibility date. Failure to
list an account could result in fewer shares allocated if there is an
oversubscription than if all accounts had been disclosed.
Full payment for subscriptions may be made in cash if delivered in person
at Palmyra Saving's stock information center; by check, bank draft, or money
order; or by authorization of withdrawal from deposit accounts maintained with
Palmyra Saving. Appropriate means by which withdrawals may be authorized are
provided on the order form. No wire transfers will be accepted. Interest will be
paid on payments made by cash, check, bank draft or money order at Palmyra
Saving's passbook rate from the date payment is received at the stock
information center until the completion or termination of the conversion. If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
conversion, unless the certificate matures after the date of receipt of the
order form but prior to closing, in which case funds will earn interest at the
passbook rate from the date of maturity until the conversion is completed or
terminated, but a hold will be placed on the funds, making them unavailable to
the depositor until completion or termination of the conversion. When the
conversion is completed, the funds received in the offering will be used to
purchase the shares of common stock ordered. THE SHARES OF COMMON STOCK ISSUED
IN THE CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. If the conversion is not
consummated for any reason, all funds submitted will be promptly refunded with
interest as described above.
If a subscriber authorizes Palmyra Saving to withdraw the amount of the
aggregate purchase price from his or her deposit account, Palmyra Saving will do
so as of the effective date of conversion, though the account must contain the
full amount necessary for payment at the time the subscription order is
received. Palmyra Saving will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at Palmyra Saving's passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price after the
conversion, provided that there is in force from the time of its subscription
until that time, a loan commitment from an unrelated financial institution or
PFSB Bancorp to lend to the employee stock ownership plan, at that time, the
aggregate purchase price of the shares for which it subscribed.
Individual retirement accounts maintained in Palmyra Saving do not permit
investment in the common stock. A depositor interested in using his or her
Individual Retirement Account funds to purchase common stock must do so through
a self-directed individual retirement account. Since Palmyra Saving does not
offer those accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the individual retirement account funds to a trustee offering a
self-directed individual retirement account program with the agreement that the
funds will be used to purchase PFSB Bancorp's common stock in the offering.
There will be no early withdrawal or Internal Revenue Service interest penalties
for transfers. The new trustee would hold the common stock in a self-directed
account in the same manner as Palmyra Saving now holds the depositor's
Individual Retirement Account funds. An annual administrative fee may be payable
to the new trustee. Depositors interested in using funds in an individual
retirement account at Palmyra Saving to purchase common stock should contact the
stock information center as soon as possible so that the necessary forms may be
forwarded for execution and returned before the subscription offering ends. In
addition, federal laws and regulations require that officers, directors and 10%
shareholders who
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use self-directed individual retirement account funds to purchase shares of
common stock in the subscription offering, make purchases for the exclusive
benefit of individual retirement accounts.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at the address as may be specified in properly
completed order forms or to the last address of the persons appearing on the
records of Palmyra Saving as soon as practicable following the sale of all
shares of common stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law. PURCHASERS MAY NOT BE ABLE TO
SELL THE SHARES OF COMMON STOCK WHICH THEY PURCHASED UNTIL CERTIFICATES FOR THE
COMMON STOCK ARE AVAILABLE AND DELIVERED TO THEM, EVEN THOUGH TRADING OF THE
COMMON STOCK MAY HAVE BEGUN.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended, no prospectus will be mailed any later than
five days prior to that date or hand delivered any later than two days prior to
that date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus. Palmyra Saving will accept for processing only orders submitted on
original order forms. Palmyra Saving is not obligated to accept orders submitted
on photocopied or telecopied order forms. ORDERS CANNOT AND WILL NOT BE ACCEPTED
WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE
ORDER FORM.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of PFSB Bancorp and Palmyra Saving as converted, as determined by an
independent appraisal. Palmyra Saving and PFSB Bancorp have retained RP
Financial to prepare an appraisal of the pro forma market value of PFSB Bancorp
and Palmyra Saving as converted, as well as a business plan. RP Financial will
receive a fee expected to total approximately $25,000 for its appraisal services
and assistance in the preparation of a business plan, plus reasonable out-of-
pocket expenses incurred in connection with the appraisal. Palmyra Saving has
agreed to indemnify RP Financial under certain circumstances against liabilities
and expenses, including legal fees, arising out of, related to, or based upon
the conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of PFSB Bancorp and Palmyra Saving as converted taking into account the
formation of PFSB Bancorp as PFSB Bancorp for Palmyra Saving. For its analysis,
RP Financial undertook substantial investigations to learn about Palmyra
Saving's business and operations. Management supplied financial information,
including annual financial statements, information on the composition of assets
and liabilities, and other financial schedules. In addition to this information,
RP Financial reviewed Palmyra Saving's Form AC Application for Approval of
Conversion and PFSB Bancorp's Form SB-2 Registration Statement. Furthermore, RP
Financial visited Palmyra Saving's facilities and had discussions with Palmyra
Saving's management and its special conversion legal counsel, Muldoon, Murphy &
Faucette LLP. No detailed individual analysis of the separate components of
PFSB Bancorp's or Palmyra Saving's assets and liabilities was performed in
connection with the evaluation.
In estimating the pro forma market value of PFSB Bancorp and Palmyra Saving
as converted, as required by applicable regulatory guidelines, RP Financial's
analysis utilized three selected valuation procedures, the Price/Book method,
the Price/Earnings method, and Price/Assets method, all of which are described
in its report. RP Financial placed the greatest emphasis on the Price/Earnings
and Price Book methods in estimating pro forma market value. In applying these
procedures, RP Financial reviewed, among other factors, the economic make-up of
Palmyra Saving's primary market area, Palmyra Saving's financial performance and
condition in relation to publicly traded institutions that RP Financial deemed
comparable to Palmyra Saving, the specific terms of the offering of PFSB
Bancorp's common stock, the pro forma impact of the additional capital raised in
the conversion, conditions of securities markets in general, and the market for
thrift institution common stock in particular. RP Financial's analysis provides
an approximation of the pro forma market value of PFSB Bancorp and Palmyra
Saving as converted based on the valuation methods applied and the assumptions
outlined in its report. Included in its report
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were certain assumptions as to the pro forma earnings of PFSB Bancorp after the
conversion that were utilized in determining the appraised value. These
assumptions included estimated expenses and an assumed after-tax rate of return
on the net conversion proceeds as described under "Pro Forma Data," purchases by
the employee stock ownership plan of 8% of the common stock sold in the
conversion and purchases in the open market by the management development and
recognition plan of a number of shares equal to 4% of the common stock sold in
the conversion at the $10.00 purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, RP Financial has advised PFSB Bancorp and
Palmyra Saving that, in its opinion, as of December 11, 1998 and updated as of
January 22, 1999, the aggregate estimated pro forma market value of PFSB Bancorp
and Palmyra Saving, as converted and, therefore, the common stock was within the
valuation range of $5,525,000 to $7,475,000 with a midpoint of $6,500,000. After
reviewing the methodology and the assumptions used by RP Financial in the
preparation of the appraisal, the Board of Directors established the estimated
valuation range which is equal to the valuation range of $5,525,000 to
$7,475,000 with a midpoint of $6,500,000. Assuming that the shares are sold at
$10.00 per share in the conversion, the estimated number of shares would be
between 552,500 and 747,500 with a midpoint of 650,000. The purchase price of
$10.00 was determined by discussion among the Boards of Directors of Palmyra
Saving and PFSB Bancorp and Trident Securities, taking into account, among other
factors, the requirement under Office of Thrift Supervision regulations that the
common stock be offered in a manner that will achieve the widest distribution of
the stock, and desired liquidity in the common stock subsequent to the
conversion. Since the outcome of the offering relates in large measure to market
conditions at the time of sale, it is not possible to determine the exact number
of shares that will be issued by PFSB Bancorp at this time. The estimated
valuation range may be amended, with the approval of the Office of Thrift
Supervision, if necessitated by developments following the date of the appraisal
in, among other things, market conditions, the financial condition or operating
results of Palmyra Saving, regulatory guidelines or national or local economic
conditions.
