<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended September 30, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to __________
Commission File Number: 0-25355
PFSB BANCORP, INC.
(Name of small business issuer in its charter)
MISSOURI 31-1627743
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 West Lafayette Street, Palmyra, Missouri 63461
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (573) 769-2134
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ____
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. X
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The issuer's gross revenues for the fiscal year ended September 30, 1999
were $4,435,995.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $4,023,498, based upon the average of the bid and asked
price ($10.375 per share) as quoted on the OTC Bulletin Board for December 17,
1999. Solely for purposes of this calculation, the shares held by the directors
and officers of the registrant are deemed to be held by affiliates.
The number of shares outstanding of the registrant's Common Stock as of
December 17, 1999 was 475,150.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Stockholders and of the Proxy
Statement for the 2000 Annual Meeting of Stockholders are incorporated by
reference in Parts II and III, respectively, of this Form 10-KSB
Transactional Small Business Disclosure Format (check one): Yes ___ No X
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INDEX
<TABLE>
<CAPTION>
Part I
Page
<S> <C>
Item 1. Description of Business............................................ 3
Item 2. Description of Properties.......................................... 27
Item 3. Legal Proceedings.................................................. 27
Item 4. Submission of Matters to a Vote of Securities
Holders......................................................... 27
Part II
Item 5. Market for Common Equity and Related Stockholder Matters........... 28
Item 6. Management's Discussion and Analysis or Plan of Operation.......... 28
Item 7. Financial Statements............................................... 28
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 28
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............... 28
Item 10. Executive Compensation............................................. 28
Item 11. Security Ownership of Certain Beneficial Owners and Management..... 28
Item 12. Certain Relationships and Related Transactions..................... 28
Item 13. Exhibits and Reports on Form 8-K................................... 29
</TABLE>
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This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on PFSB Bancorp, Inc.'s current expectations
regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which PFSB Bancorp, Inc. operates, as well as nationwide, PFSB Bancorp, Inc.'s
ability to control costs and expenses, competitive products and pricing, loan
delinquency rates, changes in federal and state legislation and regulation, and
the impact of Year 2000 issues. These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be
placed on such statements. PFSB Bancorp, Inc. assumes no obligation to update
any forward-looking statements.
PART I
Item 1. DESCRIPTION OF BUSINESS
General
PFSB Bancorp, Inc., headquartered in Palmyra, Missouri, was formed in
November 1998 as the holding company for Palmyra Savings in connection with the
conversion of Palmyra Savings from mutual to stock form of ownership. The
conversion was completed on March 31, 1999 through the sale of 559,000 shares of
common stock by PFSB Bancorp at a price of $10.00 per share. PFSB Bancorp's
sole business activity is the ownership of all of Palmyra Savings' capital
stock. PFSB Bancorp does not transact any material business other than through
its subsidiary, Palmyra Savings. PFSB Bancorp is subject to the regulation of
the Office of Thrift Supervision and the Securities and Exchange Commission.
PFSB Bancorp is listed on the OTC Bulletin Board under the symbol PFSI.
Palmyra Savings' principal business is attracting deposits from the general
public and originating loans secured by one-to-four family residential real
estate properties located in its market area. Palmyra Savings is regulated by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Palmyra Savings' deposits have been federally insured by the Federal Deposit
Insurance Corporation since 1938 and are currently insured by the Federal
Deposit Insurance Corporation under the Savings Association Insurance Fund.
Palmyra Savings has been a member of the Federal Home Loan Bank System since
1937.
Market Area
Palmyra Savings 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 Savings' depositors live in Lewis,
Clark and Marion Counties and most of Palmyra Savings' 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. 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.
Competition
Palmyra Savings 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 Savings' 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 Savings has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. Palmyra
Savings' 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 Savings' growth in the future.
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Lending Activities
General. At September 30, 1999, Palmyra Savings' net loans receivable
totaled $41.4 million, or 62.3% of total assets. Palmyra Savings has
concentrated its lending activities on one- to four-family mortgage loans, with
these loans amounting to 88.8% of loans at September 30, 1999. Palmyra Savings
also originates multi-family, commercial real estate, land and residential
construction loans, as well as loans secured by savings accounts. In addition,
Palmyra Savings 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 $6.9
million, or 16.6% of net loans, at September 30, 1999. A substantial portion of
Palmyra Savings' mortgage loan portfolio is secured by real estate located in
Missouri.
Loan Portfolio Analysis. The following table sets forth the composition of
Palmyra Savings' loan portfolio at the dates indicated. Palmyra Savings had no
concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------
1999 1998
------------------ ------------------
Amount Percent Amount Percent
-------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................... $37,600 88.79% $36,801 88.91%
Multi-family.......................... 328 0.78 806 1.95
Commercial............................ 2,440 5.76 2,073 5.01
Construction.......................... 1,086 2.56 876 2.12
Land.................................. 408 0.96 420 1.01
------- ------ ------- ------
Total mortgage loans............... $41,862 98.85 40,976 99.00
Consumer loans:
Education loans....................... 112 0.27 98 0.24
Savings account loans................. 364 0.86 305 0.74
Other................................. 9 0.02 10 0.02
------- ------ ------- ------
Total consumer loans............... 485 1.15 413 1.00
------- ------ ------- ------
Total loans, gross................. 42,347 100.00% 41,389 100.00%
====== ======
Less:
Undisbursed loan funds................ 681 592
Allowance for loan losses............. 280 280
Deferred loan fees.................... 1 4
------- -------
Loan receivable, net............... $41,385 $40,513
======= =======
</TABLE>
One- to Four-Family Real Estate Loans. Palmyra Savings' primary lending
activity is the origination of loans secured by one- to four-family residences
located in its market area. Palmyra Savings 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, 1999, $37.6 million, or 88.8%, of Palmyra Savings' total loans
consisted of one- to four-family loans, of which $6.0 million were purchased
loans. All one- to four-family mortgage loans are held in Palmyra Savings'
portfolio for long-term investment.
Palmyra Savings' 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 Savings 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
4
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amortization schedule equal to the original amortization term less the prior
balloon term(s). Palmyra Savings' residential mortgage loans do not have any
annual interest rate adjustment limits, but have a lifetime interest rate
adjustment limit of 6%. Palmyra Savings 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 Savings from
charging a prepayment penalty on a loan that has been outstanding for more than
five years. Palmyra Savings' residential mortgage loans are generally
underwritten, but not documented, according to secondary market guidelines.
To a limited extent, Palmyra Savings originates mortgage loans secured by
non-owner-occupied residential properties. Most of these loans are secured by
rental properties or second residences. 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 a maximum of 75% and the terms are generally
limited to no more than 20 years.
The retention of balloon loans in Palmyra Savings' loan portfolio, which
through the use of modification agreements function like adjustable rate
mortgage loans, helps reduce Palmyra Savings' 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 Savings 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 Savings has no assurance that yields on
adjustable rate mortgage loans will be sufficient to offset increases in Palmyra
Savings' cost of funds. Palmyra Savings believes these risks, which have not had
a material adverse effect on Palmyra Savings to date, generally are less than
the risks associated with holding fixed-rate loans in portfolio during a rising
interest rate environment.
Palmyra Savings generally requires title insurance or an acceptable
attorney's opinion on the status of its lien on all loans where real estate is
the primary source of security. Palmyra Savings 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 Savings' 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 Savings' Board of Directors, Palmyra
Savings can lend up to 95% of the appraised value of the property securing a
one- to four-family residential loan. Generally, Palmyra Savings 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 Savings' primary market
area. Otherwise appraisals are performed by either Eldon R. Mette, Palmyra
Savings' President and Chief Executive Officer, or L. Edward Schaeffer, Palmyra
Savings' 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.
Palmyra Savings originates fixed and adjustable rate mortgage loans and
most of the residential mortgage loans that it purchases are adjustable rate
mortgage loans.
Multi-family and Commercial Real Estate Loans. Palmyra Savings
occasionally originates and purchases mortgage loans for the acquisition and
refinancing of multi-family and commercial real estate properties. At September
30, 1999, $328,000, or 0.8%, of Palmyra Savings' 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 $2.4
million, or 5.8%, of Palmyra Savings' total loans consisted of loans secured by
commercial real estate, $577,000 of which are purchased participation interests.
All purchased participation interests are underwritten according to the same
standards that Palmyra Savings would use if it were originating the underlying
loans. Palmyra Savings has no written or oral commitments with any institution
to purchase a predetermined number or type of participation interests.
At September 30, 1999, Palmyra Savings' commercial real estate loans are
secured by churches, storefronts, a nursing home and a restaurant, all located
in Missouri. At September 30, 1999, Palmyra Savings' largest multi-family or
commercial real estate loan that Palmyra Savings originated was $200,000 and is
secured by land located in Marion County, Missouri. The largest purchased
multi-family or commercial real estate participation interest had an outstanding
balance of $444,000 at September 30, 1999 and is secured by a nursing home
located in Shelbina, Missouri.
5
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All multi-family loans and commercial real estate loans originated by
Palmyra Savings 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 Savings are also adjustable rate loan generally indexed to the prime
rate and with terms of up to 25 years. Palmyra Savings requires appraisals of
all properties securing multi-family loans and commercial real estate loans. If
the property is located outside of Palmyra Savings' primary market area,
appraisals are performed by an independent appraiser designated by Palmyra
Savings, 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 Savings 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 Savings
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 Savings also obtains loan guarantees from financially
capable parties based on a review of personal financial statements.
Residential Construction Loans. Palmyra Savings originates residential
construction loans to local home builders and to individuals for the
construction and acquisition of their personal residence. At September 30, 1999,
residential construction loans amounted to $1.1 million, or 2.6% of Palmyra
Savings' total loans.
Palmyra Savings' 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
Savings lends to a limited number of local 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, 1999, the largest amount of
construction loans outstanding to one builder was $91,000, all of which was for
speculative construction. Construction loans to individuals are made on the
same terms as Palmyra Savings' 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 Savings
requires an appraisal of the property by a staff appraiser. Palmyra Savings 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 Savings 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 to be inaccurate, Palmyra Savings 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 Savings 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 Savings has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to residential properties. It is
also Palmyra Savings' general policy to obtain regular financial statements from
builders so that it can monitor their financial strength.
Land Loans. Palmyra Savings occasionally originates loans secured by
unimproved land, including small residential subdivisions in Palmyra Savings'
primary market area. These loans have terms of three to 20 years and
6
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generally have adjustable interest rates. At September 30, 1999, land loans
totaled $408,000, or 1.0% of total loans. The largest land loan at that date was
$101,000.
Consumer Loans. Historically, Palmyra Savings' consumer lending activities
have been limited to guaranteed education loans and savings account loans. At
September 30, 1999, consumer loans amounted to $485,000, or 1.2% of total loans.
Palmyra Savings 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 Savings engages
in a limited amount of direct mobile home lending but only with the security of
the underlying real estate.
Palmyra Savings 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 Savings 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 Savings sells the loan at par to the Missouri
Higher Education Loan Authority.
Palmyra Savings also offers loans secured by savings deposits at Palmyra
Savings. 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 Savings may lend to
one borrower is limited by federal regulations. At September 30, 1999, Palmyra
Savings' regulatory limit on loans to one borrower was $1.3 million. At that
date, Palmyra Savings' largest amount of loans to one borrower, including the
borrower's related interests, was $538,000 and consisted of residential mortgage
loans. These loans were performing according to their original terms at
September 30, 1999.
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Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 1999 regarding the dollar amount of loans maturing
in Palmyra Savings' portfolio based on their contractual terms to maturity, but
does not include potential prepayments. Demand loans, loans having no stated
schedule of repayments 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 Savings' 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 Savings' experience with its
borrowers, Palmyra Savings 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.............. $2,422 $3,166 $3,161 $8,098 $20,753 $37,600
Multi-family..................... 14 32 37 117 128 328
Commercial....................... 199 246 235 559 1,201 2,440
Construction..................... 1,086 -- -- -- -- 1,086
Land............................. 135 48 40 90 95 408
Consumer loans:
Education........................ 71 38 3 -- -- 112
Savings account loans............ 188 50 39 28 59 364
Other............................ 3 6 -- -- -- 9
------ ------ ------ ------ ------- -------
Total........................... $4,118 $3,586 $3,515 $8,892 $22,236 $42,347
====== ====== ====== ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, 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.............. $ 882 $34,296
Multi-family..................... -- 314
Commercial....................... 40 2,201
Land............................. 41 232
Consumer loans:
Education........................ 41 --
Savings account loans............ 176 --
Other............................ 6 --
------ -------
Total........................... $1,186 $37,043
====== =======
</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 Savings 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.
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Loan Solicitation and Processing. Palmyra Savings' lending activities
follow written, non-discriminatory, underwriting standards and loan origination
procedures established by Palmyra Savings' 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 Savings
does not utilize mortgage brokers or other third-party originators. All loans
are approved by Palmyra Savings' Board of Directors except for savings account
loans which may be approved by a branch manager.
Loan Originations, Purchases and Sales. Palmyra Savings primarily
originates three- and five-year balloon mortgage loans with amortization terms
of up to 30 years. Occasionally, Palmyra Savings originates fully amortizing
fixed rate loans with terms of fifteen years or less.
Palmyra Savings generally retains for its portfolio all of the loans that
it originates and purchases. Occasionally, Palmyra Savings 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 Savings limits its
participation interest in a loan to up to 80%. In the case of participations in
one- to four-family mortgage loans, Palmyra Savings participates 80% and the
lead lender retains the servicing rights. Palmyra Savings pays no fee on the
loans it purchases.
Palmyra Savings 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.
