<PAGE>
2000 Annual Report
PFSB BANCORP, INC.
<PAGE>
PFSB Bancorp, Inc.
2000 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.. 5
Independent Auditors' Report........................................................... 12
Consolidated Statements of Financial Condition......................................... 13
Consolidated Statements of Stockholders' Equity........................................ 14
Consolidated Statements of Income...................................................... 15
Consolidated Statements of Cash Flows.................................................. 16
Notes to Consolidated Financial Statements............................................. 18
Directors and Officers................................................................. 36
Corporate Information.................................................................. 36
Stockholders' Information.............................................................. 37
</TABLE>
<PAGE>
[LETTERHEAD OF PFSB BANCORP, INC.]
================================================================================
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 our "second" annual report as a public company.
Rather than repeat to you the numbers shown on the following pages, I will try
to give you more of an overview of our operations, our appreciation for your
support and some thoughts concerning the future.
Earnings were down this past year from the previous year, primarily due to the
sudden increase in interest rates requiring us to raise CD rates to retain
deposits. Even though most of our mortgage loans reprice every three years,
mortgage rates do not increase as fast as the rates on savings deposits and
CD's, which causes the interest rate spread to narrow.
In addition to our local loan originations, we have been fortunate to purchase
loans out of our market area that we believe will help improve our interest rate
spread. In addition, we have initiated a new loan program to finance
manufactured housing, with or without security on the underlying land.
The Company repurchased 129,568 shares of stock during the past year. In
addition, we paid a total dividend of $.30 per share during the past year. The
Board of Directors believe that stock repurchases and the payment of dividends
are effective means to enhance shareholder value and return on equity.
We are also pleased to announce the Kahoka Branch's relocation to a new building
during July, 2000.
We remain committed to giving quality personal service to our customers and
believe with our strong capital structure we shall be able to continue to retain
and effectively serve our customer base.
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 in Missouri but 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, 2000, there were 559,000 shares of common stock
outstanding (including unreleased Employee Stock Ownership Plan ("ESOP") shares
of 38,012 and unvested Stock-Based Incentive Plan ("SBIP") shares of 22,360) and
346 stockholders, excluding persons or entities who hold stock in nominee or
"street name". Dividend payments by the Company depend primarily on dividends
received by the Company from the Bank. Under federal regulations, the dollar
amount of dividends the Bank may pay depends 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 N 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, 2000 and 1999. This
information was provided by Nasdaq Trading & Market Services. 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 2000 Fiscal 1999
High Low Dividends High Low Dividends
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $11.1250 $ 9.6250 $0.15 N/A N/A N/A
Second Quarter $11.0000 $10.0000 --- N/A N/A N/A
Third Quarter $12.3750 $11.0000 $0.15 $11.4375 $8.5000 ---
Fourth Quarter $12.1250 $11.1250 --- $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 in this report.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $70,044 $66,445 $59,476 $58,433
Cash and cash equivalents 3,792 2,340 2,268 2,146
Investment securities available-for-sale 8,870 9,816 7,087 8,509
Investment securities held-to-maturity 7,427 7,484 5,589 5,093
Mortgage-backed securities held-to-maturity 3,099 3,650 2,584 2,828
Loans receivable, net 44,529 41,385 40,513 38,394
Deposits 56,385 53,139 52,724 51,412
FHLB advances 4,250 2,500 500 1,000
Total equity, substantially restricted 9,263 10,645 6,048 5,715
<CAPTION>
Year Ended September 30,
--------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
(Dollars in Thousands,
Except Per Share Amounts)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $4,537 $4,292 $4,164 $4,133
Interest expense 2,865 2,665 2,685 2,626
------ ------ ------ ------
Net interest income 1,672 1,627 1,479 1,507
Provision for loan losses --- --- 25 21
------ ------ ------ ------
Net interest income after provision for loan losses 1,672 1,627 1,454 1,486
Noninterest income 59 145 75 63
Noninterest expense 1,483 1,309 1,104 1,035
------ ------ ------ ------
Income before income taxes 248 463 425 514
Income taxes 78 163 149 182
------ ------ ------ ------
Net income $ 170 $ 300 $ 276 $ 332
====== ====== ====== ======
Basic income per share $ 0.40 $ 0.58 * *
====== ======
Diluted income per share $ 0.39 $ --- * *
====== ======
Dividends per share $ 0.30 $ --- * *
====== ======
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
-----------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
KEY OPERATING RATIOS:
Performance Ratios:
Return on average assets (net income divided by average
assets) 0.25 % 0.47 % 0.47 % 0.57 %
Return on average equity (net income divided by average
equity) 1.75 3.48 4.64 6.49
Interest rate spread (difference between average yield on
interest-earning assets and average cost of interest-bearing
liabilities) 1.95 2.09 2.24 2.34
Net interest margin (net interest income to average
interest-earning assets) 2.57 2.66 2.62 2.70
Noninterest expense to average total assets 2.21 2.07 1.88 1.79
Average interest-earning assets to average
interest-bearing liabilities 114.07 112.91 107.87 107.66
Asset Quality Ratios:
Nonperforming loans to loan receivable, net(1) 0.34 0.33 0.54 0.47
Nonperforming assets to total assets(2) 0.21 0.21 0.37 0.31
Allowance for loan losses to gross loans receivable 0.62 0.66 0.68 0.64
Allowance for loan losses to nonperforming loans 186.02 203.75 127.82 140.82
Net charge-offs to average outstanding loans --- --- --- ---
Capital Ratios:
Tangible 12.32 12.56 10.13 9.82
Core 12.32 12.56 10.13 9.82
Risk-based 26.97 28.11 22.30 22.25
Average equity to average assets 14.50 13.62 10.12 9.66
<CAPTION>
At September 30,
--------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OTHER DATA:
Number of:
Mortgage loans outstanding 1,232 1,191 1,221 1,244
Deposit accounts 7,977 7,674 7,761 7,678
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>
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; 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 and other expenses.