RP Financial's appraisal report is filed as an exhibit to the registration
statement that PFSB Bancorp has filed with the Securities and Exchange
Commission. See "Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of PFSB Bancorp and Palmyra Saving as
converted, as of the close of the subscription offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the Office of Thrift Supervision that, to the best of RP Financial's
knowledge and judgment, nothing of a material nature has occurred that would
cause it to conclude that the actual total purchase price on an aggregate basis
was incompatible with its estimate of the total pro forma market value of PFSB
Bancorp and Palmyra Saving as converted at the time of the sale. If, however,
the facts do not justify that statement, the offering or other sale may be
canceled, a new estimated valuation range and price per share set and new
subscription, direct community and syndicated community offerings held. Under
circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more than 859,625 shares or less than 552,500 shares. If the total amount
of shares issued is less than 552,500 or more than 859,625 (15% above the
maximum of the estimated valuation range), for aggregate gross proceeds of less
than $5,525,000 or more than $8,596,250, subscription funds will be returned
promptly with interest to each subscriber unless he indicates otherwise. If RP
Financial establishes a new valuation range, it must be approved by the Office
of Thrift Supervision.
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If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of Palmyra Saving and PFSB Bancorp, if possible. Other
purchase arrangements must be approved by the Office of Thrift Supervision and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the plan
of conversion and in excess of the proposed director purchases discussed
earlier, although no purchases are currently intended. If other purchase
arrangements cannot be made, the plan of conversion will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents Palmyra Saving furnished to it. RP
Financial also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of the information and
did not independently verify the financial statements and other data provided by
Palmyra Saving and PFSB Bancorp or independently value the assets or liabilities
of PFSB Bancorp and Palmyra Saving. THE APPRAISAL BY RP FINANCIAL IS NOT
INTENDED TO BE, AND MUST NOT BE INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS
TO THE ADVISABILITY OF VOTING TO APPROVE THE PLAN OF CONVERSION OR OF PURCHASING
SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED ON
MANY FACTORS WHICH CHANGE FROM TIME TO TIME, THERE IS NO ASSURANCE THAT PERSONS
WHO PURCHASE SHARES IN THE CONVERSION WILL LATER BE ABLE TO SELL SHARES
THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE PRICE.
LIMITATIONS ON PURCHASES OF SHARES
The plan of conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. The plan
of conversion provides for the following purchase limitations:
1. The maximum purchase in the subscription offering by any person or
group of persons through a single account is $60,000, which equals
6,000 shares;
2. No person may purchase more than $60,000, which equals 6,000 shares,
in the direct community offering; and
3. The maximum purchase in the conversion by any person, related persons
or persons acting in concert is $100,000, which equals 10,000 shares.
For purposes of the plan of conversion, the directors are not deemed to be
acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
Palmyra Saving's and PFSB Bancorp's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation up to 9.99% of the shares
of common stock sold in the conversion, provided that orders for shares which
exceed 5% of the shares of common stock sold in the conversion may not exceed,
in the aggregate, 10% of the shares sold in the conversion. Palmyra Saving and
PFSB Bancorp do not intend to increase the maximum purchase limitation unless
market conditions warrant an increase in the maximum purchase limitation is
necessary to sell a number of shares in excess of the minimum of the estimated
valuation range. If the Boards of Directors decide to increase the purchase
limitation above, persons who subscribed for the maximum number of shares of
common stock will be, and other large subscribers in the discretion of PFSB
Bancorp and Palmyra Saving may be, given the opportunity to increase their
subscriptions accordingly, based on the rights and preferences of any person who
has priority subscription rights.
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The term "acting in concert" is defined in the plan of conversion to mean
knowing participation in a joint activity or interdependent conscious parallel
action towards a common goal whether or not by an express agreement; or a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose under any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. In general, a
person who acts in concert with another party shall also be deemed to be acting
in concert with any person who is also acting in concert with that other party.
PFSB BANCORP AND PALMYRA SAVING MAY PRESUME THAT CERTAIN PERSONS ARE ACTING IN
CONCERT BASED UPON, AMONG OTHER THINGS, JOINT ACCOUNT RELATIONSHIPS AND THE FACT
THAT PERSONS MAY HAVE FILED JOINT SCHEDULES 13D WITH THE SECURITIES AND EXCHANGE
COMMISSION WITH RESPECT TO OTHER COMPANIES.
The term "associate" of a person is defined in the plan of conversion to
mean any corporation or organization other than Palmyra Saving or a majority-
owned subsidiary of Palmyra Saving of which a person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or in a similar
fiduciary capacity; and any relative or spouse of a person, or any relative of a
spouse, who either has the same home as a person or who is a director or officer
of Palmyra Saving or any of its parents or subsidiaries. For example, a
corporation of which a person serves as an officer would be an associate of a
person and, therefore, all shares purchased by a corporation would be included
with the number of shares which a person could purchase individually under the
above limitations.
The term "officer" is defined in the plan of conversion to mean an
executive officer of Palmyra Saving, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of Palmyra Saving and PFSB
Bancorp and by NASD members. See "--Restrictions on Transferability by Directors
and Officers and NASD Members."
RESTRICTIONS ON REPURCHASE OF STOCK
Under Office of Thrift Supervision regulations, Office of Thrift
Supervision-regulated savings associations and their holding companies may not
for a period of three years from the date of an institution's mutual-to-stock
conversion repurchase any of its common stock from any person, except if an
offer made to all of its stockholders to repurchase the common stock on a pro
rata basis, approved by the Office of Thrift Supervision or the repurchase of
qualifying shares of a director. Furthermore, repurchases of any common stock
are prohibited if the effect thereof would cause the association's regulatory
capital to be reduced below the amount required for the liquidation account or
the regulatory capital requirements imposed by the Office of Thrift Supervision.
Repurchases are generally prohibited during the first year following conversion.
Upon ten days' written notice to the Office of Thrift Supervision, and if the
Office of Thrift Supervision does not object, an institution may make open
market repurchases of its outstanding common stock during years two and three
following the conversion, provided that certain regulatory conditions are met
and that the repurchase would not adversely affect the financial condition of
the institution. Any repurchases of common stock by PFSB Bancorp would be must
meet these regulatory restrictions unless the Office of Thrift Supervision would
provide otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of common stock purchased in the offering by directors and officers
of PFSB Bancorp may not be sold for a period of one year following the
conversion, except upon the death of the stockholder or in any exchange of the
common stock in connection with a merger or acquisition of PFSB Bancorp. Shares
of common stock received by directors or officers through the employee stock
ownership plan or the management development and recognition plan or upon
exercise of options issued under the stock option plan or purchased subsequent
to the conversion are free of this restriction. Accordingly, shares of common
stock issued by PFSB Bancorp to directors
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and officers shall bear a legend giving appropriate notice of the restriction
and, in addition, PFSB Bancorp will give appropriate instructions to the
transfer agent for PFSB Bancorp's common stock with respect to the restriction
on transfers. Any shares issued to directors and officers as a stock dividend,
stock split or otherwise with respect to restricted common stock shall also be
restricted.
Purchases of outstanding shares of common stock of PFSB Bancorp by
directors, executive officers, or any person who was an executive officer or
director of Palmyra Saving after adoption of the plan of conversion, and their
associates during the three-year period following the conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the Office of Thrift Supervision. This restriction does not
apply, however, to negotiated transactions involving more than 1% of PFSB
Bancorp's outstanding common stock or to the purchase of stock under the stock
option plan.
PFSB Bancorp has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, for the registration of the common stock to
be issued in the conversion. The registration under the Securities Act of shares
of the common stock to be issued in the conversion does not cover the resale of
the shares. Shares of common stock purchased by persons who are not affiliates
of PFSB Bancorp may be resold without registration. Shares purchased by an
affiliate of PFSB Bancorp will have resale restrictions under Rule 144 of the
Securities Act. If PFSB Bancorp meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of PFSB
Bancorp who complies with the other conditions of Rule 144, including those that
require the affiliate's sale to be aggregated with those of certain other
persons, would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of 1% of
the outstanding shares of PFSB Bancorp or the average weekly volume of trading
in the shares during the preceding four calendar weeks. Provision may be made in
the future by PFSB Bancorp to permit affiliates to have their shares registered
for sale under the Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates face
certain restrictions on the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon purchase of the
securities.
RESTRICTIONS ON ACQUISITION OF PFSB BANCORP
The following discussion is a summary of certain provisions of federal law
and regulations and Missouri corporate law, as well as the Articles of
Incorporation and Bylaws of PFSB Bancorp, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of PFSB Bancorp
contained in the registration statement that PFSB Bancorp has filed with the
Securities and Exchange Commission. See "Where You Can Find More Information" as
to how to obtain a copy of these documents.