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The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------------
1999 1998
--------- --------
(In Thousands)
<S> <C> <C>
Total loans receivable, net, at beginning of period................ $ 40,513 $ 38,394
Loans originated:
Mortgage loans:
One- to four-family............................................... $ 12,517 $ 8,742
Commercial........................................................ 1,509 408
Construction...................................................... 1,490 1,010
Land.............................................................. 208 192
--------- --------
Total mortgage loans............................................. 15,724 10,352
Consumer loans:
Education......................................................... 55 89
Savings account................................................... 296 181
Other............................................................. 1 13
--------- --------
Total consumer loans............................................. 352 283
--------- --------
Total loans originated.......................................... 16,076 10,635
Loans purchased:
One- to four-family............................................... 1,231 2,654
Multi-family...................................................... -- 83
Commercial........................................................ 450 --
Construction...................................................... 304 51
--------- --------
Total loans purchased............................................ 1,985 2,788
Loans sold:
Education........................................................ (43) (114)
Principal repayments............................................... (17,232) (11,475)
Increase (decrease) in other items, net............................ 86 285
--------- --------
Net increase (decrease) in loans receivable, net................... 872 2,119
--------- --------
Total loans receivable, net, at end of period...................... $ 41,385 $ 40,513
========= ========
</TABLE>
Loan Commitments. Palmyra Savings 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, 1999, Palmyra Savings had loan commitments totaling
$791,000, not including undisbursed portions of mortgage loans and consumer
loans of $691,000.
Loan Fees. In addition to interest earned on loans, Palmyra Savings
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 Savings 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, 1999, Palmyra Savings had $2,000 of deferred loan fees.
Palmyra Savings recognized $3,000 and $3,000
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of deferred loan fees during the years ended September 30, 1999 and 1998,
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 Savings 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 15/th/ day of the month. In most cases,
deficiencies are cured promptly. If a delinquency continues beyond the 25/th/
day of the month, additional contact is made either through additional notices
or other means and Palmyra Savings will attempt to work out a payment schedule.
While Palmyra Savings generally prefers to work with borrowers to resolve the
problems, Palmyra Savings will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Palmyra Savings' 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 Savings.
Palmyra Savings 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 Savings 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 Savings continues to accrue
interest even if the loan is past due 90 days or more as the risk of loss to
Palmyra Savings is minimal because Palmyra Savings' consumer loan portfolio
consists primarily of government guaranteed education loans and savings account
loans.
11
<PAGE>
The following table sets forth information with respect to Palmyra Savings'
nonperforming assets at the dates indicated. Palmyra Savings had no restructured
loans within the meaning of Statement of Financial Accounting Standards No. 15
at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------
1999 1998
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family............................................................ $ 137 $ 196
Commercial..................................................................... -- 23
----- -----
Total mortgage loans.......................................................... 137 219
Consumer loans.................................................................. -- --
----- -----
Total.......................................................................... 137 219
Accruing loans contractually past due 90 days or more........................... -- --
----- -----
Total of nonaccrual and 90 days past due loans.................................. 137 219
Real estate owned............................................................... 100 --
----- -----
Total nonperforming assets................................................... $ 237 $ 219
===== =====
Nonaccrual and 90 days or more past due loans as a percentage
of loans receivable, net..................................................... 0.33% 0.54%
Nonaccrual and 90 days or more past due loans as a percentage of total assets... 0.21% 0.37%
Nonperforming assets as a percentage of total assets............................ 0.36% 0.37%
</TABLE>
Interest income that would have been recorded for 1999 had nonaccruing
loans been current in accordance with their original terms amounted to
approximately $13,000. The amount of interest included in interest income in
1999 on these loans amounted to approximately $6,000.
Real Estate Owned. Real estate acquired by Palmyra Savings 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, 1999, Palmyra Savings had foreclosed real estate of $100,000.
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 Savings.
12
<PAGE>
The aggregate amounts of Palmyra Savings' classified and special mention
assets at the dates indicated were as follows:
At September 30,
--------------------
1999 1998
--------- ---------
(In thousands)
Classified assets:
Loss........................................... $ -- $ --
Doubtful....................................... -- --
Substandard.................................... 137 219
Special mention................................ -- 432
----- -----
$ 137 $ 651
===== =====
At September 30, 1999, assets designated substandard consisted of six one-
to four-family mortgage loans totalling $137,000.
Allowance for Loan Losses. In originating loans, Palmyra Savings 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, 1999, Palmyra Savings 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
Savings 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 Savings' loan portfolio, will
not request Palmyra Savings 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 Savings' financial condition and results of operations.
13
<PAGE>
The following table sets forth an analysis of Palmyra Savings' allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1999 1998
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period............................................ $ 280 $ 255
Provision for loan losses................................................... -- 25
Recoveries.................................................................. -- --
Charge-offs................................................................. -- --
------- -------
Allowance at end of period.................................................. $ 280 $ 280
======= =======
Allowance for loan losses as a percentage of total loans outstanding
at the end of the period................................................. 0.66% 0.68%
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................................................. 203.75% 127.85%
</TABLE>
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,
-----------------------------------------
1999 1998
------------------- -------------------
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....................................... $155 88.79% $145 88.91%
Multi-family.............................................. 7 0.78 8 1.95
Commercial................................................ 49 5.76 38 5.01
Construction.............................................. 1 2.56 2 2.12
Land...................................................... 8 0.96 2 1.01
Consumer..................................................... -- 1.15 -- 1.00
Unallocated.................................................. 60 -- 85 --
---- ------ ---- ------
Total allowance for loan losses........................ $280 100.00% $280 100.00%
==== ====== ==== ======
</TABLE>
Investment Activities
Palmyra Savings 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 Savings may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like
Palmyra Savings are also required to maintain an investment in FHLB stock.
Palmyra Savings is required under federal regulations to maintain a minimum
amount of liquid assets.
14
<PAGE>
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 Savings 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 Savings' 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 Savings may have
to invest the funds at a lower interest rate. Palmyra Savings' 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 Savings' liquidity position, and anticipated
cash needs and sources. The effect that the proposed investment would have on
Palmyra Savings' credit and interest rate risk and risk-based capital is also
considered. Palmyra Savings purchases investment securities to provide necessary
liquidity for day-to-day operations. Palmyra Savings also purchases investment
securities when investable funds exceed loan demand.
The following table sets forth the amortized cost and fair value of Palmyra
Savings's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------
1999 1998
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ------ --------- -------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government agency securities................................ $ 9,816 $ 9,816 $ 7,087 $ 7,087
------- ------- ------- -------
Total available for sale...................................... 9,816 9,816 7,087 7,087
------- ------- ------- -------
Held to maturity:
U.S. Government agency securities................................ 6,914 6,682 4,959 4,995
Municipal........................................................ 570 573 630 645
Mortgage-backed securities....................................... 3,650 3,574 2,584 2,624
------- ------- ------- -------
Total held to maturity........................................ 11,134 10,829 8,173 8,264
------- ------- ------- -------
Total......................................................... $20,950 $20,645 $15,260 $15,351
======= ======= ======= =======
</TABLE>
Palmyra Savings purchases mortgage-backed securities when investable funds
exceed loan demand. All of Palmyra Savings' 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
Savings will have to reinvest the funds at a lower interest rate.
Occasionally, Palmyra Savings 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.
15
<PAGE>
At September 30, 1999, Palmyra Savings did not own any securities, other
than U.S. Government and agency securities, which had an aggregate book value in
excess of 10% of PFSB Bancorp's stockholders' equity at that date.
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of Palmyra
Savings' debt securities at September 30, 1999, 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 Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency
securities................ $ 997 5.00% $8,011 5.86% $6,922 6.05% $ 800 7.00% $16,730 5.94%
Municipal.................... 60 4.73 330 5.17 180 5.53 -- -- 570 5.24
Mortgage-backed securities... 156 6.00 308 7.66 565 6.18 2,621 6.62 3,650 6.61
------ ------ ------ ------ -------
Total............... $1,213 5.12% $8,649 5.89% $7,667 6.05% $3,421 6.71% $20,950 6.04%
====== ====== ====== ====== =======
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for Palmyra
Savings' lending and other investment activities. In addition, Palmyra Savings
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 Savings 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 Savings has no other borrowing arrangements.
Deposit Accounts. Nearly all of Palmyra Savings' depositors reside in
Missouri. Palmyra Savings' 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 Savings reviews its deposit
mix and pricing weekly. Palmyra Savings does not utilize brokered deposits, nor
has it aggressively sought jumbo certificates of deposit.
Palmyra Savings believes it is competitive in the interest rates it offers
on its deposit products. Palmyra Savings determines the rates paid based on a
number of factors, including rates paid by competitors, Palmyra Savings' need
for funds and cost of funds, borrowing costs and movements of market interest
rates.
In the unlikely event Palmyra Savings is liquidated, 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 Savings.
16
<PAGE>
The following table indicates the amount of Palmyra Savings' jumbo
certificate accounts by time remaining until maturity as of September 30, 1999.
Jumbo certificate accounts have principal balances of $100,000 or more.
Certificates
Maturity Period of Deposits
- --------------- -------------
(In thousands)
Three months or less....................... $ 568
Over three through six months.............. 219
Over six through twelve months............. 525
Over twelve months......................... 1,094
-------
Total................................... $ 2,406
=======
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 Savings between the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1999 1998
------------------------------------------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ------- ---------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook accounts........................................ $ 8,474 15.94% $ 8,422 15.97%
NOW accounts............................................. 2,039 3.84 1,792 3.40
Money market deposits.................................... 1,281 2.41 1,275 2.42
Fixed-rate certificates maturing:
Within 1 year......................................... 23,864 44.91 22,269 42.24
After 1 year, but within 2 years...................... 9,124 17.17 5,930 11.25
After 2 years, but within 5 years..................... 8,357 15.73 13,036 24.72
------- ------ ------- ------
Total............................................. $53,139 100.00% $52,724 100.00%
======= ====== ======= ======
</TABLE>
Time Deposits by Maturities. The following table sets forth the amount of
time deposits in Palmyra Savings categorized by maturities at September 30,
1999.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------
Less than 1 - 2 2 - 3 3 - 4 After
One Year Years Years Years 4 Years Total
--------- ------ ------ ------ ------- -------
<S> (Dollars in thousands)
Certification accounts: <C> <C> <C> <C> <C> <C>
4.00 - 4.99%.............................................. $14,861 -- $ 980 -- -- $15,841
5.00 - 5.99%.............................................. 6,873 7,084 1,191 1,193 2,116 18,457
6.00 - 6.99%.............................................. 2,130 2,040 1,237 1,640 -- 7,047
-------- ------ ------ ------ ------- -------
Total.................................................... $23,864 $9,124 $3,408 $2,833 $2,116 $41,345
======== ====== ====== ====== ======= =======
</TABLE>
Time Deposits by Rates. The following table sets forth the time deposits
in Palmyra Savings classified by rates as of the dates indicated.
17
<PAGE>
At September 30,
1999 1998
------- ------
(In thousands)
4.00 - 4.99%..................... $15,842 $ 3,148
5.00 - 5.99%..................... 18,457 30,809
6.00 - 6.99%..................... 7,046 7,278
------- -------
Total $41,345 $41,235
======= =======
Deposit Activity. The following table sets forth the deposit activity of
Palmyra Savings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------
1999 1998
-------- ---------
(In thousands)
<S> <C> <C>
Beginning balance................. $ 52,724 $ 51,412
Net withdrawals
before interest credited......... (1,480) (613)
Interest credited................. 1,895 1,925
-------- --------
Net increase in deposits.......... 415 1,312
-------- ---------
Ending balance.................... $ 53,139 $ 52,724
======== =========
</TABLE>
Borrowings. Palmyra Savings 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 Savings 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, 1999, Palmyra Savings had an
available credit line of $19.1 million from the Federal Home Loan Bank of Des
Moines under which Palmyra Savings had outstanding advances of $2.5 million.
The following tables set forth certain information regarding Palmyra
Savings' use of Federal Home Loan Bank of Des Moines advances during the periods
and at the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
1999 1998
--------- --------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of advances outstanding at any month end............................. $2,500 $1,000
Approximate average short-term advances outstanding................................. 423 269
Approximate weighted average rate paid on advances.................................. 4.33% 5.70%
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-------------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
Balance outstanding at end of period................................................ $2,500 $ 500
Weighted average rate paid on advances.............................................. 5.90% 5.74%
</TABLE>
Subsidiary Activities
PFSB Bancorp's sole subsidiary is Palmyra Savings. Palmyra Savings has one
subsidiary, PSA Service Corporation. Under Office of Thrift Supervision
regulations, Palmyra Savings 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 Savings formed PSA Service Corporation as a wholly
owned subsidiary to sell mortgage life insurance to Palmyra Savings' borrowers.
PSA Service Corporation also offers safe deposit box services in Palmyra
Savings' Canton branch office.
Personnel
As of September 30, 1999, Palmyra Savings had 17 full-time employees and
one part-time employee, none of whom is represented by a collective bargaining
unit. Palmyra Savings believes its relationship with its employees is good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, PFSB Bancorp is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision. Palmyra Savings is regulated, examined and
supervised extensively by the Office of Thrift Supervision, as its primary
federal regulator, and the Federal Deposit Insurance Corporation, as the deposit
insurer. Palmyra Savings is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund managed by the Federal Deposit Insurance Corporation.
Palmyra Savings 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 certain approvals before entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The Office of Thrift Supervision and the Federal Deposit Insurance
Corporation examine Palmyra Savings periodically to test Palmyra Savings' safety
and soundness and compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework for Palmyra
Savings' activities and is intended primarily to protect the insurance fund and
Palmyra Savings' depositors.