Management's discussion and analysis of the financial condition and results of
operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto.
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 FHLB of Des Moines as a supplemental source of funds.
Operating results depend 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.
-5-
<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>
+300 bp $7,295 $(1,714) (19)%
+200 bp 7,870 (1,139) (13)
+100 bp 8,442 (567) (6)
0 bp 9,009 --- ---
-100 bp 9,348 339 4
-200 bp 9,362 353 4
-300 bp 9,502 493 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, 2000 and 1999
----------------------------------------------------------------
Total assets increased to $70.0 million at September 30, 2000, from $66.4
million at September 30, 1999. The increase can primarily be attributed to an
increase in deposits of $3.2 million and a $l.8 million increase in FHLB
advances. Deposits increased principally from an increase in retail certificates
of deposits. Maturing investment securities contributed to a $1.0 million
decrease in investment portfolio. The majority of the new funds were invested
into the loan portfolio, which increased $3.1 million and $560,000 for the
construction of a new banking facility located in Kahoka, Missouri. During 2000,
$1.4 million of loans were purchased from other institutions. Equity decreased
from $10.6 million at September 30, 1999 to $9.3 million at September 30, 2000,
primarily from the purchase of treasury stock. During the year ended September
30, 2000, the Company acquired 129,568 shares of its outstanding common stock at
a cost of $1.5 million.
-6-
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 2000 and 1999
-------------------------------------------------------------------------------
Net income. Net income for 2000 decreased $130,000 or 43.3% to $170,000
compared to $300,000 for 1999. Basic income per share dropped from $0.58 for
1999 to $0.40 for 2000. Diluted income per share was $0.39 for 2000.
Net interest income. Net interest income increased 2.8% or $45,000 to $1.7
million for 2000. Interest income increased $245,000 for 2000 as compared to the
prior year while interest expense increased $200,000 during the same period. The
increase in interest income was due to the increase in interest-earning assets,
primarily loans receivable which increased $3.1 million for the period. Interest
expense rose due to an increase in deposits of $3.2 million as well as a $1.8
million increase in outstanding FHLB advances. The benefits of this increase in
interest-earning assets was partially offset by an increase in cost of funds,
mainly due to an increase in interest on FHLB advances of $204,000. Investment
yields increased from 6.0% to 6.1% and loan yields decreased from 7.6% to 7.5%
from 1999 compared to 2000. For the same period, the cost of deposits remained
unchanged. These factors resulted in a decrease of the interest rate spread from
2.09% to 1.95%.
Provision for Loan Losses. The allowance for loan losses remained unchanged
from 1999 to 2000 at $280,000. There were no loan losses or recoveries for 2000
or 1999. The allowance represented 0.62% and 0.67% of loans outstanding at 2000
and 1999, respectively. Management believes the overall allowance is adequate to
meet any potential losses in the loan portfolio.
Noninterest income. Total noninterest income decreased $86,000 to $59,000 for
2000. The decrease is attributable to a $44,000 gain on the sale of the Kahoka
facility in 1999, a $14,000 reduction in the gain on investments called, an
$11,000 decrease in service charges and other fees and an $8,000 increase in
costs associated with foreclosed real estate.
Noninterest expense. Total noninterest expense increased $174,000 to $1.5
million for 2000. Of the increase, $59,000 was due to increased employee cost
which included compensation expenses which are associated with the addition of
the SBIP and the addition of one full-time employee. Professional fees rose
$64,000 during 2000 primarily for costs associated with being a public company
and services in connection with the implementation of the SBIP and the purchase
of treasury stock. Other expenses increased $38,000 primarily from
administrative costs also associated with being a public company.
Income Taxes. Income taxes decreased $85,000 between 2000 and 1999 as a result
of lower income before income taxes in 2000.
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.
-7-
<PAGE>
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.