CONVERSION REGULATIONS
Office of Thrift Supervision regulations prohibit any person from making an
offer, announcing an intent to make an offer or participating in any other
arrangement to purchase stock or acquiring stock or subscription rights in a
converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make an offer or announcement of an
offer to purchase shares or actually acquire shares in the converting
institution or its holding company for a period of three years from the date of
the completion of the conversion if, upon the completion of an offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution or its holding
company. The Office of Thrift Supervision has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed to acquire, hold or dispose
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of securities of an insured institution. However, offers made exclusively to an
association or its holding company or an underwriter or member of a selling
group acting on the converting institution's or its holding company behalf for
resale to the general public are excepted. The regulation also provides civil
penalties for willful violation or assistance in any violation of the regulation
by any person connected with the management of the converting institution or its
holding company or who controls more than 10% of the outstanding shares or
voting rights of a converting or converted institution or its holding company.
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the Office of Thrift Supervision has been given 60 days' prior written
notice and has not issued a notice disapproving the proposed acquisition. In
addition, Office of Thrift Supervision regulations provide that no company may
acquire control of a savings association without the prior approval of the
Office of Thrift Supervision. Any company that acquires control becomes a
"savings and loan holding company" under registration, examination and
regulation by the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the Office of Thrift Supervision
that the acquirer has the power to direct, or directly or indirectly to exercise
a controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquirer also meets any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Control
factors include the acquirer being one of the two largest stockholders. The
determination of control may be rebutted by submission to the Office of Thrift
Supervision, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to control determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock must file with the
Office of Thrift Supervision a certification form that the holder is not in
control of the institution, is not under a rebuttable determination of control
and will take no action which would result in a determination or rebuttable
determination of control without prior notice to or approval of the Office of
Thrift Supervision, as applicable. There are also rebuttable presumptions in the
regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The Office of Thrift Supervision may prohibit an acquisition of control if
it finds, among other things, that the acquisition would result in a monopoly or
substantially lessen competition, the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or the
competence, experience or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by the person.
ANTI-TAKEOVER PROVISIONS IN PFSB BANCORP'S ARTICLES OF INCORPORATION AND BYLAWS
AND IN MISSOURI LAW
A number of provisions of PFSB Bancorp's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of PFSB Bancorp's Articles of Incorporation and Bylaws and regulatory
provisions relating to stock ownership and transfers, the Board of Directors and
business combinations, which might be deemed to have a potential "anti-takeover"
effect. These provisions may have the effect of discouraging a future takeover
attempt which is not approved by the Board of Directors but which individual
Holding Company stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in a transaction may not have an opportunity to do so. These provisions will
also render the removal of the incumbent Board of Directors or management of
PFSB Bancorp more difficult. The following description of certain of the
provisions of the Articles of Incorporation and Bylaws of PFSB Bancorp is
necessarily general and reference should be made in each case to
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the Articles of Incorporation and Bylaws, which are incorporated herein by
reference. See "Where You Can Find More Information" as to where to obtain a
copy of these documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of PFSB Bancorp
provides that in no event shall any record owner of any outstanding common stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of common
stock be entitled or permitted to any vote in respect of the shares held in
excess of that percentage limit, unless permitted by a resolution adopted by a
majority of the board of directors. Beneficial ownership is determined under
Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act
of 1934, as amended, and includes shares beneficially owned by that person or
any of his or her affiliates, shares which that person or his or her affiliates
have the right to acquire upon the exercise of conversion rights or options and
shares as to which the person and his or her affiliates have or share investment
or voting power, but shall not include shares beneficially owned by the employee
stock ownership plan or directors, officers and employees of Palmyra Saving or
Holding Company or shares that are associated with a revocable proxy and that
are not otherwise beneficially, or deemed by PFSB Bancorp to be beneficially,
owned by the person and his or her affiliates.
BOARD OF DIRECTORS. The Board of Directors of PFSB Bancorp is divided into
three classes, each of which shall contain approximately one-third of the whole
number of the members of the Board. The members of each class shall be elected
for a term of three years, with the terms of office of all members of one class
expiring each year so that approximately one-third of the total number of
directors are elected each year. PFSB Bancorp's Articles of Incorporation
provides that the size of the Board shall be established in the Bylaws. The
Bylaws currently set the number of directors at seven. The Articles of
Incorporation provides that any vacancy occurring in the Board, including a
vacancy created by an increase in the number of directors, shall be filled by a
vote of a majority of the directors then in office and any director so chosen
shall hold office for a term expiring at the next annual meeting of
stockholders. The classified Board is intended to provide for continuity of the
Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of PFSB
Bancorp. The Articles of Incorporation of PFSB Bancorp provides that a director
may be removed from the Board of Directors prior to the expiration of his or her
term only for cause and only upon the vote of 80% of the outstanding shares of
voting stock. In the absence of this provision, the vote of the holders of a
majority of the shares could remove the entire Board, but only with cause, and
replace it with persons of the holders' choice.
CUMULATIVE VOTING; SPECIAL MEETINGS. The Bylaws do not provide for
cumulative voting for any purpose. The Bylaws also provide that special meetings
of stockholders of PFSB Bancorp may be called only by the President or by the
Board of Directors of PFSB Bancorp.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance
of 5,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide PFSB Bancorp's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits,
restricted stock grants and the exercise of stock options. However, these
additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, to deter future attempts to gain control of
PFSB Bancorp. The Board of Directors also has sole authority to determine the
terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of preferred stock
to persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of PFSB
Bancorp, and thereby assist members of management to retain their positions.
PFSB Bancorp's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of common stock upon exercise of stock
options and in connection with the management development and recognition plan.
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STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation requires the approval of the
holders of at least 80% of PFSB Bancorp's outstanding shares of voting stock to
approve certain "Business Combinations" involving a "Related Person" except in
cases where the proposed transaction has been approved in advance by a majority
of those members of PFSB Bancorp's Board of Directors who are unaffiliated with
the Related Person and were directors prior to the time when the Related Person
became a Related Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of PFSB Bancorp or an affiliate of that person or entity. This
provision of the Articles of Incorporation applies to any "Business
Combination," which is defined to include any merger or consolidation of PFSB
Bancorp with or into any Related Person; any sale, lease, exchange, mortgage,
transfer, or other disposition of 25% or more of the assets of PFSB Bancorp or
combined assets of PFSB Bancorp and its subsidiaries to a Related Person; any
merger or consolidation of a Related Person with or into PFSB Bancorp or a
subsidiary of PFSB Bancorp; any sale, lease, exchange, transfer, or other
disposition of 25% or more of the assets of a Related Person to PFSB Bancorp or
a subsidiary of PFSB Bancorp; the issuance of any securities of PFSB Bancorp or
a subsidiary of PFSB Bancorp to a Related Person; the acquisition by PFSB
Bancorp or a subsidiary of PFSB Bancorp of any securities of a Related Person;
any reclassification of common stock of PFSB Bancorp or any recapitalization
involving the common stock of PFSB Bancorp; or any agreement or other
arrangement providing for any of the foregoing.
Under Missouri law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, except for certain exceptions, be approved by the vote of the
holders of two-thirds of the outstanding shares of common stock of PFSB Bancorp
and any other affected class of stock. One exception under Missouri law to the
majority approval requirement applies to stockholders owning 20% or more of the
common stock of a corporation for a period of less than five years. A 20%
stockholder, in order to obtain approval of a business combination, must obtain
the approval of a majority of the outstanding stock, excluding the stock owned
by a 20% stockholder, or satisfy other requirements under Missouri law relating
to board of director approval of his or her acquisition of the shares of PFSB
Bancorp. The increased stockholder vote required to approve a business
combination may have the effect of foreclosing mergers and other business
combinations which a majority of stockholders deem desirable and placing the
power to prevent a merger or combination in the hands of a minority of
stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to PFSB
Bancorp's Articles of Incorporation must be approved by a majority vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by PFSB Bancorp and amendment of PFSB Bancorp's Bylaws
and Articles of Incorporation. PFSB Bancorp's Bylaws may be amended by its Board
of Directors, or by a vote of 66 2/3% of the total votes eligible to be voted at
a duly constituted meeting of stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of PFSB Bancorp require
a stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give not less
than 60 nor more than 90 days' advance notice to the Secretary of PFSB Bancorp;
provided, however, that if less than 71 days' notice or prior public disclosure
of the date of the meeting is given or made to shareholders, notice, to be
timely, must be received no later than the close of business on the 10th day
following the date on which notice was mailed to shareholders or other public
disclosure was made. The notice provision requires a stockholder who desires to
raise new business to provide certain information to PFSB Bancorp concerning the
nature of the new business, the stockholder and the stockholder's interest in
the business matter. Similarly, a stockholder wishing to nominate any person for
election as a director must provide PFSB Bancorp with certain information
concerning the nominee and the proposing stockholder.