The regulatory structure also gives regulatory authorities extensive
discretion in their supervisory and enforcement activities and examination
policies, including policies regarding asset classification and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulatory requirements and policies, whether by the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation or the Congress, could
have a material adverse impact on PFSB Bancorp, Palmyra Savings and their
operations. The description of statutory provisions and regulations that apply
to PFSB Bancorp and Palmyra Savings discussed below and elsewhere in this
prospectus is not a complete description of them and their effects on Palmyra
Savings and PFSB Bancorp.
Holding Company Regulation
PFSB Bancorp is a nondiversified unitary savings and loan holding company
under federal law. Formerly, a unitary savings and loan holding company was not
restricted as to the types of business activities in which it could engage,
provided that its subsidiary savings association continued to be a qualified
thrift lender. See "--Federal Savings Institution Regulation--Qualified Thrift
Lender Test." Recent legislation, however, restricts unitary savings and loan
holding companies not existing or applied for before May 4, 1999 to activities
permissible for a financial holding company as defined under the legislation,
including insurance and securities activities, and those permitted for a
multiple savings and loan holding company as described below. PFSB Bancorp
qualifies for the grandfather.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company and from acquiring or retaining
control
19
<PAGE>
of a depository institution that is not insured by the Federal Deposit Insurance
Corporation, unless it first receives the approval of the Office of Thrift
Supervision. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of the holding company and the
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision may not approve any acquisition that
results in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, there are two exceptions to this
general rule. First, the approval of interstate supervisory acquisitions by
savings and loan holding companies. Second, the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit the acquisition. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies do not have specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations place these restrictions on
subsidiary savings institutions as described below. Palmyra Savings must notify
the Office of Thrift Supervision 30 days before declaring any dividend to PFSB
Bancorp. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision, which has authority to order the stoppage of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association
are limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 3% leverage ratio and an 8% risk-based capital ratio.
Effective April 1, 1999, however, the minimum leverage ratio increased to 4% for
all institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system) and, together with the risk-
based capital standard itself, a 4% Tier 1 risk-based capital standard. The
Office of Thrift Supervision regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard requires an institution to maintain Tier 1
or core capital to risk-weighted assets of at least 4% and total capital to
risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary capital. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of asset.
Core or Tier 1 capital is defined as common stockholders' equity and retained
earnings, certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock, and the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of supplementary capital included as
part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. Presently, the Office of Thrift Supervision has deferred
implementation of the interest rate risk component. At September 30, 1999,
Palmyra Savings met each of its capital requirements. See Note J to Notes to
Consolidated Financial Statements for further information.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than
20
<PAGE>
8%, a ratio of Tier 1 or core capital to risk-weighted assets of less than 4%,
or a ratio of core capital to total assets of less than 4%, or 3% or less for
institutions with the highest examination rating, is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Although there is a
narrow exception, the Office of Thrift Supervision is required to appoint a
receiver or conservator for an institution that is "critically undercapitalized"
if the institution is critically undercapitalized on average during the calendar
quarter 270 days after becoming critically undercapitalized. The regulation also
provides that an institution must file a capital restoration plan with the
Office of Thrift Supervision within 45 days of the date that the Office of
Thrift Supervision notifies it that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions immediately apply to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The Office of
Thrift Supervision could also take any one of a number of discretionary
supervisory actions, including issuing a capital directive and replacing senior
executive officers and directors.
Insurance of Deposit Accounts. Deposits of Palmyra Savings are presently
insured by the Savings Association Insurance Fund. The Federal Deposit
Insurance Corporation maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for Savings
Association Insurance Fund member institutions are determined semiannually by
the Federal Deposit Insurance Corporation and currently range from zero basis
points for the healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1998, Financing Corporation payments for Savings Association Insurance
Fund members approximated 6.10 basis points, while Bank Insurance Fund members
paid 1.22 basis points. By law, there will be equal sharing of Financing
Corporation payments between the members of both insurance funds on the earlier
of January 1, 2000 or the date the two insurance funds are merged.
The Federal Deposit Insurance Corporation may terminate an institution's
deposit insurance if it finds that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed
by the Federal Deposit Insurance Corporation or the Office of Thrift
Supervision. The management of Palmyra Savings does not know of any practice,
condition or violation that might lead to termination of its deposit insurance.
Financial Institution Modernization Legislation. Recently enacted federal
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but activities is
grandfathered for unitary savings and loan holding companies, such as PFSB
Bancorp, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired PFSB
Bancorp.
Loans to One Borrower. Federal law provides that savings institutions must
generally follow the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral.
Qualified Thrift Lender Test. Federal law requires savings institutions to
meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets" in
certain "qualified thrift investments" in at least 9 months out of each 12 month
period. "Portfolio assets" equals total assets less specified liquid assets up
to
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<PAGE>
20% of total assets, intangibles, including goodwill, and the value of property
used to conduct business. "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.
A savings institution that fails the qualified thrift lender test faces
certain operating restrictions and may be required to convert to a commercial
bank charter. As of September 30, 1999, Palmyra Savings complied with the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out merger. The rule
effective through the first quarter of 1999 established three tiers of
institutions based primarily on an institution's capital level. A Tier I
institution exceeded all capital requirements before and after a proposed
capital distribution and has not been advised by the Office of Thrift
Supervision that it needs more than normal supervision. A Tier I institution
could, after first giving notice to, but without obtaining approval of the
Office of Thrift Supervision, make capital distributions during the calendar
year equal to the greater of 100% of its net earnings to date during the
calendar year plus the amount that would have reduced by one-half the excess
capital over its capital requirements at the beginning of the calendar year, or
75% of its net income for the previous four quarters. Any additional capital
distributions required prior regulatory approval.
Effective April 1, 1999, the Office of Thrift Supervision's capital
distribution regulation changed. Under the new regulation, an application to
and the prior approval of the Office of Thrift Supervision is required before
any capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under Office of Thrift Supervision
regulations (generally, compliance with all capital requirements and examination
ratings in one of two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with Office of Thrift Supervision. If an
application is not required, the institution must still give advance notice to
Office of Thrift Supervision of the capital distribution. If Palmyra Savings'
capital fell below its regulatory requirements or if the Office of Thrift
Supervision notified it that it was in need of more than normal supervision,
Palmyra Savings' ability to make capital distributions could be restricted. In
addition, the Office of Thrift Supervision could prohibit a proposed capital
distribution, which would otherwise be permitted by the regulation if the Office
of Thrift Supervision determines that the distribution would be an unsafe or
unsound practice.
Liquidity. Palmyra Savings is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the Office of Thrift Supervision to any amount within the range
of 4% to 10%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. Palmyra Savings met these requirements at September 30,
1999.
Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
Palmyra Savings' latest quarterly thrift financial report. Palmyra Savings'
assessments for the fiscal year ended September 30, 1999 totaled $21,000.
Branching. Office of Thrift Supervision regulations permit federally
chartered savings associations to branch nationwide under certain conditions.
Generally, federal savings associations may establish interstate networks and
geographically diversify their loan portfolios and lines of business. The
Office of Thrift Supervision authority preempts any state law purporting to
regulate branching by federal savings associations.
Transactions with Related Parties. Palmyra Savings' authority to engage in
transactions with "affiliates" is limited by federal law. Generally, an
affiliate is any company that controls or is under common control with an
institution, including PFSB Bancorp. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-
22
<PAGE>
affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
Palmyra Savings' authority to extend credit to executive officers,
directors and 10% Stockholders, as well as entities within the control of these
persons, is also governed by federal law. These persons are often referred to
as "insiders" of a company. Loans to insiders are required to be made on terms
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans Palmyra Savings may make to insiders based, in
part, on Palmyra Savings' capital position and requires certain board approval
procedures to be followed.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order, to removal of officers and/or
directors, to institution of a receivership or conservatorship, or to
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in
especially serious cases. The Federal Deposit Insurance Corporation has the
authority to recommend to the Director of the Office of Thrift Supervision that
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the Federal Deposit Insurance
Corporation has authority to take action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
Federal Home Loan Bank System
Palmyra Savings is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank of
Des Moines provides a central credit facility primarily for member institutions.
Palmyra Savings, as a member of the Federal Home Loan Bank of Des Moines, is
required to acquire and hold shares of capital stock in that Federal Home Loan
Bank of Des Moines in an amount at least equal to 1.0% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank of Des Moines, whichever is greater. Palmyra
Savings was in compliance with this requirement with an investment in Federal
Home Loan Bank of Des Moines stock at September 30, 1999, of $391,200. Federal
Home Loan Bank of Des Moines advances must be secured by specified types of
collateral.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, Palmyra Savings' net interest income
would likely also be reduced. Recent legislation has changed the structure of
the Federal Home Loan Banks funding obligations for insolvent thrifts, revised
the capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
23
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts,
primarily NOW and regular checking accounts. The regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less, subject to adjustment by the
Federal Reserve Board the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10%, subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances, as adjusted by
the Federal Reserve Board, are exempted from the reserve requirements. Palmyra
Savings complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Office of Thrift
Supervision regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift
Supervision, in connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of applications by such institution.
The Community Reinvestment Act requires public disclosure of an institution's
Community Reinvestment Act rating. Palmyra Savings' latest Community
Reinvestment Act rating, received from the Office of Thrift Supervision was
"Satisfactory."
FEDERAL AND STATE TAXATION
Federal Taxation
General. PFSB Bancorp and Palmyra Savings report their income using the
accrual method of accounting and are taxed under federal income tax laws in the
same manner as other corporations with some exceptions, including particularly
Palmyra Savings' reserve for bad debts discussed below. PFSB Bancorp's and
Palmyra Savings' tax years 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 Savings or
PFSB Bancorp.
Bad Debt Reserve. Historically, savings institutions such as Palmyra
Savings 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 Savings' 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
Savings' actual loss experience, or a percentage equal to 8% of Palmyra Savings'
taxable income, computed with certain modifications and reduced by the amount of
any permitted additions to the non-qualifying reserve. Due to Palmyra Savings'
loss experience, Palmyra Savings 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 Savings has no post-1987
reserves that would be recaptured. For taxable years beginning after December
31, 1995, Palmyra Savings'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 Stockholders.
24
<PAGE>
Distributions. To the extent that Palmyra Savings 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 Savings' 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 Savings' taxable income. Nondividend distributions include distributions
in excess of Palmyra Savings' current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Palmyra Savings' current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from Palmyra Savings' 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 Savings 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. Palmyra Savings
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 Savings'
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 Savings, 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 Savings 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 Savings will not file a consolidated tax
return, except that if PFSB Bancorp or Palmyra Savings 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 Savings' federal income tax
returns for the past five years.
Missouri Taxation
Missouri-based thrift institutions, like Palmyra Savings, 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 Savings 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 Savings 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 Savings 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 Savings' state
income tax returns have not been audited for the past five years.
As a Missouri corporation, the Company is subject to annual franchise and
income taxes imposed by the State of Missouri. Franchise taxes are assessed at
a rate of 1/20 of 1% of the par value of outstanding shares and surplus. Income
taxes are assessed at a rate of 6.25% of federal taxable income derived from
Missouri sources.
For additional information regarding taxation, see Note I of Notes to
Consolidated Financial Statements contained in the Annual Report.
EXECUTIVE OFFICERS OF THE REGISTRANT
25
<PAGE>
The following table sets forth certain information regarding the executive
officers of PFSB Bancorp and Palmyra Savings.
<TABLE>
<CAPTION>
Name Age (1) Position
- ---- ------- --------
<S> <C> <C>
Eldon R. Mette.............. 62 President and Chief Executive Officer of PFSB Bancorp and
Palmyra Savings
Ronald L. Nelson............ 46 Vice President, Treasurer and Secretary of PFSB Bancorp and
Palmyra Savings
</TABLE>
____________________________
(1) As of September 30, 1999
The executive officers of PFSB Bancorp and Palmyra Savings are elected
annually and hold office until their successors have been elected and qualified
or until they are removed or replaced.
Eldon R. Mette has been employed with Palmyra Savings since 1969. Before
becoming President in January 1999, Mr. Mette served as Executive Vice President
since September 1969.
Ronald L. Nelson has been employed with Palmyra Savings since 1973. He has
served as Vice President and Treasurer since 1978.
ITEM 2. DESCRIPTION OF PROPERTIES
Properties
The following table sets forth information relating to Palmyra Saving's
offices as of September 30, 1999.
<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 $205,260 Owned 2,816
Branch Offices
- --------------
600 Washington Street(2)
Canton, Missouri 1992 258,940 Owned 2,904
103 E. Commercial Street(3)
Kahoka, Missouri 1976 56,990 Leased 4,096
</TABLE>
______________________________
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by Palmyra Savings and PSA Service Corporation.
(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 Savings 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 Savings 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. Palmyra
Savings' Board of Directors has recently approved plans for the
construction of the new Kahoka office building. The expected completion
date is April 2000.
26
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
PFSB Bancorp is not a party to any pending legal proceedings.
Periodically, there have been various claims and lawsuits involving Palmyra
Savings, such as claims to enforce liens, condemnation proceedings on properties
in which Palmyra Savings holds security interests, claims involving the making
and servicing of real property loans and other issues incident to Palmyra
Savings' business. Palmyra Savings 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 Savings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information regarding the market for PFSB Bancorp's common equity and
related stockholder matters is incorporated herein by reference to PFSB
Bancorp's 1999 Annual Report to Stockholders on page 2.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information regarding management's discussion and analysis of
financial condition and results of operation is incorporated herein by reference
to PFSB Bancorp's 1999 Annual Report to Stockholders on pages 6 through 13.
ITEM 7. FINANCIAL STATEMENTS
The information regarding financial statements is incorporated herein by
reference to PFSB Bancorp's 1999 Annual Report to Stockholders on pages 14
through 36.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information regarding change in accountants is incorporated herein by
reference to PFSB Bancorp's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on January 27, 2000 at page 12.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information relating to the directors and officers of PFSB Bancorp
and information regarding compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to PFSB Bancorp's Proxy Statement for the 2000
Annual Meeting of Stockholders to be held on January 27, 2000 at pages 4, 5 and
7 and to Part I, Item 1, "Business--Executive Officers of the Registrant" of
this report.
ITEM 10. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein
by reference to PFSB Bancorp's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on January 27, 2000 at pages 6 through 7.
27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to PFSB Bancorp's
Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on
January 27, 2000 at page 3.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to PFSB Bancorp's Proxy
Statement for the 2000 Annual Meeting of Stockholders to be held on January 27,
2000 at page 7 through 8.
28
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report by means of
incorporation to PFSB Bancorp's 1999 Annual Report to
Stockholders:
. Independent Auditors' Report
. Consolidated Statements of Financial Condition as of
September 30, 1999 and 1998
. Consolidated Statements of Income for the Years Ended
September 30, 1999 and 1998
. Consolidated Statements of Equity for the Years Ended
September 30, 1999 and 1998
. Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999 and 1998
. Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they
are not required or applicable, or the required information
is shown in the consolidated financial statements or the
notes thereto.
(3) Exhibits
3.1 Articles of Incorporation of PFSB Bancorp, Inc.(1)
3.2 Bylaws of PFSB Bancorp, Inc.(1)
4.0 Form of Stock Certificate of PFSB Bancorp, Inc.(1)
10.1 Employment Agreement between PFSB Bancorp, Inc.,
Palmyra Savings and Eldon R. Mette(2)
10.2 Employment Agreement between PFSB Bancorp, Inc.,
Palmyra Savings and Ronald L. Nelson(2)
13.0 PFSB Bancorp, Inc. 1999 Annual Report to Stockholders
21.0 Subsidiary information is incorporated herein by
reference to Part I, Item 1, "Business--Subsidiary
Activities"
27.0 Financial Data Schedule
____________________
(1) Incorporated herein by reference from the Exhibits to
Form SB-2, Registration Statement and amendments
thereto, initially filed on December 18, 1998,
Registration No. 333-69191.
(2) Incorporated herein by reference from the exhibits to
the Form 10-QSB filed May 17, 1999.
(b) Reports on Form 8-K
None.
29
<PAGE>
CONFORMED
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PFSB BANCORP, INC.
Date: December 28, 1999 By: /s/ Eldon R. Mette
-------------------------
Eldon R. Mette
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Eldon R. Mette President and Chief Executive December 28, 1999
- --------------------------- Officer (principal executive officer)
Eldon R. Mette
/s/ Ronald L. Nelson Vice President, Secretary and
- --------------------------- Treasurer (principal financial and
Ronald L. Nelson accounting officer)
/s/ L. Edward Schaeffer Chairman of the Board December 28, 1999
- ---------------------------
L. Edward Schaeffer
/s/ Glenn J. Maddox Director December 28, 1999
- ---------------------------
Glenn J. Maddox
Director
- ---------------------------
Albert E. Davis
/s/ Robert M. Dearing Director December 28, 1999
- ---------------------------
Robert M. Dearing
/s/ James D. Lovegreen Director December 28, 1999
- ---------------------------
James D. Lovegreen
/s/ Donald L. Slavin Director December 28, 1999
- ---------------------------
Donald L. Slavin
</TABLE>
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PFSB BANCORP, INC.
Date: December __, 1999 By: _____________________________________
Eldon R. Mette
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
- --------------------------- President and Chief Executive December __, 1999
Eldon R. Mette Officer (principal executive
officer)
- --------------------------- Vice President, Secretary and December __, 1999
Ronald L. Nelson Treasurer (principal financial and
accounting officer)
- --------------------------- Chairman of the Board December __, 1999
L. Edward Schaeffer
- --------------------------- Director December __, 1999
Glenn J. Maddox
- --------------------------- Director December __, 1999
Albert E. Davis
- --------------------------- Director December __, 1999
Robert M. Dearing
- --------------------------- Director December __, 1999
James D. Lovegreen
- --------------------------- Director December __, 1999
Donald L. Slavin
</TABLE>
<PAGE>
Exhibit 13
1999 Annual Report
PFSB BANCORP, INC.
<PAGE>
PFSB Bancorp, Inc.
1999 ANNUAL REPORT
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Report to Stockholders................................................................. 1
Business of the Corporation............................................................ 2
Common Stock Information............................................................... 2
Selected Consolidated Financial Information............................................ 3
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 6
Independent Auditors' Report........................................................... 14
Consolidated Statements of Financial Condition......................................... 15
Consolidated Statements of Stockholders' Equity........................................ 16
Consolidated Statements of Income...................................................... 17
Consolidated Statements of Cash Flows.................................................. 18
Notes to Consolidated Financial Statements............................................. 20
Directors and Officers................................................................. 37
Corporate Information.................................................................. 37
Stockholders' Information.............................................................. 38
</TABLE>
<PAGE>
[PFSB BANCORP, INC. LETTERHEAD]
REPORT TO STOCKHOLDERS
President's Message
To Our Stockholders:
On behalf of the Board of Directors, officers and employees of PFSB Bancorp,
Inc. and its wholly owned subsidiary, Palmyra Savings, it is my privilege to
present to you the "first" annual report following our conversion to a public
company after having operated as a mutual institution for 112 years.
Rather than repeat to you the numbers shown on the following pages, I will try
to give you more of an insight into our history, our appreciation for your
support and some of our intentions for the future. We believe you expect
personal contact and service from personnel that truly take an interest in your
needs. At the same time, we find it necessary to invest in modern equipment to
fulfill the needs of customers that have limited time. We will strive to
balance these needs.
We would like to express our sincerest thanks to our customers, friends and
associates who invested in the Company during our conversion. Your Board of
Directors, the officers and staff will endeavor to protect and reward your
investment.
We intend to continue with our primary business of serving the residential real
estate market and the savings needs of the people in our communities. Further,
in attempting to increase shareholder value, we intend to cautiously pursue the
initiation of other services to generate more interest and fee income. As
stated in our prospectus, we are in the process of constructing a new branch
office facility in Kahoka, Missouri, that will allow us to provide more
convenient access, drive-up ATM services, as well as safe deposit boxes.
We believe we have prepared ourselves as well as can be for the Year 2000. Even
though we do not expect any major problems, we have backup plans in place. I
truly believe the safest course of action for our depositors is to remain calm
and leave your deposits with Palmyra Savings.
All of us at PFSB Bancorp, Inc. appreciate your support and look forward to a
long-lasting and profitable relationship.
Sincerely,
/s/ Eldon R. Mette
- --------------------------
Eldon R. Mette
President and Chief Executive Officer
-1-
<PAGE>
BUSINESS OF THE CORPORATION
PFSB Bancorp, Inc. (the "Company"), a Missouri corporation, was organized in
November 1998 for the purpose of becoming the holding company for Palmyra
Savings (formerly Palmyra Saving and Building Association, F.A.) (the "Bank")
upon the conversion of the Bank from a federal mutual savings association to a
federal stock savings bank. The conversion was completed on March 31, 1999.
The Company is not engaged in any significant business activity other than
holding the stock of the Bank. Accordingly, the information set forth in this
report, including financial statements and related data, applies primarily to
the Bank.
The Bank is a federal stock association, originally organized in 1887 and is
regulated by the Office of Thrift Supervision ("OTS"). Its deposits are insured
up to applicable limits by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Company ("FDIC"). The Bank also is a member of
the Federal Home Loan Bank ("FHLB") System.
The Bank's business strategy is to operate as a traditional, community-oriented
savings association dedicated to financing home ownership and providing quality
customer service. The Bank operates out of three offices in northeast Missouri
which are 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. The Bank'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.
COMMON STOCK INFORMATION
The Company's common stock is traded on the OTC Bulletin Board under the symbol
"PFSI". As of September 30, 1999, there were 559,000 shares of common stock
outstanding (including unreleased Employee Stock Ownership Plan ("ESOP") shares
of 42,484) and 348 stockholders, excluding persons or entities who hold stock in
nominee or "street name". Dividend payments by the Company are dependent
primarily on dividends received by the Company from the Bank. Under federal
regulations, the dollar amount of dividends the Bank may pay is dependent upon
its capital position and recent net income. Generally, if the Bank satisfies its
regulatory capital requirements, it may make dividend payments up to the limits
prescribed in the OTS regulations. However, institutions that have converted to
the stock form of ownership may not declare or pay a dividend on, or repurchase
any of, its common stock if the effect thereof would cause the regulatory
capital of the institution to be reduced below the amount required for the
liquidation account which was established in the conversion in accordance with
the OTS regulations. See Note M of the Consolidated Financial Statements.
The table below shows the high and low bid range of the Company's common stock
and dividends paid for the year ended September 30, 1999. This information was
provided by U.S. Bancorp Piper Jaffray. OTC Bulletin Board quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1999
<S> <C> <C> <C>
High Low Dividends
-----------------------------------------
First Quarter N/A N/A N/A
Second Quarter N/A N/A N/A
Third Quarter $11.4375 $8.5000 ---
Fourth Quarter $10.5000 $9.7500 ---
</TABLE>
-2-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated
financial position and results of operations of the Company at and for the dates
indicated. Since the Company had not commenced operations prior to the mutual-
to-stock conversion of the Bank in March 1999 the financial information
presented for the periods prior to 1999 is that of the Bank only. The
consolidated data is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and its subsidiaries
presented herein.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets $66,445 $59,476 $58,433 $57,223
Cash and cash equivalents 2,340 2,268 2,146 1,732
Investment securities available-for-sale 9,816 7,087 8,509 6,245
Investment securities held-to-maturity 7,484 5,589 5,093 7,198
Mortgage-backed securities held-to-maturity 3,650 2,584 2,828 3,280
Loans receivable, net 41,385 40,513 38,394 37,259
Deposits 53,139 52,724 51,412 51,391
FHLB advances 2,500 500 1,000 200
Total equity, substantially restricted 10,645 6,048 5,715 5,302
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands,
Except Per Share Amounts)
SELECTED OPERATING DATA:
Interest income $4,292 $4,164 $4,133 $3,982
Interest expense 2,665 2,685 2,626 2,598
------ ------ ------ ------
Net interest income 1,627 1,479 1,507 1,384
Provision for loan losses --- 25 21 87
------ ------ ------ ------
Net interest income after provision for loan losses 1,627 1,454 1,486 1,297
Noninterest income 145 75 63 85
Noninterest expense 1,309 1,104 1,035 1,368
------ ------ ------ ------
Income before income taxes 463 425 514 14
Income tax expense (benefit) 163 149 182 (8)
------ ------ ------ ------
Net income $ 300 $ 276 $ 332 $ 22
====== ====== ====== ======
Basic income per share $0.58 * * *
======
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
-------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
KEY OPERATING RATIOS:
Performance Ratios:
<S> <C> <C> <C> <C>
Return on average assets (net income divided by average assets) 0.47% 0.47% 0.57% 0.04%
Return on average equity (net income divided by average equity) 3.48 4.64 6.49 0.41
Interest rate spread (difference between average yield on interest-
earning assets and average cost of interest-bearing liabilities) 2.09 2.24 2.34 2.18
Net interest margin (net interest income as a percentage of average
interest-earning assets) 2.66 2.62 2.70 2.54
Noninterest expense as a percent of average total assets 2.07 1.88 1.79 2.43
Average interest-earning assets to average
Interest-bearing liabilities 112.91 107.87 107.66 107.62
Asset Quality Ratios:
Nonperforming loans as a percent of loan receivable, net(1) 0.33 0.54 0.47 2.39
Nonperforming assets as a percent of total assets(2) 0.21 0.37 0.31 1.56
Allowance for loan losses as a percent of gross loans 0.66 0.68 0.64 0.62
receivable
Allowance for loan losses as a percent of nonperforming loans 203.75 127.82 140.82 26.32
Net charge-offs as a percent of average outstanding loans -- -- -- --
Capital Ratios:
Tangible 12.56 10.13 9.82 9.43
Core 12.56 10.13 9.82 9.43
Risk-based 28.11 22.30 22.25 21.46
Average equity as a percent of average assets 13.62 10.12 9.66 9.65
At September 30,
---------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
OTHER DATA:
Number of:
Mortgage loans outstanding 1,191 1,221 1,244 1,295
Deposit accounts 7,674 7,761 7,678 7,716
Full-service offices 3 3 3 3
</TABLE>
* Operating as a mutual institution
_______________
(1) Nonperforming loans consist of loans accounted for on a nonaccrual basis
(2) Nonperforming assets consist of nonaccrual loans.
-4-
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table provides a summary of operations by quarter for the year
ended September 30, 1999. The Company commenced operations in March 31, 1999
with the mutual-to-stock conversion of the Bank.