99
<PAGE>
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF PFSB BANCORP'S ARTICLES OF
INCORPORATION AND BYLAWS. The Board of Directors of Palmyra Saving believes
that the provisions described above are prudent and will reduce PFSB Bancorp's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist PFSB Bancorp and Palmyra Saving in the orderly deployment of
the conversion proceeds into productive assets during the initial period after
the conversion. The Board of Directors believes these provisions are in the best
interest of Palmyra Saving and PFSB Bancorp and its stockholders. In the
judgment of the Board of Directors, PFSB Bancorp's Board will be in the best
position to determine the true value of PFSB Bancorp and to negotiate more
effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interest of
PFSB Bancorp and its stockholders to encourage potential acquirors to negotiate
directly with the Board of Directors of PFSB Bancorp and that these provisions
will encourage negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of PFSB Bancorp and that is in the best interest of all
stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of PFSB Bancorp
for its stockholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of PFSB Bancorp's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, these offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive PFSB
Bancorp's remaining stockholders of benefits of certain protective provisions of
the Exchange Act, if the number of beneficial owners became less than 300,
thereby allowing for deregistration under the Exchange Act.
Despite the belief of Palmyra Saving and PFSB Bancorp as to the benefits to
stockholders of these provisions of PFSB Bancorp's Articles of Incorporation and
Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt that would not be approved by PFSB Bancorp's Board, but where
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in a transaction may not have any opportunity to do so. These provisions will
also render the removal of PFSB Bancorp's Board of Directors and of management
more difficult. The Board of Directors of Palmyra Saving and PFSB Bancorp,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
Following the conversion, if required by law, following the approval by
stockholders, PFSB Bancorp may adopt additional anti-takeover charter provisions
or other devices regarding the acquisition of its equity securities that would
be permitted for a Missouri business corporation.
The cumulative effect of the restriction on acquisition of PFSB Bancorp
contained in the Articles of Incorporation and Bylaws of PFSB Bancorp and in
Federal and Missouri law may be to discourage potential takeover attempts and
perpetuate incumbent management, even though certain stockholders of PFSB
Bancorp may deem a potential acquisition to be in their best interests, or deem
existing management not to be acting in their best interests.
100
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF PFSB BANCORP
GENERAL
PFSB Bancorp is authorized to issue 5,000,000 shares of common stock having
a par value of $.01 per share and 1,000,000 shares of preferred stock having a
par value of $.01 per share. PFSB Bancorp currently expects to issue up to
747,500 shares of common stock, unless increased to 859,625 shares of common
stock sold. No shares of preferred stock will be issued in the conversion. Each
share of PFSB Bancorp's common stock will have the same relative rights as, and
will be identical in all respects with, each other share of common stock. Upon
payment of the purchase price for the common stock, in accordance with the plan
of conversion, all stock will be duly authorized, fully paid and nonassessable.
THE COMMON STOCK OF PFSB BANCORP WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. PFSB Bancorp can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by PFSB Bancorp limited by law and applicable regulation.
See "Dividend Policy" and "Regulation." The holders of common stock of PFSB
Bancorp will be entitled to receive and share equally in dividends as may be
declared by the Board of Directors of PFSB Bancorp out of funds legally
available therefor. If PFSB Bancorp issues preferred stock, the holders thereof
may have a priority over the holders of the common stock with respect to
dividends.
VOTING RIGHTS. Upon conversion, the holders of common stock of PFSB
Bancorp will possess exclusive voting rights in PFSB Bancorp. They will elect
PFSB Bancorp's Board of Directors and act on other matters as are required to be
presented to them under Missouri law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
PFSB Bancorp," each holder of common stock will be entitled to one vote per
share and will not have any right to cumulate votes in the election of
directors. If PFSB Bancorp issues preferred stock, holders of PFSB Bancorp
preferred stock may also possess voting rights. Certain matters require a vote
of 80% of the outstanding shares entitled to vote. See "Restrictions on
Acquisition of PFSB Bancorp."
As a federal mutual savings and loan association, corporate powers and
control of Palmyra Saving are vested in its Board of Directors, who elect the
officers of Palmyra Saving and who fill any vacancies on the Board of Directors
as it exists upon conversion. Subsequent to conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of Palmyra
Saving, all of which will be owned by PFSB Bancorp, and voted at the direction
of PFSB Bancorp's Board of Directors. Consequently, the holders of the common
stock will not have direct control of Palmyra Saving.
LIQUIDATION. If there is any liquidation, dissolution or winding up of
Palmyra Saving, PFSB Bancorp, as holder of Palmyra Saving's capital stock would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of Palmyra Saving, including all deposit accounts and accrued
interest, and after distribution of the balance in the special liquidation
account to eligible account holders and supplemental eligible account holders,
all assets of Palmyra Saving available for distribution. Upon liquidation,
dissolution or winding up of PFSB Bancorp, the holders of its common stock would
be entitled to receive, after payment or provision for payment of all its debts
and liabilities, all of the assets of PFSB Bancorp available for distribution.
If PFSB Bancorp issues preferred stock, the preferred stock holders may have a
priority over the holders of the common stock upon liquidation or dissolution.
101
<PAGE>
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of PFSB Bancorp
will not be entitled to preemptive rights with respect to any shares that may be
issued. The common stock cannot be redeemed.
PREFERRED STOCK
None of the shares of the authorized Holding Company preferred stock will
be issued in the conversion and there are no plans to issue the preferred stock.
Preferred stock may be issued with designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
RESTRICTIONS ON ACQUISITION
Acquisitions of PFSB Bancorp are restricted by provisions in its Articles
of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "Regulation" and "Restrictions on Acquisition of PFSB
Bancorp."
REGISTRATION REQUIREMENTS
PFSB Bancorp has registered the common stock with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended, and will not
deregister its common stock for a period of at least three years following the
conversion. As a result of registration, the proxy and tender offer rules,
insider trading reporting and restrictions, annual and periodic reporting and
other requirements of the that statute will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for PFSB Bancorp by
Muldoon, Murphy & Faucette LLP, Washington, D.C. The federal tax consequences of
the offering have been opined upon by Muldoon, Murphy & Faucette LLP and the
Missouri tax consequences of the offering have been opined upon by Moore, Horton
& Carlson, P.C. Muldoon, Murphy & Faucette LLP and Moore, Horton & Carlson, P.C.
have consented to the references herein to their opinions. Certain legal matters
will be passed upon for Trident Securities by Housley Kantarian & Bronstein,
P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of Palmyra Saving at September 30,
1998 and 1997 and for each of the years ended September 30, 1998 and 1997
included in this prospectus have been audited by Moore, Horton & Carlson, P.C.,
independent auditors, as stated in its report in the back of this prospectus,
and have been so included in reliance upon the report of the firm given upon
their authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to Palmyra Saving setting forth its opinion as to the estimated pro forma
market value of PFSB Bancorp and Palmyra Saving as converted and its letter with
respect to subscription rights and to the use of its name and statements with
respect to it appearing in this prospectus.
102
<PAGE>
CHANGE IN ACCOUNTANTS
Prior to the fiscal year ended September 30, 1998, Palmyra Saving's
consolidated financial statements were audited by Wade, Stables, Schanbacher &
Walker, P.C. The former accountant was dismissed and replaced by Moore, Horton &
Carlson, P.C., which was engaged on August 20, 1998 and continues as the
independent auditors of Palmyra Saving. The decision to change auditors was
approved by the Board of Directors on August 20, 1998. Palmyra Saving's
consolidated financial statements included in this prospectus were audited by
Moore, Horton & Carlson, P.C.
For the fiscal years ended September 30, 1997 and 1996 and up to the date
of the replacement of Palmyra Saving's former accountant, there were no
disagreements with the former accountant on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which, if not resolved to the satisfaction of the former accountant, would have
caused it to make a reference to the subject matter of the disagreement in
connection with its reports. The independent auditors' report on the
consolidated financial statements for the fiscal years ended September 30, 1997
and 1996 did not contain an adverse opinion or a disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
WHERE YOU CAN FIND MORE INFORMATION
PFSB Bancorp has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 (File No. 333-69191) under the Securities
Act of 1933, as amended, with respect to the common stock offered in the
conversion. This prospectus does not contain all the information contained in
the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. This
information may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549 and at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies may be obtained at prescribed rates from the Public
Reference Room of the Securities and Exchange Commission at 450 Fifth Street,
NW, Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The registration statement also is available through the
Securities and Exchange Commission's World Wide Web site on the Internet at
http://www.sec.gov.
Palmyra Saving has filed with the Office of Thrift Supervision an
Application for Approval of Conversion, which includes proxy materials for
Palmyra Saving's Special Meeting and certain other information. This prospectus
omits certain information contained in that application. The application,
including the proxy materials, exhibits and certain other information included
in the Application, may be inspected, without charge, at the offices of the
Office of Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552 and at
the office of the Regional Director of the Office of Thrift Supervision at the
Midwest Regional Office of the Office of Thrift Supervision, 122 W. John
Carpenter Freeway, Suite 600, Irving, Texas 75039.
103
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PALMYRA SAVING & BUILDING ASSOCIATION, F.A.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..................................................................... F-1
Consolidated Statements of Financial Condition as of September 30, 1998 and 1997................. F-2
Consolidated Statements of Income for the Years Ended September 30, 1998 and 1997................ 31
Consolidated Statements of Equity for the Years Ended September 30, 1998 and 1997................ F-3
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998 and 1997............ F-4
Notes to Consolidated Financial Statements....................................................... F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for PFSB Bancorp have not been included in
this prospectus because PFSB Bancorp, which has engaged in only organizational
activities to date, has no significant assets, contingent or other liabilities,
revenues or expenses.
104
<PAGE>
[LETTERHEAD OF MOORE, HORTON & CARLSON, P.C.]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Palmyra Saving and Building Association, F.A.
Palmyra, Missouri
We have audited the accompanying consolidated statements of financial condition
of Palmyra Saving and Building Association, F.A. ("Association") as of September
30, 1998 and 1997, and the related consolidated statements of income, changes in
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Association as
of September 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Moore, Horton & Carlson, P.C.
Mexico, Missouri
November 18, 1998
F-1
<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash (includes interest-bearing deposits of $1,003,689 and
$878,254, respectively) $ 2,268,166 $ 2,145,689
Investment securities--Note B
Available-for-sale, at fair value 7,086,677 8,508,981
Held-to-maturity (fair value of $5,639,849 and $5,106,899, respectively) 5,589,029 5,093,378
Mortgage-backed securities held-to-maturity (fair value of $2,623,999
and $2,870,571, respectively)--Note C 2,584,376 2,827,532
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 373,500 480,400
Loans receivable--Note D 40,512,748 38,394,460
Accrued interest receivable--Note E 443,909 446,955
Premises and equipment--Note F 562,365 491,251
Other assets 55,532 44,555
----------- -----------
TOTAL ASSETS $59,476,302 $58,433,201
=========== ===========
LIABILITIES AND EQUITY
Liabilities
Deposits--Note G $52,723,768 $51,411,814
Advances from FHLB--Note H 500,000 1,000,000
Advances from borrowers for property taxes and insurance 50,219 53,688
Other liabilities 154,338 252,208
----------- -----------
TOTAL LIABILITIES $53,428,325 $52,717,710
Commitments and contingencies--Note L and M
Equity--Notes I and J
Retained earnings - substantially restricted 6,017,345 5,741,791
Unrealized gain (loss) on securities, net of taxes 30,632 (26,300)
----------- -----------
TOTAL EQUITY $ 6,047,977 $ 5,715,491
----------- -----------
TOTAL LIABILITIES AND EQUITY $59,476,302 $58,433,201
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
RETAINED SECURITIES TOTAL
EARNINGS NET OF TAXES EQUITY
---------- ------------ ----------
<S> <C> <C> <C>
Balance at September 30, 1996, as originally reported $5,322,897 $(108,198) $5,214,699
Prior-period adjustment--Note O 87,000 --- 87,000
---------- --------- ----------
Balance as restated 5,409,897 (108,198) 5,301,699
Net income 331,894 --- 331,894
Change in unrealized gain (loss) on securities --- 81,898 81,898
---------- --------- ----------
BALANCE AT SEPTEMBER 30, 1997 5,741,791 (26,300) 5,715,491
Net income 275,554 --- 275,554
Change in unrealized gain (loss) on securities --- 56,932 56,932
---------- --------- ----------
BALANCE AT SEPTEMBER 30, 1998 $6,017,345 $ 30,632 $6,047,977
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 276,027 $ 331,894
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 56,275 41,133
Amortization of premiums and discounts (7,294) (12,908)
Loan fee amortization and payoffs (2,988) (3,590)
Provisions for loan losses 25,000 20,813
Deferred income taxes (10,000) (11,500)
Loss on sale of investments 2,056 14,015
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable 3,046 24,111
Other assets (10,977) 10,097
Other liabilities (121,465) (55,672)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 209,680 358,393
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities,
held-to-maturity (2,994,688) (1,845,000)
Proceeds from maturities and calls of investment
securities, held-to-maturity 2,510,000 3,950,000
Purchase of investment securities,
available-for-sale (3,993,213) (3,094,813)
Proceeds from maturities and calls of investment
securities, available-for-sale 5,500,000 950,000
Purchase of mortgage-backed securities (374,863) ---
Principal collected on mortgage-backed securities 618,338 453,989
Proceeds from redemption of FHLB stock 106,900 ---
Loans originated, net of repayments 532,316 (172,945)
Purchase of mortgage loans (2,787,237) (1,103,683)
Proceeds from sale of education loans 114,148 124,247
Purchase of premises and equipment (127,389) (53,465)
Net book value of premises and
equipment disposals --- 24,274
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (895,688) (767,396)
</TABLE>
F-4
<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 1,311,954 $ 20,838
Advances from FHLB
Borrowings 500,000 1,000,000
Repayments (1,000,000) (200,000)
Net increase (decrease) in advances for
taxes and insurance (3,469) 2,115
----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 808,485 822,953
----------- ----------
NET INCREASE IN CASH 122,477 413,950
CASH, BEGINNING OF PERIOD 2,145,689 1,731,739
----------- ----------
CASH, END OF PERIOD $ 2,268,166 $2,145,689
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for
Interest on deposits $ 2,672,539 $2,620,334
=========== ==========
Interest on FHLB advances $ 9,422 $ 4,833
=========== ==========
Income tax (refund) $ 284,174 $ (48,355)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of Palmyra Saving and Building
Association, F.A. conform to generally accepted accounting principles ("GAAP")
and to prevailing practices within the thrift industry. A summary of the more
significant accounting policies follows:
NATURE OF OPERATIONS: The Association provides a variety of financial services
- --------------------
to individual and corporate customers through its headquarters located in
Palmyra, Missouri and its branch locations in Canton and Kahoka, Missouri. The
Association's primary deposit products are interest-bearing checking and savings
accounts and certificates of deposit. Its primary lending products are one- to
four-family residential loans.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
- ---------------------------
accounts of the Association and its wholly-owned subsidiary, PSA Service
Corporation, whose activities consist principally of selling mortgage redemption
insurance and safe deposit box rental to the Association's customers.
Significant intercompany balances and transactions have been eliminated in
consolidation.
INVESTMENT SECURITIES: Investment securities are classified as held-to-
- ---------------------
maturity, which are recorded at amortized cost, or available-for-sale.
Securities designated as held-to-maturity are designated as such because the
Association has the ability and the intent to hold these securities to maturity.
Securities designated as available-for-sale, provide the investor with certain
flexibility in managing its investment portfolio. Such securities are reported
at fair value; net unrealized gains and losses are excluded from income and
reported net of applicable income taxes as a separate component of equity.
Gains or losses on sales of securities are recognized in operations at the time
of sale and are determined by the difference between the net sales proceeds and
the cost of the securities using the specific identification method, adjusted
for any unamortized premiums or discounts. Premiums or discounts are amortized
or accreted to income using the interest method over the period to maturity.
MORTGAGE-BACKED SECURITIES: Mortgage-backed securities represent participating
- ---------------------------
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. These securities are recorded at amortized costs.
Gains and losses on sales of mortgage-backed securities are recognized in
operations at the time of sale and are determined by the difference between the
net sales proceeds and the amortized costs of the securities using the specific
identification method, adjusted for any unamortized premiums or discounts.
Premiums or discounts are amortized or accreted to income using the interest
method over the period to maturity.
STOCK IN FEDERAL HOME LOAN BANK OF DES MOINES: Stock in the FHLB is stated at
- ---------------------------------------------
cost and the amount of stock held is determined by regulation. No ready market
exists for such stock and it has no quoted market value.