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended
------------------------------------------------
September 30 June 30 March 31
------------------------------------------------
<S> <C> <C> <C>
(Dollars in Thousands, Except Per Share Data)
Interest income $1,101 $1,111 $1,046
Interest expense 655 649 667
------ ------ ------
Net interest income 446 462 379
Provision for loan losses --- --- ---
------ ------ ------
Net interest income after provision
for loan losses 446 462 379
Noninterest income 35 10 35
Noninterest expense 369 329 313
------ ------ ------
Income before income taxes 112 143 101
Income taxes 41 46 38
------ ------ ------
Net income $ 71 $ 97 $ 63
====== ====== ======
Basic income per share $0.14 $0.19 $0.12
====== ====== ======
</TABLE>
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
This report contains forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather they
are statements based on the current expectations of the Company regarding its
business strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects", "believes",
"anticipates", "intends" and similar expressions. Forward-looking statements
are not guarantees of future performance. Numerous risks and uncertainties
could cause or contribute to the Company's actual results, performance and
achievements to be materially different from those expressed or implied by the
forward-looking statements. Factors that may cause or contribute to these
differences include, without limitation, general economic conditions, including
changes in market interest rates and changes in monetary and fiscal policies of
the federal government; legislative and regulatory changes; the Company's
ability to remedy any computer malfunctions that may result from the advent of
the year 2000; and, other factors disclosed periodically in the Company's
filings with the Securities and Exchange Commission. Because of the risks and
uncertainties inherent in forward-looking statements, readers are cautioned not
to place undue reliance on them, whether included in this report or made
elsewhere from time to time by the Company or on its behalf. The Company
assumes no obligation to update any forward-looking statements.
General
- -------
The Company is a Missouri corporation that was organized for the purpose of
becoming the holding company for the Bank upon the Bank's conversion from a
federal mutual savings association to a federal stock savings bank. The Bank's
conversion was completed on March 31, 1999. The Bank's business consists
principally of attracting retail deposits from the general public and using
these funds to originate and purchase residential mortgage loans generally
located in Missouri.
The Company's operating results depend primarily on its net interest income,
which is the difference between the income it receives from its loans and
investments, and the interest paid on deposits and borrowings. Noninterest
income and expenses also affect the Company's operating results. Noninterest
income would include such items as loan service fees, service charges and other
fees. Noninterest expense would include such items as salaries and benefits,
occupancy costs, data processing expenses and other expenses.
The discussion and analysis included herein covers material changes in results
of operations during the three month and twelve month periods ended September
30, 1999 and 1998, as well as those material changes in liquidity and capital
resources that have occurred since September 30, 1998.
Operating Strategy
- ------------------
The business of the Company 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, the Company also originates and purchases multi-family loans
and originates commercial real estate loans, land loans, residential
construction loans and loans secured by savings accounts. The Company 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.
Operating results are dependent primarily on net interest income, which is the
difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of interest-bearing liabilities, consisting
primarily of deposits. Operating results are also significantly affected by
general economic and competitive conditions, primarily changes in market
interest rates, governmental legislation and policies concerning monetary and
fiscal affairs and housing, as well as financial institutions and the attendant
actions of the regulatory authorities.
-6-
<PAGE>
The Company's business strategy is to operate as a conservative, well-
capitalized, profitable community-oriented financial institution dedicated to
financing home ownership and providing quality customer service. To supplement
loan demand in its primary market area, the Company 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. The Company believes that it has
successfully implemented its strategy by (i) maintaining strong capital levels,
(ii) maintaining effective control over operating expenses to attempt to achieve
profitability under differing interest rate scenarios, (iii) limiting interest
rate risk, (iv) emphasizing local loan originations and (v) emphasizing high-
quality customer service with a competitive fee structure.
Interest Rate Risk Management
- -----------------------------
In order to reduce the impact on the Company's net interest earnings due to
changes in interest rates, the Company's strategy on interest rate sensitivity
risk is to manage the exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture where annual net interest
earnings and the market value of portfolio equity are not significantly impacted
by unexpected changes in interest rates.
Interest Rate Sensitivity of Net Portfolio Value
- ------------------------------------------------
The Company manages its interest rate risk by measuring the effect of interest
rate changes on the market value of assets and liabilities and the resulting
changes in the market value of portfolio stockholders' equity. The following
table illustrates the percent of change in market value of stockholders' equity
given various changes in interest rates.
<TABLE>
<CAPTION>
Basis Point ("bp") Net Portfolio Value
Change in Rates $ Amount $ Change % Change
------------------ -------- ------------------- --------
<S> <C> <C> <C> <C>
+300 bp $7,590 $(1,432) (16)%
+200 bp 8,070 (952) (11)
+100 bp 8,550 (472) (5)
0 bp 9,022 --- ---
-100 bp 9,326 304 3
-200 bp 9,382 360 4
-300 bp 9,480 458 5
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Furthermore, in the
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table. Therefore, the data presented in the
table should not be relied upon as indicative of actual results.
Comparison of Financial Condition at September 30, 1999 and 1998
- ----------------------------------------------------------------
Total assets increased $7.0 million or 11.7% to $66.4 million in 1999 primarily
due to the stock conversion which was completed March 31, 1999, resulting in net
proceeds to the Company of $5.0 million and an increase in outstanding
FHLB advances of $2.0 million. Investment securities increased $4.6 million,
mortgage-backed securities increased $1.1 million, and loans receivable
increased $872,000. Deposits increased by $415,000 and FHLB advances increased
$2.0 million during the period.
-7-
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Net income. Net income for 1999 increased $24,000 or 8.7% to $300,000 compared
to $276,000 for 1998. The small increase in net income was due primarily to an
increase in noninterest expense of $205,000 or 18.5% from $1.1 million for 1998
and $1.3 million for 1999. The increase in noninterest expense was partially
offset by an increase in net interest income of $173,000 or 11.9% and an
increase in noninterest income of $70,000.
Net interest income. Interest income increased $128,000 for 1999 as compared to
the prior year. Interest expense decreased $20,000 during the same period
providing an increase in net interest income of $148,000. The increase in
interest income was due to the increase in interest-earning assets, which can be
attributed primarily to the stock conversion which was completed March 31, 1999,
resulting in net proceeds to the Company of $5.0 million as well as a $2.0
million increase in outstanding FHLB advances. The benefits of this increase in
interest earning assets was partially offset by a decrease in investment yield
from 6.2% to 6.0% and a decrease in loan yield from 7.9% to 7.6% from 1999
compared to 1998. For the same period, the cost of deposits decreased from 5.1%
to 4.9%.
Provision for Loan Losses. The provision for loan losses was $-0- in 1999
compared to $25,000 in 1998. The provision decreased primarily because
management believes the overall allowance is adequate to meet any potential
losses in the loan portfolio. There were no loan losses or recoveries in 1999,
1998 or 1997. The allowance for loan losses was $280,000 at September 30, 1999
and 1998. Management deemed the allowance adequate at both dates.
Noninterest income. Total noninterest income increased $70,000 to $144,545 for
1999, primarily due to a $44,000 gain on sale of the Kahoka, Missouri facility.
Gains from calls and maturities of investment securities were $14,000, for 1999
compared to a loss of $2,000 for 1998.
Noninterest expense. Total noninterest expense increased $205,000 for the
period. Of the increase, $107,000 was due to increased employee costs including
the addition of an ESOP and the addition of three full time employees, $22,000
was increased printing and office supply costs, $9,000 was due to increased
depreciation expense on additional equipment, $7,000 was due to increased
occupancy costs, $7,000 was due to increased advertising costs, and $20,000 was
due to increased professional fees. The remaining difference can be attributed
to overall rising costs.
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. 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 adequate at both dates.
-8-
<PAGE>
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 Bank's service corporation sells to Bank'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 Bank's
former data processing provider. The data processing provider, a business
cooperative of which the Bank 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 SAIF in 1996. Other
noninterest expense consists primarily of fees paid to directors, OTS assessment
fees, professional fees, stationary and printing expenses, insurance cost,
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 Bank
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.
-9-
<PAGE>
Yields Earned and Rates Paid
- ----------------------------
The earnings of the Company depend largely on the spread between the yield on
interest-earning assets and the cost of interest-bearing liabilities, as well as
the relative size of the Company's interest-earning assets and interest-bearing
liability portfolios.
The following table sets forth, for the periods indicated, information 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, resultant yields, interest rate spreads,
net interest margin, and ratio of average interest-earning assets to average
interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------- ----------------------------------------
Interest Interest
Average and Yield/ Average And Yield/
Balance(1) Dividends Cost Balance(1) Dividends Cost
---------------- ---------- ----------- ---------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets(2):
Loans receivable, net $40,650 $3,083 7.59% $39,233 $3,084 7.86%
Investment securities 14,407 865 6.00 12,544 780 6.22
Mortgage-backed securities 3,079 209 6.77 2,804 194 6.91
FHLB stock 383 24 6.33 431 29 6.82
Interest-bearing deposits 2,754 111 4.04 1,495 77 5.14
------- ------ ------- ------
Total interest-earning assets 61,273 4,292 7.00 56,507 4,164 7.37
Noninterest-earning assets 1,945 2,185
------- -------
Total average assets $63,218 $58,692
======= =======
Interest-bearing liabilities:
Savings accounts $12,068 371 3.07 $11,271 329 2.92
Certificates of deposit 41,778 2,276 5.45 40,844 2,341 5.73
------- ------ ------- ------
Total average deposits 53,846 2,647 4.92 52,115 2,670 5.12
FHLB advances 423 18 4.33 269 15 5.70
------- ------ ------- ------
Total interest-bearing liabilities 54,269 2,665 4.91 52,384 2,685 5.13
------ ------
Noninterest-bearing liabilities 340 366
------- -------
Total average liabilities 54,609 52,750
Average total equity 8,609 5,942
------- -------
Total liabilities and equity $63,218 $58,692
======= =======
Net interest income $1,627 $1,479
====== ======
Interest rate spread 2.09% 2.24%
==== ====
Net interest margin 2.66% 2.62%
==== ====
Ratio of average interest-earning assets
to average interest-bearing 112.91% 107.87%
liabilities ======= =======
</TABLE>
_______________
(1) Average balances for a period are calculated using the average month-end
balance during each period.
(2) Interest-earning assets include non-accrual loans and loans 90 days or more
past due.
-10-
<PAGE>
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); (iii) effects
attributable to changes in rate/volume/changes in rate multiplied by changes in
volume); and, (iv) to the net change.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- -------------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ ----- ---- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net $(108) $111 $ (4) $ (1) $(14) $135 $ (1) $120
Investment securities (27) 116 (4) 85 (18) (47) 1 (64)
Mortgage-backed securities (5) 19 --- 14 (9) (18) 1 (26)
FHLB stock (2) (3) --- (5) (2) (3) --- (5)
Interest-earning deposits (17) 65 (14) 34 4 2 --- 6
----- ---- ---- ---- ---- ---- ---- ----
Total net change in incomes
on interest-earning assets (159) 308 (22) 127 (39) 69 1 31
Interest-bearing liabilities:
Savings accounts 17 23 1 41 (1) (12) --- (36)
Certificates of deposit (116) 53 (2) (65) 15 48 --- 63
----- ---- ---- ---- ---- ---- ---- ----
Total average deposits (99) 76 (1) (24) 14 36 --- 50
FHLB advances (4) 9 (2) 3 1 7 1 9
----- ---- ---- ---- ---- ---- ---- ----
Total net change in expense
on interest-bearing
liabilities (103) 85 (3) (21) 15 43 1 59
----- ---- ---- ---- ---- ---- ---- ----
Net change in net interest income $ (56) $223 $(19) $148 $(54) $ 26 --- $(28)
===== ==== ==== ==== ==== ==== ==== ====
</TABLE>
-11-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are maturities and prepayments of
investment securities, customer deposits, proceeds from principal and interest
payments on loans and FHLB. 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.
The Company 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. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At September 30,
1999, cash and interest-bearing deposits totaled $2.3 million, or 3.52% of total
assets and investment securities classified as available-for-sale totaled $9.8
million. At September 30, 1999, the Company had outstanding advances of $2.5
million under an available credit line of $19.1 million with the FHLB.
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. The Company's actual liquidity
ratio at September 30, 1999, was 19.41%.
Liquid funds necessary for normal daily operations are maintained with the FHLB.
Excess funds over balances required to cover bank charges for services are
transferred to time deposit accounts at the FHLB. At September 30, 1999, the
Company and its subsidiaries held $1.4 million in excess funds in time deposit
accounts at the FHLB.
The Company uses its sources of funds primarily to fund loan commitments and to
pay deposits withdrawals. At September 30, 1999, the Company had commitments to
originate loans aggregating approximately $1.5 million. As of September 30,
1999, certificates of deposit amounted to $41.3 million or 77.8% of total
deposits, including $23.9 million, which are scheduled to mature in less than
one year. Historically, the Company has been able to retain a significant
amount of its deposits as they mature. The Company believes it has adequate
resources to fund all loan commitments through deposit growth by adjusting the
offering rates of certificates to retain deposits in changing interest rate
environments or, if necessary, through FHLB advances.
Net cash provided by operating activities for the Company during the year ended
September 30, 1999, was $162,000. Net income of $300,000, adjusted for non-cash
charges, largely accounted for the net cash provided by operating activities.
Net cash used by investing activities was $7.0 million. The largest component
of cash used in investing activities was the purchase of investment and
mortgage-backed securities. Net cash provided by financing activities was $7.0
million. The largest component of cash provided by financing activities was
proceeds from the sale of common stock.
The Company is not subject to any regulatory capital requirements. The Bank is
subject to certain capital requirements imposed by the OTS. The Bank satisfied
these requirements at September 30, 1999. See Note J of the Consolidated
Financial Statements.
Effect of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
-12-
<PAGE>
Year 2000
- ---------
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that may be affected 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-
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.
This possibility poses several potential risks to the Company.
The Company is dependent on a third-party data processing center to process
customers' banking transactions. Failure of one or more of the data processing
centers computers systems could result in the Company's inability to properly
process customer transactions. This possibility could result in the loss of
customers to other financial institutions, resulting in a loss of revenue.
Concern on the part of depositors that Year 2000 issues could impair access to
their deposit account balances following the Year 2000 date change could result
in larger than normal deposit outflows prior to December 31, 1999. These
possible outflows could result in liquidity shortages for the Company, which
could cause loss of customer confidence. This possibility could also result in
the loss of customers to other financial institutions, resulting in a loss of
revenue.
Since it is not possible to predict the extent and longevity of such potential
problems, management believes it is also not possible to estimate the potential
lost revenue due to Year 2000 issues.
The Company has developed and is implementing a comprehensive plan to insure
that all information and non-information technology assets are Year 2000
compliant. A complete inventory of all technology assets and a review of all
third-party vendors and service providers were made to identify systems which
posed potential Year 2000 problems. Having identified these internal and
external components, the Company has replaced some of its computer hardware with
Year 2000-compliant equipment. The Company has requested third-party providers
to insure that their systems have been tested and are Year 2000 compliant. All
major third-party providers have indicated that they are Year 2000 compliant by
the first quarter of 1999. Proxy testing and connectivity testing with the data-
processing center has been completed, and the data center has indicated that it
is Year 2000 compliant. The Company has tested all internal hardware and
software systems and determined that they are also Year 2000 compliant.
The Company's liquidity position is such that a short-term increase in deposit
outflows, if it should occur, should have no material adverse impact on
operations.
The Company has developed a business resumption and contingency plan to document
plans of action to be implemented if there is a Year 2000 disruption. Although
the Company believes that the probability of an extended disruption is unlikely,
the plan takes into account possible disruptions caused by the loss of utilities
such as power, water or telecommunications. The Company is prepared to handle
customer's transactions off-line for a short period of time if necessary.
The Company estimates its total costs relating to Year 2000 issues to be $82,000
of which approximately $72,000 has been incurred as of September 30, 1999.
The Company has implemented an aggressive information campaign to assure its
customers and the community that they are prepared for the Year 2000, and to
inform them of what they can do to make sure they are also prepared.
Impact of New Accounting Standards
- ----------------------------------
See Note A of the Notes to the Consolidated Financial Statements.
-13-
<PAGE>
[MOORE, HORTON & CARLSON, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
PFSB Bancorp, Inc.
Palmyra, Missouri
We have audited the accompanying consolidated statements of financial condition
of PFSB Bancorp, Inc. ("Company") as of September 30, 1999 and 1998 and the
related consolidated statements of income, equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
Mexico, Missouri
November 2, 1999
-14-
Mexico.Sedalia.Marshall.Columbia
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30
1999 1998
---------------------------
<S> <C> <C>
ASSETS
Cash (includes interest-bearing deposits of $1,866,765 and
$1,003,689, respectively) $ 2,340,403 $ 2,268,166
Investment securities--Note B
Available-for-sale, at fair value 9,816,351 7,086,677
Held-to-maturity (fair value of $7,255,444 and $5,639,849, respectively) 7,484,079 5,589,029
Mortgage-backed securities held-to-maturity (fair value of $3,573,973
and $2,623,999, respectively)--Note C 3,650,255 2,584,376
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 391,200 373,500
Loans receivable--Note D 41,384,851 40,512,748
Accrued interest receivable--Note E 617,378 443,909
Premises and equipment--Note F 521,190 562,365
Foreclosed real estate--Note D 99,521 ---
Other assets 139,653 55,532
----------- -----------
TOTAL ASSETS $66,444,881 $59,476,302
=========== ===========
LIABILITIES AND EQUITY
Liabilities
Deposits--Note G $53,138,995 52,723,768
Advances from FHLB--Note H 2,500,000 500,000
Advances from borrowers for property taxes and insurance 52,185 50,219
Other liabilities 108,475 154,338
----------- -----------
TOTAL LIABILITIES $55,799,655 $53,428,325
Commitments and contingencies--Note L and O
Stockholders' Equity--Notes J and M
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued --- ---
Common stock, $.01 par value, 5,000,000 shares authorized,
559,000 shares issued 5,590 ---
Additional paid-in capital 4,975,544 ---
Retained earnings - substantially restricted 6,316,932 6,017,345
Accumulated other comprehensive income (loss) (228,000) 30,632
Unearned Employee Stock Ownership Plan ("ESOP") shares (424,840) ---
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $10,645,226 $ 6,047,977
----------- -----------
TOTAL LIABILITIES AND EQUITY $66,444,881 $59,476,302
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Total
Common Paid-In Retained Comprehensive ESOP Stockholders'
Stock Capital Earnings Income (loss) Shares Equity
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
SEPTEMBER 30, 1997 $ --- $ --- $5,741,791 $ (26,300) $ --- $ 5,715,491
Comprehensive income:
Net income --- --- 275,554 --- --- 275,554
Other comprehensive income
(loss) - unrealized gain on
securities available-for-sale,
net of reclassification adjustments
for amounts included in net income,
net of taxes of $33,595 --- --- --- 56,932 --- 56,932
------ ---------- ---------- --------- --------- -----------
Total comprehensive income --- --- 275,554 56,932 --- 332,486
------ ---------- ---------- --------- --------- -----------
BALANCE AT
SEPTEMBER 30, 1998 --- --- 6,017,345 30,632 --- 6,047,977
Comprehensive income:
Net income --- --- 299,587 --- --- 299,587
Other comprehensive income
(loss) - unrealized loss on
securities available-for-sale,
net of reclassification adjustments
for amounts included in net income,
net of taxes of $152,067 --- --- --- (258,632) --- (258,632)
------ ---------- ---------- --------- --------- -----------
Total comprehensive income --- --- 299,587 (258,632) --- 40,955
Net proceeds from issuance of
common stock--Note M 5,590 4,976,173 --- --- --- 4,981,763
Common stock issued to
ESOP--Note K --- --- --- --- (447,200) (447,200)
Release of ESOP shares --- (629) --- --- 22,360 21,731
------ ---------- ---------- --------- --------- -----------
BALANCE AT
SEPTEMBER 30, 1999 $5,590 $4,975,544 $6,316,932 $(228,000) $(424,840) $10,645,226
====== ========== ========== ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
---------------------------
<S> <C> <C>
Interest Income
Mortgage loans $3,050,082 $3,048,539
Consumer and other loans 33,041 34,982
Investment securities 888,652 809,753
Mortgage-backed securities 208,412 193,808
Interest-bearing deposits 111,263 76,791
---------- ----------
Total Interest Income $4,291,450 4,163,873
Interest Expense
Deposits--Note G 2,646,497 2,669,858
Advances from FHLB 18,311 15,337
---------- ----------
Total Interest Expense 2,664,808 2,685,195
---------- ----------
Net Interest Income 1,626,642 1,478,678
Provision for Loan Losses--Note D --- 25,000
---------- ----------
Net Interest Income After Provision
for Loan Losses 1,626,642 1,453,678
Noninterest Income
Service charges and other fees 69,855 65,149
Gain (loss) on sale of investments 13,750 (2,056)
Gain on sale of premises and equipment 43,838 1,205
Net expense of foreclosed real estate (4,002) ---
Other 21,104 10,534
---------- ----------
Total Noninterest Income 144,545 74,832
Noninterest Expense
Employee salaries and benefits 667,404 560,020
Occupancy costs 142,046 134,977
Advertising 43,318 36,611
Data processing 93,997 107,463
Federal insurance premiums 31,659 32,249
Directors' fees 59,830 51,890
Other 270,346 180,746
---------- ----------
Total Noninterest Expense 1,308,600 1,103,956
---------- ----------
INCOME BEFORE INCOME TAXES 462,587 424,554
Income Taxes--Note I 163,000 149,000
---------- ----------
NET INCOME $ 299,587 $ 275,554
========== ==========
Income Per Share $ 0.58 N/A
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 299,587 $ 275,554
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 63,200 56,275
Amortization of premiums and discounts (2,290) (7,294)
Loan fee amortization and payoffs (2,665) (2,988)
Provisions for loan losses --- 25,000
Deferred income taxes (10,500) (10,000)
Loss (gain) on sale of investments (13,750) 2,056
Gain on sale of premises and equipment (43,838) ---
Gain on sale of foreclosed real estate (9,179) ---
ESOP shares released 21,731 ---
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable (173,469) 3,046
Other assets (84,121) (10,977)
Other liabilities 116,704 (121,465)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 161,140 209,207
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities,
held-to-maturity (5,912,569) (2,994,688)
Proceeds from maturities and calls of investment
securities, held-to-maturity 4,026,957 2,510,000
Purchase of investment securities,
available-for-sale (8,676,659) (3,993,213)
Proceeds from maturities and calls of investment
securities, available-for-sale 5,545,000 5,500,000
Purchase of mortgage-backed securities (1,722,343) (374,863)
Principal collected on mortgage-backed securities 654,352 618,338
Proceeds from redemption (purchase of) FHLB stock (17,700) 106,900
Loans originated, net of repayments 929,243 532,789
Purchase of mortgage loans (1,985,032) (2,787,237)
Proceeds from sale of education loans 43,343 114,148
Purchase of premises and equipment (78,112) (127,389)
Proceeds from sales of foreclosed real estate 52,666 ---
Proceeds from sale of premises and equipment 99,925 ---
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (7,040,929) (895,215)
</TABLE>
-18-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cont'd
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net increase in deposits $ 415,227 $ 1,311,954
Advances from FHLB
Borrowings 2,500,000 500,000
Repayments (500,000) (1,000,000)
Net increase (decrease) in advances for
taxes and insurance 1,966 (3,469)
Proceeds from sale of common stock 4,981,763 ---
Loan to ESOP (447,200) ---
---------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,951,756 808,485
---------- -----------
NET INCREASE IN CASH 72,237 122,477
Cash, beginning of period 2,268,166 2,145,689
---------- -----------
CASH, END OF PERIOD $2,340,403 $ 2,268,166
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for
Interest on deposits $2,646,656 $ 2,672,539
========== ===========
Interest on FHLB advances $ 14,669 $ 9,422
========== ===========
Income tax $ 175,000 $ 284,174
========== ===========
Noncash investing and financing activities are as follows
Loans to facilitate sales of real estate $ 42,300 $ ---
========== ===========
Foreclosed real estate acquired by foreclosure or deed in lieu of $ 185,308 $ ---
foreclosure ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
PFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of PFSB Bancorp, Inc. (the
"Company") conform to generally accepted accounting principles ("GAAP") and to
prevailing practices within the thrift industry. A summary of the more
significant accounting policies follows:
Nature of Operations: The Company, a Missouri corporation, was incorporated in
- --------------------
November, 1998 for the purpose of becoming the holding company for Palmyra
Savings (formerly Palmyra Saving and Building Association, F.A.) (the "Bank").
On March 31, 1999, the Bank converted from a mutual to a stock form of ownership
and the Company completed its initial public offering and acquired all of the
outstanding capital stock of the Bank.
The Company 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. Its primary deposit products are
interest-bearing checking and savings accounts and certificates of deposit and
its primary lending products are one- to four-family residential loans.
Principles of Consolidation: The consolidated financial statements include the
- ---------------------------
accounts of the Company and its wholly-owned subsidiary, the Bank and its
wholly-owned subsidiary, PSA Service Corporation, whose activities consist
principally of selling mortgage redemption insurance and safe deposit box rental
to the Bank'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
Company 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 stockholders'
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 a method which approximates 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 cost.
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 a method which
approximates 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 a method which approximates the interest method.
-20-
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
The Company's real estate loan portfolio consists primarily of long-term loans
secured by first trust deeds on single-family residences, other residential
property, commercial property and land. The adjustable-rate mortgage is the
Company's primary loan investment. 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.
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.
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired except those
classified as small-balance homogeneous loans which are collectively evaluated
for impairment. The Company considers all one-to four-family residential
mortgage loans, residential construction loans, and all consumer and other loans
to be smaller homogeneous loans. Impaired loans are assessed individually and
impairment identified when the accrual of interest has been discontinued, loans
have been restructured or management has serious doubts about the future
collectibility of principal and interest, even though the loans are currently
performing. Factors considered in determining impairment include, but are not
limited to, expected future cash flow, the financial condition of the borrower
and current economic conditions. The Company measures each impaired loan based
on the fair value of its collateral and charges off those loans or portions of
loans deemed uncollectible. Management has elected to continue to use its
existing nonaccrual methods for recognizing interest income on impaired loans.
Premises and Equipment: Premises and equipment have been stated at cost less
- ----------------------
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
respective assets, which range from five to fifty years.
Foreclosed Real Estate: Real estate acquired in settlement of loans is carried
- ----------------------
at the lower of the balance of the related loan at the time of foreclosure or
fair value less the estimated costs to sell the asset. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
Income Taxes: Deferred tax assets and liabilities are recognized for the future
- ------------
tax consequences, attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
-21-
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
Statements of Cash Flows: For purposes of the cash flows, cash and amounts due
- ------------------------
from depository institutions and interest-bearing deposits in other banks with a
maturity of three months or less at date of purchase are considered cash
equivalents.
Risk and Uncertainties: The Company is a community-oriented financial
- ----------------------
institution which provides traditional financial services within the areas it
serves. The Company is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate one- to four-family
residential mortgage loans located primarily in Northeastern Missouri. The
Company's principal market area consists of rural communities and substantially
all of the Company's loans are to residents of or secured by properties located
in its principal lending area. Accordingly, the ultimate collectibility of the
Company's loan portfolio is dependent upon market conditions in that area. This
geographic concentration is considered in management's establishment of the
allowance for loan losses.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the periods covered. Actual results could
differ significantly from these estimates and assumptions.