LOANS RECEIVABLE: Loans receivable are carried at unpaid principal balances,
- ----------------
less the allowance for loan losses and deferred loan origination fees. Loan
origination and commitment fees and certain direct loan origination costs are
deferred and amortized to interest income over the contractual life of the loan
using the interest method.
The Association's real estate loan portfolio consists primarily of long-term
loans secured by first trust deeds on single-family residences, other
residential property, commercial property and land. The adjustable-rate
mortgage is the Association's primary loan investment. Consumer loans consist
principally of loans secured by savings deposits and insured education loans.
Mortgage loans are placed on nonaccrual status when principal or interest is
delinquent for 90 days or more.
F-6
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
Uncollectible interest on loans is charged off or an allowance established by a
charge to income equal to all interest previously accrued. Interest is
subsequently recognized only to the extent cash payments are received until
delinquent interest is paid in full and in management's judgment, the borrower's
ability to make periodic interest and principal payments is back to normal in
which case the loan is returned to accrual basis. Interest on consumer loans
continues to accrue even if the loan is 90 days or more past due and is reversed
when management determines the interest to be uncollectible.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
- -------------------------
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-
offs, net of recoveries.
IMPAIRED LOANS: The Association accounts for impaired loans in accordance with
- --------------
Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures, an amendment of
SFAS No. 114". These statements address the accounting by creditors for
impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of small-
balance homogeneous loans that are collectively evaluated for impairment, loans
measured at fair value or at lower of cost or fair value, leases, and debt
securities. The Association considers all one- to four-family residential
mortgage loans, construction loans, and all consumer and other loans to be
smaller homogeneous loans.
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired. Impaired loans are
assessed individually and impairment identified when the accrual of interest has
been discontinued, loans have been restructured or management has serious doubts
about the future collectibility of principal and interest, even though the loans
are currently performing. Factors considered in determining impairment include,
but are not limited to, expected future cash flow, the financial condition of
the borrower and current economic conditions. The Association measures each
impaired loan based on the fair value of its collateral and charges off those
loans or portions of loans deemed uncollectible. Management has elected to
continue to use its existing nonaccrual methods for recognizing interest income
on impaired loans.
PREMISES AND EQUIPMENT: Premises and equipment have been stated at cost less
- ----------------------
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
respective assets, which range from five to fifty years.
FORECLOSED REAL ESTATE: Real estate acquired in settlement of loans is carried
- ----------------------
at the lower of the balance of the related loan at the time of foreclosure or
fair value less the estimated costs to sell the asset. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
- ------------
tax consequences, attributable to differences between the financial statement
carrying amounts of existing assets and labilities and their respective income
tax bases. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STATEMENTS OF CASH FLOWS: For purposes of the cash flows, cash and amounts due
- ------------------------
from depository institutions and interest-bearing deposits in other banks with a
maturity of three months or less at date of purchase are considered cash
equivalents.
F-7
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
RISK AND UNCERTAINTIES: The Association is a community-oriented financial
- ----------------------
institution which provides traditional financial services within the areas it
serves. The Association is engaged primarily in the business of attracting
deposits from the general public using these funds to originate one- to four-
family residential mortgage loans located primarily in Northeastern Missouri.
The Association's principal market area consists of rural communities and
substantially all of the Association's loans are to residents of or secured by
properties located in its principal lending area. Accordingly, the ultimate
collectibility of the Association's loan portfolio is dependent upon market
conditions in that area. This geographic concentration is considered in
management's establishment of the allowance for loan losses.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the periods covered. Actual results could
differ significantly from these estimates and assumptions.
In the normal course of its business, the Association encounters two significant
types of risk, economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The
Association is subject to interest rate risk to the degree that its interest-
bearing liabilities mature or reprice more or less rapidly, or on a different
basis, than its interest-earning assets. Credit risk is the risk of default on
the Association's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities held by the
Association.
The Association is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Association also undergoes periodic examinations by the regulatory agencies,
which may subject it to further changes with respect to asset valuations,
amounts of required loss allowances and operating restrictions resulting from
the regulators' judgements based on information available to them at the time of
their examination.
NEW ACCOUNTING STANDARDS: In June 1997, the Financial Accounting Standards
- ------------------------
Board ("FASB") issued SFAS No. 130, Reporting of Comprehensive Income and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income in a full set of general purpose financial statements. An enterprise
shall continue to display an amount for net income but will also be required to
display other comprehensive income, which includes other changes in equity.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, to revise present disclosure
requirements applicable to those benefits. Although the standard does not
change the measurement or recognition requirements for postretirement benefit
plans, it standardizes the disclosure requirements; requires additional
information on changes in benefit obligations and fair values of plan assets;
and eliminates certain present disclosure requirements.
SFAS Nos. 130, 131 and 132 are effective for fiscal years beginning after
December 15, 1997 and, accordingly, will be adopted by the Association in the
year ending September 30, 1999. Management does not expect that these standards
will significantly affect the Association's financial reporting.
F-8
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 standardizes the accounting for Derivative
instruments, including certain derivative instruments embedded in other
contracts, Under SFAS No. 133, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of the other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the
accounting for fair value and cash flow hedges. If the derivative instrument is
not designated as a hedge, the gain or loss is recognized in earnings in the
period of change.
SFAS No. 133 is effective for the financial statements issued for periods
beginning after June 15, 1999. The Association is currently evaluating the
effects of SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise. SFAS 134 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities and No. 115, Accounting for Certain
Investments in Debt and Equity Securities for years beginning after December 15,
1998. The Association currently conducts no mortgage-banking activities.
NOTE B--INVESTMENT SECURITIES
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
---------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government agency obligations
September 30, 1998 $7,037,978 $48,699 $ --- $7,086,677
========== ======= ======= ==========
September 30, 1997 $8,550,809 $19,936 $61,764 $8,508,981
========== ======= ======= ==========
Held-to-Maturity:
September 30, 1998
U.S. Government agency obligations $4,959,029 $35,900 $ --- $4,994,929
State and local obligations 630,000 14,920 --- 644,920
---------- ------- ------- ----------
$5,589,029 $50,820 $ --- $5,639,849
========== ======= ======= ==========
September 30, 1997
U.S. Government agency obligations $4,403,378 $20,080 $18,435 $4,405,023
State and local obligations 690,000 11,876 --- 701,876
---------- ------- ------- ----------
$5,093,378 $31,956 $18,435 $5,106,899
========== ======= ======= ==========
</TABLE>
F-9
<PAGE>
NOTE B--INVESTMENT SECURITIES - CONT'D
The scheduled contractual maturities of debt securities at September 30, 1998,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Amounts maturing:
One year or less $ --- $ --- $ 695,114 $ 697,036
After one year through five years 3,296,925 3,318,965 1,362,780 1,383,784
After five years through ten years 3,741,053 3,767,712 3,531,135 3,559.029
---------- ---------- ---------- ----------
$7,037,978 $7,086,677 $5,589,029 $5,639,849
========== ========== ========== ==========
</TABLE>
During 1998 and 1997, securities available-for-sale were called for redemption
with proceeds of $2,300,000 and $200,000, respectively, resulting in gross
realized losses of $3,670 and $1,180 in 1998 and 1997, respectively.
During 1998 and 1997, securities held-to-maturity were called for redemption
with proceeds of $950,000 and $500,000, respectively, resulting in a gross
realized gain of $1,614 in 1998 and a gross realized loss of $12,835 in 1997.
Investment securities were pledged to secure deposits as required or permitted
by law, with an amortized cost of $1,399,344 and fair value of $1,407,749 at
September 30, 1998.
NOTE C--MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held-to-maturity consist of the following:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
---------- --------- ------- ----------
<S> <C> <C> <C> <C>
September 30, 1998
GNMA $ 460,807 $16,747 $ --- $ 477,554
FNMA 1,522,667 14,856 11,135 1,526,388
FHLMC 572,339 21,264 --- 593,603
SBA 28,563 --- 2,109 26,454
---------- ------- ------- ----------
$2,584,376 $52,867 $13,244 $2,623,999
========== ======= ======= ==========
September 30, 1997
GNMA $ 583,162 $27,118 $ --- $ 610,280
FNMA 1,380,429 12,646 21,317 1,371,758
FHLMC 803,687 25,534 --- 829,221
SBA 60,254 --- 942 59,312
---------- ------- ------- ----------
$2,827,532 $65,298 $22,259 $2,870,571
========== ======= ======= ==========
</TABLE>
F-10
<PAGE>
NOTE C--MORTGAGE-BACKED SECURITIES - CONT'D
The amortized cost and fair value of mortgage-backed securities at September 30,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Amounts maturing:
After one year through five years $ 337,380 $ 342,174
After five through ten years 22,863 24,015
After ten years 2,224,133 2,257,810
---------- ----------
$2,584,376 $2,623,999
========== ==========
</TABLE>
Mortgage-backed securities were pledged to secure deposits as required or
permitted by law, with an amortized cost of $854,291 and fair value of $871,958
at September 30, 1998.