In the normal course of its business, the Company encounters two significant
types of risk, economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more or less rapidly, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities held by the
Company.
The Company is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
Net Income Per Share: Basic income per share is based upon the weighted average
- --------------------
number of common shares outstanding during the periods presented. For 1999,
there were no dilutive potential common shares outstanding during the period.
Income per share for all periods presented conform to SFAS No. 128.
New Accounting Standards: The Company has adopted SFAS No. 130, Reporting of
- ------------------------
Comprehensive Income and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information for the year ended September 30, 1999. SFAS
No. 130 requires the Company to classify items of other comprehensive income by
their nature in the consolidated financial statements. The Company has
displayed the accumulated balance of other comprehensive income separately in
the equity section of the consolidated financial statements. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. The
Company has one reportable operating segment.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, entities are required to carry all derivative instruments in
the statement of financial position at fair value.
The FASB has deferred implementation of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company does not expect the statement to have a
significant effect on the consolidated financial statements.
-22-
<PAGE>
NOTE B--INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------------- Fair
Cost Gains Losses Value
----------------------------------------------------------
Available-for-sale:
U.S. Government agency obligations
<S> <C> <C> <C> <C>
September 30, 1999 $10,178,351 $ --- $362,000 $9,816,351
=========== ======= ======== ==========
September 30, 1998 $ 7 037,978 $48,699 $ --- $7,086,677
=========== ======= ======== ==========
Held-to-Maturity:
September 30, 1999
U.S. Government agency obligations $ 6,914,079 $ --- $231,738 $6,682,341
State and local obligations 570,000 3,481 378 573,103
----------- ------- -------- ----------
$ 7,484,079 $ 3,481 $232,116 $7,255,444
=========== ======= ======== ==========
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
=========== ======= ======== ==========
</TABLE>
The scheduled contractual maturities of debt securities at September 30, 1999,
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 $ 1,000,000 $ 996,838 $ 60,000 $ 60,023
After one year through five
years 3,497,157 3,395,524 4,946,006 4,822,906
After five years through ten
years 5,681,194 5,423,989 1,678,073 1,621,383
After ten years --- --- 800,000 751,132
----------- ---------- ---------- ----------
$10,178,351 $9,816,351 $7,484,079 $7,255,444
=========== ========== ========== ==========
</TABLE>
During 1999 and 1998, securities available-for-sale were called for redemption
with proceeds of $5,545,000 and $2,300,000, respectively, resulting in gross
realized gain of $6,509 in 1999 and a gross realized loss of $3,670 in 1998.
During 1999 and 1998, securities held-to-maturity were called for redemption
with proceeds of $3,830,000 and $950,000, respectively, resulting in a gross
realized gain of $7,242 and $1,614 in 1999 and 1998, respectively.
Investment securities were pledged to secure deposits as required or permitted
by law, with an amortized cost of $1,994,074 and fair value of $1,964,949 at
September 30, 1999.
-23-
<PAGE>
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
------------------------------------------------------
September 30, 1999
<S> <C> <C> <C> <C>
GNMA $ 363,606 $ 7,738 $ 280 $ 371,064
FNMA 1,289,433 4,684 38,383 1,255,734
FHLMC 1,970,983 11,943 60,033 1,922,893
SBA 26,233 --- 1,951 24,282
---------- ------- -------- ----------
$3,650,255 $24,365 $100,647 $3,573,973
========== ======= ======== ==========
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
========== ======= ======== ==========
</TABLE>
The amortized cost and fair value of mortgage-backed securities at September 30,
1999, 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:
One year or less $ 155,654 $ 155,965
After one year through five years 307,675 304,915
After five years through ten years 565,648 545,875
After ten years 2,621,278 2,567,218
---------- ----------
$3,650,255 $3,573,973
========== ==========
</TABLE>
Mortgage-backed securities were pledged to secure deposits as required or
permitted by law, with an amortized cost of $703,369 and fair value of $700,825
at September 30, 1999.
-24-
<PAGE>
NOTE D--LOANS RECEIVABLE
Loans receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family residences $37,600,376 $36,801,348
Multi-family 327,880 806,042
Commercial 2,439,996 2,072,984
Construction 1,085,712 875,915
Land 408,469 419,577
----------- -----------
41,862,433 40,975,866
Less undisbursed portion of mortgage 681,161 592,430
loans ----------- -----------
41,181,272 40,383,436
Consumer and other loans:
Savings 364,434 305,287
Education 111,885 97,975
Other 8,782 10,237
----------- -----------
485,101 413,499
----------- -----------
41,666,373 40,796,935
Less:
Net deferred loan-origination fees 1,522 4,187
Allowance for loan losses 280,000 280,000
----------- -----------
281,522 284,187
----------- -----------
Loans receivable $41,384,851 $40,512,748
=========== ===========
</TABLE>
In the normal course of business, the Company has made loans to its directors
and officers. In the opinion of management, related party loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and
does not involve more than the normal risk of collectibility. The aggregate
dollar amount of loans outstanding to directors, officers and employees total
approximately $543,000 and $756,000 at September 30, 1999 and 1998,
respectively.
The Company had loans serviced by others amounting to $6,873,192 and $8,568,593
at September 30, 1999 and 1998, respectively.
Allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
-----------------------
<S> <C> <C>
Balance, beginning of period $280,000 $255,000
Provision for loan losses --- 25,000
-------- --------
BALANCE, END OF PERIOD $280,000 $280,000
======== ========
</TABLE>
-25-
<PAGE>
NOTE D--LOANS RECEIVABLE - Cont'd
The recorded investment in impaired loans, for which there is no need for a
valuation allowance based upon the measure of the loan's fair value of the
underlying collateral at September 30, 1999 and 1998, was $-0- and $22,592,
respectively. The average recorded investment in impaired loans during the year
ended September 30, 1999 and 1998 was $8,696 and $12,165, respectively. The
related interest income that would have been recorded had the loans been current
in accordance with their original terms amounted to approximately $7,000 and
$2,000 at September 30, 1999 and 1998, respectively. The amount of interest
included in interest income on such loans for the year ended September 30, 1999
and 1998, amounted to approximately $7,000 and $-0-, respectively.
There was no allowance for losses on foreclosed real estate at September 30,
1999 and 1998.
NOTE E--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Loans $261,260 $243,378
Investments securities 323,489 181,689
Mortgage-backed securities 32,629 18,842
-------- --------
$617,378 $443,909
======== ========
</TABLE>
NOTE F--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Land $ 72,958 $ 82,132
Building and improvements 448,595 569,052
Furniture and equipment 438,492 380,078
-------- ---------
960,045 1,031,262
Less accumulated depreciation and
amortization 438,855 468,897
-------- ----------
$521,190 $ 562,365
======== ==========
</TABLE>
-26-
<PAGE>
NOTE G--DEPOSITS
Deposit account balances are summarized as follows at September 30:
<TABLE>
<CAPTION>
Weighted
Average Rate 1999 1998
At September 30, ------------------------------------------------------
1999 Amount % Amount %
------ ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOW 2.50% $ 2,039,278 3.8% $ 1,791,576 3.4%
Money Market 3.70 1,281,203 2.4 1,275,154 2.4
Passbook savings 3.00 8,473,576 16.0 8,421,794 16.0
----------- ----- ----------- -----
2.99 11,794,057 22.2 11,488,524 21.8
Certificates of deposit:
4.00 to 4.99% 4.61 15,841,502 29.8 3,148,195 6.0
5.00 to 5.99% 5.31 18,456,977 34.7 30,808,573 58.4
6.00 to 6.99% 6.39 7,046,459 13.3 7,278,476 13.8
----------- ----- ----------- -----
5.28 41,344,938 77.8 41,235,244 78.2
----------- ----- ----------- -----
4.73% $53,138,995 100.0% $52,723,768 100.0%
=========== ===== =========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $2,406,000 and $2,166,000 at September 30, 1999 and
1998, respectively. Deposits over $100,000 are not federally insured.
The Company held deposits of approximately 1,648,000 and $1,649,000 for its
directors, officers and employees at September 30, 1999 and 1998, respectively.
At September 30, 1999, contractual maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Stated Year Ended September 30
Interest Rate 2000 2001 2002 2003 2004
- -------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4.00 to 4.99% $14,861,317 $ --- $ 980,185 $ --- $ ---
5.00 to 5.99% 6,872,629 7,083,630 1,190,845 1,193,535 2,116,338
6.00 to 6.99% 2,129,817 2,040,475 1,236,501 1,639,666 ---
----------- ---------- ---------- ---------- ----------
$23,863,763 $9,124,105 $3,407,531 $2,833,201 $2,116,338
=========== ========== ========== ========== ==========
</TABLE>
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
-----------------------
<S> <C> <C>
NOW, Money Market and
Passbook savings accounts $ 370,347 $ 328,833
Certificate accounts 2,276,150 2,341,025
---------- ----------
$2,646,497 $2,669,858
========== ==========
</TABLE>
-27-
<PAGE>
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>
1999 1998
------------------------
<S> <C> <C>
5.74% due on or before January 6, 1999 $ --- $500,000
5.84% due on or before February 9, 2000 1,000,000 ---
5.94% due on or before March 22, 2000 1,500,000 ---
---------- --------
$2,500,000 $500,000
========== ========
</TABLE>
Maturities of FHLB advances are all due within one year.
The Company has signed a blanket pledge agreement with the FHLB under which it
can draw advances of unspecified amounts. The Company must hold an unencumbered
portfolio of eligible one- to four-family residential mortgages with a book
value of not less than 150% of the indebtedness.
NOTE I--INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
-----------------------
<S> <C> <C>
Current $173,500 $159,000
Deferred benefit (10,500) (10,000)
-------- --------
$163,000 $149,000
======== ========
</TABLE>
In addition, the Company recorded deferred income tax to equity relating to
unrealized gains and losses on investment securities available-for-sale of
$152,067 and $33,595 for the years ended September 30, 1999 and 1998,
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
1999 1998
---------------------------------------------
Amount % Amount %
---------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense at statutory rates $157,280 34.0 % $144,348 34.0 %
Increase (decrease) resulting from:
State income taxes, net of federal
benefit 15,114 3.3 14,414 3.4
Tax exempt income, net of related
expenses (9,163) (2.0) (9,549) (2.2)
Other, net (231) (0.1) (213) (0.1)
-------- ----- -------- -----
$163,000 35.2 % $149,000 35.1 %
======== ===== ======== =====
</TABLE>
-28-
<PAGE>
NOTE I--INCOME TAXES - Cont'd
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>
1999 1998
---------------------
Deferred tax assets
<S> <C> <C>
Allowance for loan losses $ 50,850 $ 37,100
Deferred loan fees 560 1,600
Accrued vacation 3,710 ---
Unrealized loss on available-for-sale
securities 134,000 ---
Deferred tax liabilities
Depreciation (40,920) (35,030)
FHLB stock dividend (45,200) (45,200)
Unrealized gain on available-for-sale
securities --- (18,067)
-------- --------
NET DEFERRED TAX ASSET (LIABILITY) $103,000 $(59,597)
======== ========
</TABLE>
During 1996, the Small Business Job Protection Act (the "Act") was signed into
law. The Act eliminated the percentage of taxable income bad debt deductions for
thrift institutions for tax years beginning after December 31, 1995. The Act
provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture
over a six year period. The Bank has provided for deferred income taxes for the
reserve recapture after 1987; therefore the impact of this legislation will not
have a material effect on the Bank's financial statements.
Prior to the enactment of the Act, the Bank 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 Company is not subject to any separate regulatory capital requirements. The
Bank is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank capital amounts and classification are also
subject to qualitative judgment by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital to risk-weighted assets, and Tier I capital to adjusted
assets (all as defined in the regulations). Management believes, as of September
30, 1999 that the Bank meets all capital adequacy requirements to which it is
subject.
Based on its regulatory capital ratios at September 30, 1999 the Bank is
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. The Bank's actual capital amounts and ratios are also
presented in the table.
-29-
<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, 1999
Total Risk-Based Capital Greater Than or Greater Than or
(to Risk Weighted Assets) $8,657 28.11% Equal to $2,464 8.0 % Equal to $3,080 10.0 %
Tier 1 Capital Greater Than or Greater Than or
(to Risk Weighted Assets) 8,377 27.20 Equal to 1,232 4.0 Equal to 4,000 6.0
Tier 1 Capital Greater Than or Greater Than or
(to Adjusted Assets) 8,377 12.56 Equal to 2,000 3.0 Equal to 3,334 5.0
Tangible Capital Greater Than or
(to Adjusted Assets) 8,377 12.56 Equal to 1,000 1.5 N/A N/A
As of September 30, 1998
Total Risk-Based Capital Greater Than or Greater Than or
(to Risk Weighted Assets) 6,297 22.30 Equal to 2,259 8.0 Equal to 2,824 10.0
Tier 1 Capital Greater Than or Greater Than or
(to Risk Weighted Assets) 6,017 21.31 Equal to 1,130 4.0 Equal to 3,566 6.0
Tier 1 Capital Greater Than or Greater Than or
(to Adjusted Assets) 6,017 10.13 Equal to 1,783 3.0 Equal to 2,971 5.0
Tangible Capital Greater Than or
(to Adjusted Assets) 6,017 10.13 Equal to 891 1.5 N/A N/A
</TABLE>
Reconciliation of equity and regulatory risk-based capital is as follows at
September 30:
<TABLE>
<CAPTION>
1999 1998
---------------------
(In thousands)
<S> <C> <C>
Equity $ 8,149 $ 6,048
Less unrealized gain (loss) on securities, net of taxes 228 (31)
Add general valuation allowance 280 280
-------- --------
Regulatory risk-based capital $ 8,657 $ 6,297
======== ========
</TABLE>
NOTE K--EMPLOYEE BENEFITS
The Company has a 401(k) salary reduction plan that covers all employees meeting
specific age and length of service requirements. Under the plan, the Company
matches participant contributions at the rate of 50% up to 4% of the
participants' annual compensation. Pension costs recognized under the plan
totaled $9,019, and $8,903 for the years ended September 30, 1999 and 1998,
respectively.