NOTE D--LOANS RECEIVABLE
Loans receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Mortgage loans:
One- to four-family residences $36,801,348 $34,580,609
Multi-family 806,042 958,167
Commercial 2,072,984 1,833,741
Construction 875,915 1,452,446
Land 419,577 289,684
----------- -----------
40,975,866 39,114,647
Less undisbursed portion of mortgage loans 592,430 898,685
----------- -----------
40,383,436 38,215,962
Consumer and other loans:
Savings 305,287 303,853
Education 97,975 123,720
Other 10,237 13,100
----------- -----------
413,499 440,673
----------- -----------
40,796,935 38,656,635
Less:
Net deferred loan-origination fees 4,187 7,175
Allowance for loan losses 280,000 255,000
----------- -----------
284,187 262,175
----------- -----------
Loans receivable $40,512,748 $38,394,460
=========== ===========
</TABLE>
F-11
<PAGE>
NOTE D--LOANS RECEIVABLE - CONT'D
In the normal course of business, the Association has made loans to its
directors and officers. In the opinion of management, related party loans are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The
aggregate dollar amount of loans outstanding to directors, officers and
employees total approximately $756,000 and $572,000 at September 30, 1998 and
1997, respectively.
The Association had loans serviced by others amounting to $8,568,593 and
$8,410,910 at September 30, 1998 and 1997, respectively.
Allowance for loan losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Balance, beginning of period $255,000 $234,187
Provision for loan losses 25,000 20,813
-------- --------
BALANCE, END OF PERIOD $280,000 $255,000
======== ========
</TABLE>
The recorded investment in impaired loans, for which there is no need for a
valuation allowance based upon the measure of the loan's fair value of the
underlying collateral at September 30, 1998 and 1997, was $-0- and $12,165,
respectively. The average recorded investment in impaired loans during the year
ended September 30, 1998 and 1997 was $12,165 and $130,772, respectively. The
related interest income that would have been recorded had the loans been current
in accordance with their original terms amounted to approximately $2,000 and
$34,000 at September 30, 1998 and 1997, respectively. The amount of interest
included in interest income on such loans for the year ended September 30, 1998
and 1997, amounted to approximately $-0- and $34,000, respectively.
NOTE E--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loans $243,378 $234,682
Investments securities 181,689 191,005
Mortgage-backed securities 18,842 21,268
-------- --------
$443,909 $446,955
======== ========
</TABLE>
F-12
<PAGE>
NOTE F--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land $ 82,132 $ 82,132
Building and improvements 569,052 580,651
Furniture and equipment 380,078 353,579
---------- ----------
1,031,262 1,016,362
Less accumulated depreciation and amortization 468,897 525,111
---------- ----------
$ 562,365 $ 491,251
========== ==========
</TABLE>
NOTE G--DEPOSITS
Deposit account balances are summarized as follows at September 30:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE 1998 1997
AT SEPTEMBER 30, -------------------- ----------------------
1998 AMOUNT % AMOUNT %
---------------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
NOW 2.53% 1,791,576 3.4 1,882,369 3.7
Money Market 3.91 1,275,154 2.4 1,028,585 2.0
Passbook savings 3.03 8,421,794 16.0 8,201,646 15.9
----------- ----- ----------- -----
3.05 11,488,524 21.8 11,112,600 21.6
Certificates of deposit:
4.00 to 4.99% 4.74 3,148,195 6.0 444,405 .9
5.00 to 5.99% 5.46 30,808,573 58.4 24,478,037 47.6
6.00 to 6.99% 6.36 7,278,476 13.8 15,376,772 29.9
----------- ----- ----------- -----
5.56 41,235,244 78.2 40,299,214 78.4
----------- ----- ----------- -----
5.02% $52,723,768 100.0% $51,411,814 100.0%
==== =========== ===== =========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $2,166,000 and $1,653,000 at September 30, 1998 and
1997, respectively. Deposits over $100,000 are not federally insured.
The Association held deposits of approximately $1,649,000 and $1,556,000 for its
directors, officers and employees at September, 1998 and 1997, respectively.
F-13
<PAGE>
NOTE G--DEPOSITS - CONT'D
At September 30, 1998, contractual maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
STATED YEAR ENDED SEPTEMBER 30
INTEREST RATE 1999 2000 2001 2002 2003
- --------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
4.00 to 4.99% $ 3,148,195 $ --- $ --- $ --- $ ---
5.00 to 5.99% 19,108,800 3,685,099 5,724,534 1,039,357 1,250,783
6.00 to 6.99% 11,992 2,245,170 2,028,311 1,364,091 1,628,912
----------- ---------- ---------- ---------- ----------
$22,268,987 $5,930,269 $7,752,845 $2,403,448 $2,879,695
=========== ========== ========== ========== ==========
</TABLE>
Interest expense on deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
---------- ----------
<S> <C> <C>
NOW, Money Market and
Passbook savings accounts $ 328,833 $ 342,098
Certificate accounts 2,341,025 2,277,827
---------- ----------
$2,669,858 $2,619,925
========== ==========
</TABLE>
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from FHLB, with weighted average interest rates and scheduled
maturities, consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
6.10% due on or before September 24, 1998 $ --- $1,000,000
5.74% due on or before January 6, 1999 500,000 ---
-------- ----------
$500,000 $1,000,000
======== ==========
</TABLE>
Maturities of FHLB advances are all due within one year.
The Association has signed a blanket pledge agreement with the FHLB under which
it can draw advances of unspecified amounts. The Association must hold an
unencumbered portfolio of eligible one- to four-family residential mortgages
with a book value of not less than 150% of the indebtedness.
F-14
<PAGE>
NOTE I--INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
--------- ---------
<S> <C> <C>
Current $159,000 $193,500
Deferred benefit (10,000) (11,500)
-------- --------
$149,000 $182,000
======== ========
</TABLE>
In addition, the Association recorded deferred income tax to equity relating to
unrealized gains and losses on investment securities available-for-sale of
$33,595 and $40,167 for the years ended September 30, 1998 and 1997,
respectively.
The provision for income taxes as shown on the consolidated statements of income
differs from amounts computed by applying the statutory federal income tax rate
of 34% to income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
-----------------------------------
<S> <C> <C> <C> <C>
Income tax expense at statutory rates $144,348 34.0% $174,724 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal benefit 14,414 3.4 17,190 3.3
Tax exempt income, net of related expenses (9,549) (2.2) (9,221) (1.8)
Other, net (213) (.1) (693) (.1)
-------- ---- -------- ----
$149,000 35.1% $182,000 35.4%
======== ==== ======== ====
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities included in other
liabilities at September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 37,100 $ 15,000
Deferred loan fees 1,600 2,600
Unrealized loss on available-for-sale securities --- 15,528
Deferred tax liabilities
Depreciation (35,030) (23,965)
FHLB stock dividend (45,200) (45,200)
Unrealized gain on available-for-sale securities (18,067) ---
-------- --------
NET DEFERRED TAX LIABILITY $(59,597) $(36,037)
======== ========
</TABLE>
F-15
<PAGE>
NOTE I--INCOME TAXES - CONT'D
During 1996, the Small Business Job Protection Act (the "Act") was signed into
law. The Act eliminated the percentage of taxable income bad debt deductions
for thrift institutions for tax years beginning after December 31, 1995. The
Act provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture
over a six year period. The Association has provided for deferred income taxes
for the reserve recapture after 1987; therefore the impact of this legislation
will not have a material effect on the Association's financial statements.
Prior to the enactment of the Act, the Association at September 30, 1998,
accumulated approximately $1,053,000 for which no deferred income tax liability
has been recognized. This amount represents an allocation of income to bad debt
deductions for income tax purposes only. If any of this amount is used other
than to absorb loan losses (which is not anticipated), the amount will be
subject to income tax at the current corporate rates.
NOTE J--REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Association
capital amounts and classification are also subject to qualitative judgement by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth below)
of total and Tier I capital to risk-weighted assets, and Tier I capital to
average assets (all as defined in the regulations). Management believes, as of
September 30, 1998, that the Association meets all capital adequacy requirements
to which it is subject.
Based on its regulatory capital ratios at September 30, 1998, the Association is
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. The Association's actual capital amounts and ratios
also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) $6,297 22.30% or equal to) 2,259 8.0% or equal to) 2,824 10.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets 6,017 21.31 or equal to) 1,130 4.0 or equal to) 3,566 6.0
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) 6,017 10.13 or equal to) 1,783 3.0 or equal to) 2,971 5.0
Tangible Capital (greater than (greater than
(to Adjusted Assets) 6,017 10.13 or equal to) 891 1.5 or equal to) N/A N/A
</TABLE>
F-16
<PAGE>
NOTE J--REGULATORY CAPITAL REQUIREMENTS - CONT'D
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) $5,997 22.25% or equal to) 2,156 8.0% or equal to) 2,695 10.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets 5,742 21.30 or equal to) 1,078 4.0 or equal to) 3,509 6.0
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) 5,742 9.82 or equal to) 1,754 3.0 or equal to) 2,924 5.0
Tangible Capital (greater than (greater than
(to Adjusted Assets) 5,742 9.82 or equal to) 877 1.5 or equal to) N/A N/A
</TABLE>
Reconciliation of equity and regulatory risk-based capital is as follows at
September 30:
<TABLE>
<CAPTION>
1998 1997
-----------------------
(Dollars in thousands)
<S> <C> <C>
Equity $6,048 $5,716
Less unrealized gain (loss) on securities, net of taxes 31 (26)
Add general valuation allowance 280 225
------ ------
Regulatory risk-based capital $6,297 $5,997
====== ======
</TABLE>
NOTE K--EMPLOYEE BENEFITS
The Association has a 401(k) salary reduction plan that covers all employees
meeting specific age and length of service requirements. Under the plan, the
Association matches participant contributions at the rate of 50% up to 4% of the
participants' annual compensation. Pension costs recognized under the plan
totalled $8,903, and $8,660 for the years ended September 30, 1998 and 1997,
respectively.
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Association is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet customer financing needs. These
financial instruments consist principally of commitments to extend credit. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Association's
exposure to credit loss in the event of nonperformance by the other party is
represented by the contractual amount of those instruments. The Association
does not generally require collateral or other security on unfunded loan
commitments until such time that loans are funded.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The
Association evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Association upon
extension of credit, is based on management's credit evaluation of the
counterparty. Such collateral consists primarily of residential properties.
The Association had the following outstanding commitments at September 30, 1998:
<TABLE>
<S> <C>
Undisbursed portion of mortgage loans $ 592,430
Commitments to originate mortgage loans with variable or pending interest rates 502,700
Commitments to originate mortgage loans with fixed interest rates ranging
from 7.00% to 7.50% 126,750
Undisbursed portion of nonmortgage loans 27,847
----------
TOTAL $1,249,727
==========
</TABLE>
F-17
<PAGE>
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - CONT'D
At September 30, 1998, the Association had amounts on deposit at banks and
federal agencies in excess of federally insured limits of approximately
$2,245,000.
NOTE M--PLAN OF CONVERSION
On September 24, 1998, the Association's Board of Directors adopted a plan of
conversion ("Plan") to convert from a federally chartered mutual savings bank to
a federally chartered stock savings bank, subject to approval by the
Associations' members. The Plan, which includes the formation of a Holding
Bank, is subject to approval by the OTS and includes the filing of a
registration statement with the Securities and Exchange Commission.
The Plan is expected to be accomplished by the sale of common stock of the
Holding Bank and the acquisition of all of the capital stock of the Association
by the Holding Bank in exchange for a portion of the net proceeds of the
conversion. The Holding Bank's common stock will be offered to various eligible
account holders, to the Association's Employee Stock Ownership Plan, to other
supplemental eligible depositors and to other members of the Association in a
subscription offering. Shares of the Holding Bank's common stock not subscribed
for in the subscription offering, if any, may be offered for sale in a community
offering, as determined by the Board of Directors of the Association.
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its retained earnings as reflected in the latest statement
of financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders (collectively,"eligible depositors") who
continue to maintain their deposit accounts in the Association after conversion.
In the event of a complete liquidation of the Association (and only in such
event), eligible depositors who continue to maintain accounts shall be entitled
to receive distribution from the liquidation account before any liquidation may
be made with respect to common stock.
The Association may not declare or pay a cash dividend if the effect thereof
would cause its equity to be reduced below either the amount required for the
liquidation account or the regulatory capital requirements imposed by the OTS.
Conversion costs will be deducted from the proceeds of sale of common stock and
recorded as a reduction to equity. If the conversion is not completed, all costs
will be charged to expense. As of September 30, 1998, the Association has
incurred costs related to the conversion of $18,655.
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No, 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of estimated fair value for financial instruments held by the
Association. Fair value estimates of the Association's financial instruments as
of September 30, 1998 and 1997, including methods and assumptions utilized, are
set forth below.
The following methods and assumptions were used by the Association in estimating
fair values of financial instruments as disclosed herein.
Cash and due from depository institutions: The carrying amounts approximate
fair value.
F-18
<PAGE>
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS - CONT'D
Investment and mortgage-backed securities: Fair value is determined by
reference to quoted market prices.
Stock in FHLB: This stock is a restricted asset and its carrying value is a
reasonable estimate of fair value.
Loans receivable: The fair value of fixed rate first mortgage loans is
estimated by using discounted cash flow analyses, using interest rates currently
offered by the Association for loans with similar terms to borrowers of similar
credit quality. The carrying value of variable rate first mortgage loans
approximate fair value. The fair value of consumer loans is calculated by using
the discounted cash flow based upon the current market for like instruments.
Fair values for impaired loans are estimated using discounted cash flow
analyses.
Accrued interest receivable: The carrying value approximates fair value.
Transaction deposits: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
Certificates of deposit: The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar maturities.
Advances from borrowers for taxes and insurance: The carrying value
approximates fair value.
All other liabilities: The carrying value approximates fair value.
Off-balance sheet instruments: The fair value of a loan commitment and a letter
of credit is determined based on the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreement and
the present credit worthiness of the counterparties. Neither the fees earned
during the year on these instruments nor their value at year-end are significant
to the Association's consolidated financial position.
Limitations: Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
The valuation techniques employed above involve uncertainties and are affected
by assumptions used and judgements regarding prepayments, credit risk, discount
rates, cash flows and other factors. Changes in assumptions could significantly
affect the reported fair value.
In addition, the fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Also, the fair value estimates do not include
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market. The amounts
at September 30, 1998 and 1997, are as follows:
F-19
<PAGE>
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS - CONT'D
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from depository institutions $ 2,268 $ 2,268 $ 2,146 $ 2,146
Investment securities - Available for sale 7,087 7,087 8,509 8,509
Investment securities - Held-to-maturity 5,589 5,640 5,093 5,107
Mortgage-backed securities - Held-to-maturity 2,584 2,624 2,828 2,871
Stock in FHLB 374 374 480 480
Loans receivable, net 40,513 40,522 38,394 38,398
Accrued interest receivable 444 444 447 447
LIABILITIES
Transaction accounts 11,489 11,489 11,113 11,113
Certificates of deposit 41,235 41,365 40,299 40,403
Advances from Federal Home Loan Bank 500 500 1,000 1,000
Advances from borrowers for property taxes
and insurance 50 50 54 54
</TABLE>
NOTE O--PRIOR-PERIOD ADJUSTMENT
The Association retroactively changed its method of computing deferred income
taxes to include the allowances for loan losses as a component of deferred
income taxes. The effect of this adjustment was to record a deferred income tax
asset and an increase in equity of $87,000.
F-20
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with the offering made hereby, and, if given or made,
that other information or representation must not be relied upon as having been
authorized by PFSB Bancorp, Inc. or Palmyra Saving and Building Association,
F.A. This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby to any person or in any
jurisdiction in which an offer or solicitation is not authorized or in which
the person making an offer or solicitation is not qualified to do so, or to any
person to whom it is unlawful to make an offer or solicitation in those
jurisdictions. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of PFSB Bancorp, Inc. or Palmyra Saving and Building
Association, F.A. since any of the dates as of which information is furnished
herein or since the date hereof.
[Logo for PFSB Bancorp, Inc.]
(Proposed Holding Company for Palmyra Savings)
747,500 Shares of Common Stock
----------------
Prospectus
----------------
TRIDENT SECURITIES, INC.
February 11, 1999
Until the later of May 20, 1999, or 90 days after the beginning of the
syndicated community offering of Common Stock, if any, all dealers that buy,
sell or trade these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