30
<PAGE>
NOTE K--EMPLOYEE BENEFITS - Cont'd
In connection with the conversion from mutual to stock form, the Company
established an ESOP for the benefit of participating employees. Employees are
eligible to participate upon attaining age twenty-one and completing one year of
service.
The ESOP borrowed $447,200 from the Company to fund the purchase of 44,720
shares of the Company's common stock. The purchase of shares of the ESOP was
recorded in the consolidated financial statements through a credit to common
stock and additional paid-in capital with a corresponding charge to a contra
equity account for the unreleased shares. The loan is secured solely by the
common stock and is to be repaid in equal quarterly installments of principal
and interest payable through March, 2009 at an interest rate of 7.75%. The
intercompany ESOP note and related interest were eliminated in consolidation.
The Company makes quarterly contributions to the ESOP which are equal to the
debt service less dividends on unallocated ESOP shares used to repay the loan.
Dividends on allocated shares will be paid to participants of the ESOP. The ESOP
shares are pledged as collateral on the ESOP loan. Shares are released from
collateral and allocated to participating employees, based on the proportion of
loan principal and interest repaid and compensation of the participants.
Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits are payable upon a participant's
retirement, death, disability or separation from service.
Effective with the date of the stock conversion the Company adopted Statement of
Position ("SOP") 93-6. As shares are committed to be released from collateral,
the Company reports compensation expense equal to the average fair value of the
shares committed to be released. Dividends on allocated shares will be charged
to stockholders' equity. Dividends on unallocated shares are recorded as a
reduction to the ESOP loan. ESOP expense for the year ended September 30, 1999
was $21,731. The fair value of unreleased shares based on the market price of
the Company's stock was $419,530 at September 30, 1999.
The number of ESOP shares at September 30, 1999 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Shares released for allocation 2,236
Unreleased shares 42,484
------
44,720
======
</TABLE>
The Board of Directors of the Company intends to present for stockholder
approval the PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan (the "Incentive
Plan"). The purpose of the Incentive Plan is to attract and retain qualified
personnel in key positions, provide officers, employees and non-employee
directors of the Company and Palmyra Savings, with a proprietary interest in the
Company as an incentive to contribute to the success of the Company, promote the
attention of management to other stockholder's concerns, and reward employees
for outstanding performance.
The Incentive Plan authorizes the granting of options to purchase common stock
of the Company and awards of restricted shares of common stock. Subject to
certain adjustments to prevent dilution of awards to participants, the number of
shares of common stock reserved for awards under the Incentive Plan is 78,260
shares, consisting of 55,900 shares reserved for options and 22,360 shares
reserved for restricted stock awards. All employees and non-employee directors
of the Company and its affiliates are eligible to receive awards under the
Incentive Plan. The Incentive Plan will be administered by a committee
consisting of members of the Board of Directors who are not employees of the
Company or its affiliates. Authorized but unissued shares or shares previously
issued and reacquired by the Company may be used to satisfy awards under the
Incentive Plan. If authorized but unissued shares are used to satisfy
restricted stock awards and the exercise of options granted under the Incentive
Plan, it will result in an increase in the number of shares outstanding and will
have a dilutive effect on the holdings of existing stockholders. The Company
may establish a trust under which the trustee will purchase, with contributions
from the Company or Palmyra Savings, previously issued shares to fund the
Company's obligation for restricted stock awards. At September 30, 1999, no
awards have been granted under the Incentive Plan.
31
<PAGE>
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet customer financing needs. These financial
instruments consist principally of commitments to extend credit. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The Company's exposure to credit
loss in the event of nonperformance by the other party is represented by the
contractual amount of those instruments. The Company does not generally require
collateral or other security on unfunded loan commitments until such time that
loans are funded.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty. Such
collateral consists primarily of residential properties.
The Company had the following outstanding commitments at September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Undisbursed portion of mortgage loans $ 681,161
Commitments to originate mortgage loans 787,900
with variable or pending interest rates
Commitments to originate mortgage loan 3,500
with fixed interest rate of 8.125%
Undisbursed portion of nonmortgage loans 10,278
----------
TOTAL $1,482,839
==========
</TABLE>
At September 30, 1999 the Company had amounts on deposit at banks and federal
agencies in excess of federally insured limits of approximately $2,027,000.
NOTE M--CONVERSION TO STOCK OWNERSHIP
On September 24, 1998, the Board of Directors of the Bank adopted a plan of
conversion pursuant to which the Bank converted from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank with the
concurrent formation of the holding company which acquired all of the common
stock of the Bank. On March 31, 1999, the Company sold 559,000 shares of common
stock at $10 per share to eligible purchasers, including depositors of the Bank.
Total proceeds from the conversion, after deducting conversion expenses of
$608,237 were $4,981,763 and are reflected as common stock and additional paid-
in capital in the accompanying consolidated statements of financial condition.
The Company utilized $2,490,252 of the net proceeds to acquire all of the common
stock of the Bank. The Company is also authorized to issue 1,000,000 shares of
$.01 par value preferred stock. At September 30, 1999, no shares of preferred
stock had been issued.
As part of the conversion, the Bank established a liquidation account for the
benefit of eligible depositors who continue to maintain their deposit accounts
in the Bank after conversion. In the unlikely event of a complete liquidation
of the Bank, and only in such event, each eligible depositor will be entitled to
receive a liquidation distribution from the liquidation account in the
proportionate amount of the then-current adjusted balance for deposit accounts
held before distribution may be made with respect to the Bank's capital stock.
The Bank may not declare or pay a cash dividend to the Company on, or repurchase
any of, its capital stock if the effect thereof would cause the retained
earnings of the Bank to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the liquidation account
does not restrict the use of application of retained earnings.
The Bank may not declare or pay cash dividends on, or repurchase any of, its
shares of common stock, if the effect would cause stockholder's equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
32
<PAGE>
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
Company. Fair value estimates of the Company's financial instruments as of
September 30, 1999 and 1998, including methods and assumptions utilized, are set
forth below.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein.
Cash and due from depository institutions: The carrying amounts approximate
fair value.
Investment 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 Company 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 accounts: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
Certificates of deposit: The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar maturities.
Advances from FHLB: The carrying value approximates fair value.
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 Company's consolidated financial position.
Limitations: Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
The valuation techniques employed above involve uncertainties and are affected
by assumptions used and judgments regarding prepayments, credit risk, discount
rates, cash flows and other factors. Changes in assumptions could significantly
affect the reported fair value.
33
<PAGE>
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS - Cont'd
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, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------
(Dollars in thousands)
ASSETS
<S> <C> <C> <C> <C>
Cash and due from depository $ 2,340 $ 2,340 $ 2,268 $ 2,268
institutions
Investment securities 9,816 9,816 7,087 7,087
available-for-sale
Investment securities held-to-maturity 7,484 7,255 5,589 5,640
Mortgage-backed securities
held-to-maturity 3,650 3,574 2,584 2,624
Stock in FHLB 391 391 374 374
Loans receivable, net 41,385 41,348 40,513 40,522
Accrued interest receivable 617 617 444 444
LIABILITIES
Transaction accounts 11,794 11,794 11,489 11,489
Certificates of deposit 41,345 41,493 41,235 41,365
Advances from FHLB 2,500 2,500 500 500
Advances from borrowers for property
taxes and insurance 52 52 50 50
</TABLE>
NOTE O--COMMITMENTS AND CONTINGENCIES
The Company has entered into a contract for the construction of a new facility
located at Kahoka, Missouri at a total cost of approximately $589,000. At
September 30, 1999, the Company has expended approximately $1,400.
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of the management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial position of the Company.
NOTE P--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and
cash flows for the Company should be read in conjunction with the consolidated
financial statements and the notes thereto.
34
<PAGE>
NOTE P--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Cont'd
<TABLE>
<CAPTION>
September 30
1999
CONDENSED BALANCE SHEET
ASSETS
<S> <C>
Cash and cash equivalents $ 2,081,156
ESOP note receivable 432,079
Investment in subsidiary 8,149,391
-----------
TOTAL ASSETS $10,662,626
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities $ 17,400
Stockholders' equity 10,645,226
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,662,626
===========
<CAPTION>
Inception
March 31, 1999
to
September 30,
1999
CONDENSED STATEMENT OF INCOME
<S> <C>
Interest Income $ 49,890
Expenses 41,536
-----------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY 8,354
Equity in undistributed earnings of 163,347
subsidiary -----------
INCOME BEFORE INCOME TAXES 171,701
Income taxes 3,400
-----------
NET INCOME $ 168,301
===========
</TABLE>
35
<PAGE>
NOTE P--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Cont'd
<TABLE>
<CAPTION>
Inception
March 31, 1999
to
September 30,
1999
--------------
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities
<S> <C>
Net income $ 168,301
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in income of the subsidiary (163,347)
Increase in accrued liabilities 17,400
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,354
Cash flows from investing activities
Purchase of common stock of the (2,490,882)
subsidiary -----------
NET CASH USED IN INVESTING ACTIVITIES (2,490,882)
Cash flows from financing activities
Proceeds from sale of common stock 4,981,763
Loan to ESOP (447,200)
Principal collected from ESOP 15,121
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,549,684
-----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 2,081,156
Cash and cash equivalents at beginning ---
of period -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,081,156
===========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
<S> <C>
OFFICERS DIRECTORS
PFSB BANCORP, INC. PFSB BANCORP, INC.
AND PALMYRA SAVINGS AND PALMYRA SAVINGS
Eldon R. Mette L. Edward Schaeffer
President and Chief Executive Officer Chairman of the Board
Owner, Schaeffer Blacksmith Shop
Ronald L. Nelson And Retired Postal Employee
Chief Financial Officer,
Vice President, Treasurer and Secretary Glenn J. Maddox
Vice Chairman of the Board
Retired Businessman
Eldon R. Mette
President and Chief Executive Officer
Donald L. Slavin
Retired Businessman
James D. Lovegreen
Owner, Lovegreen Motor Co.
Robert M. Dearing
Farmer - Stockman
Albert E. (Jerry) Davis
Retired Businessman
Robert H. Johnson
Director Emeritus
<CAPTION>
CORPORATE INFORMATION
<S> <C>
MAIN OFFICE SPECIAL COUNSEL
123 W. Lafayette Muldoon, Murphy & Faucette LLP
Palmyra, Missouri 63461 Washington, D.C. 20016
Telephone (573) 769-2134
BRANCH LOCATIONS INDEPENDENT AUDITORS
600 Washington St. Moore, Horton & Carlson, P.C.
Canton, Missouri 63435-0309 510 South Muldrow
103 East Commercial St. Mexico, Missuori 65265
Kahoka, Missouri 63445-0029
</TABLE>
37
<PAGE>
STOCKHOLDERS INFORMATION
The Annual Meeting of Stockholders will be held at the office of Palmyra
Savings, 123 West Lafayette Street, Palmyra, Missouri, on January 27, 2000, at
2:00 p.m., Central Time.
<TABLE>
<CAPTION>
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
<S> <C>
Ronald L. Nelson Registrar and Transfer Company
PFSB Bancorp, Inc. 10 Commerce Drive
123 West Lafayette Street Cranford, NJ 07016-3572
Palmyra, Missouri 63461 (800) 368-5948
(573) 769-2134
</TABLE>
ANNUAL AND OTHER REPORTS
A COPY OF THE FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR
VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON WRITTEN REQUEST TO RONALD L.
NELSON, SECRETARY, PFSB BANCORP, INC., 123 WEST LAFAYETTE STREET, PALMYRA,
MISSOURI 63461. THE COMPANY'S FORM 10-KSB IS ALSO AVAILABLE THROUGH THE SEC'S
WORLD WIDE WEB SITE ON THE INTERNET (http://www.sec.gov).
-------------------
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of PFSB Bancorp, Inc. for the year ended September 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 473
<INT-BEARING-DEPOSITS> 1,867
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,816
<INVESTMENTS-CARRYING> 11,134
<INVESTMENTS-MARKET> 10,829
<LOANS> 41,665
<ALLOWANCE> 280
<TOTAL-ASSETS> 66,445
<DEPOSITS> 53,139
<SHORT-TERM> 2,500
<LIABILITIES-OTHER> 161
<LONG-TERM> 0
0
0
<COMMON> 6
<OTHER-SE> 10,640
<TOTAL-LIABILITIES-AND-EQUITY> 66,445
<INTEREST-LOAN> 3,083
<INTEREST-INVEST> 1,097
<INTEREST-OTHER> 111
<INTEREST-TOTAL> 4,291
<INTEREST-DEPOSIT> 2,646
<INTEREST-EXPENSE> 2,665
<INTEREST-INCOME-NET> 1,627
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 1,309
<INCOME-PRETAX> 463
<INCOME-PRE-EXTRAORDINARY> 300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300
<EPS-BASIC> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> 2.52
<LOANS-NON> 137
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 280
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 280
<ALLOWANCE-DOMESTIC> 220
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 60
</TABLE>