-8-
<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,
------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Interest Interest
Average And Yield/ Average And Yield/
Balance(1) Dividends Cost Balance(1) Dividends Cost
---------- --------- ---- ---------- --------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(2):
Loans receivable, net $42,646 $3,202 7.51% $40,650 $3,083 7.59%
Investment securities 16,703 1,026 6.14 14,407 865 6.00
Mortgage-backed securities 3,375 217 6.42 3,079 209 6.77
FHLB stock 397 27 6.74 383 24 6.33
Interest-bearing deposits 1,905 66 3.48 2,754 111 4.04
------- ------ ------- ------
Total interest-earning assets 65,026 4,538 6.98 61,273 4,292 7.00
Noninterest-earning assets 2,065 1,945
------- -------
Total average assets $67,091 $63,218
======= =======
Interest-bearing liabilities:
Savings accounts $12,209 371 3.04 $12,068 371 3.07
Certificates of deposit 41,279 2,273 5.51 41,778 2,276 5.45
------- ------ ------- ------
Total average deposits 53,488 2,644 4.94 53,846 2,647 4.92
FHLB advances 3,519 222 6.33 423 18 4.33
------- ------ ------- ------
Total interest-bearing liabilities 57,007 2,866 5.03 54,269 2,665 4.91
Noninterest-bearing liabilities 359 340
------- -------
Total average liabilities 57,366 54,609
Average total equity 9,725 8,609
------- -------
Total liabilities and equity $67,091 $63,218
======= =======
Net interest income $1,672 $1,627
====== ======
Interest rate spread 1.95% 2.09%
==== ====
Net interest margin 2.57% 2.66%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.07% 112.91%
======= ======
</TABLE>
_______________________________
(1) Average balance 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.
-9-
<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,
-----------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------- ----------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
------ -------- -------- ----- ------ -------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $(30) $151 $ (2) $119 $(108) $111 $ (4) $ (1)
Investment securities 20 138 3 161 (27) 116 (4) 85
Mortgage-backed securities (10) 20 (1) 9 (5) 19 --- 14
FHLB stock 2 1 --- 3 (2) (3) --- (5)
Interest-earning deposits (16) (34) 5 (45) (17) 65 (14) 34
---- ---- ---- ---- ----- ---- ---- ----
Total net change in income
on interest-earning assets (34) 276 5 247 (159) 308 (22) 127
Interest-bearing liabilities:
Savings accounts (3) 4 --- 1 17 23 1 41
Certificates of deposit 24 (27) --- (3) (116) 53 (2) (65)
---- ---- ---- ---- ----- ---- ---- ----
Total average deposits 21 (23) --- (2) (99) 76 (1) (24)
FHLB advances 9 132 63 204 (4) 9 (2) 3
---- ---- ---- ---- ----- ---- ---- ----
Total net change in expense
on interest-bearing liabilities 30 109 63 202 (103) 85 (3) (21)
---- ---- ---- ---- ----- ---- ---- ----
Net change in net
interest income $(64) $167 $(58) $ 45 $ (56) $223 $(19) $148
==== ==== ==== ==== ===== ==== ==== ====
</TABLE>
-10-
<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 advances. While investment securities maturities and
scheduled amortization of loans are a predictable source of funds, deposit
flows, investment securities prepayments and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
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,
2000, cash and interest-bearing deposits totaled $3.8 million, or 5.41% of total
assets, and investment securities classified as available-for-sale totaled $8.9
million. At September 30, 2000, the Company had outstanding advances of $4.3
million under an available credit line of $24.8 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, 2000, was 24.14%.
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, 2000, the
Company and its subsidiaries held $2.5 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 deposit withdrawals. At September 30, 2000, the Company had commitments to
originate loans aggregating approximately $414,000. As of September 30, 2000,
certificates of deposit amounted to $44.6 million or 79.0% of total deposits,
including $30.6 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, 2000, was $313,000. Net income of $170,000, adjusted for non-cash
charges, largely accounted for the net cash provided by operating activities.
Net cash used by investing activities was $2.2 million. The largest component of
cash used in investing activities was the origination and purchase of mortgage
loans. Net cash provided by financing activities was $3.3 million. The largest
component of cash provided by financing activities was the net increase in
deposits.
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, 2000. 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.
Impact of New Accounting Standards
----------------------------------
See Note A of the Notes to the Consolidated Financial Statements.
-11-
<PAGE>
[LETTERHEAD OF MOORE, HORTON & CARLSON, P.C.]
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, 2000 and 1999 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, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Moore, Horton & Carlson, P.C
Mexico, Missouri
November 27, 2000
-12-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30
2000 1999
--------------------------
ASSETS
<S> <C> <C>
Cash (includes interest-bearing deposits of $3,490,424 and
$1,866,765, respectively) $ 3,792,322 $ 2,340,403
Investment securities--Note B
Available-for-sale, at fair value 8,869,799 9,816,351
Held-to-maturity (fair value of $7,217,291 and $7,255,444, respectively) 7,426,755 7,484,079
Mortgage-backed securities held-to-maturity (fair value of $3,007,600
and $3,573,973, respectively)--Note C 3,099,151 3,650,255
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 402,900 391,200
Loans receivable--Note D 44,529,174 41,384,851
Accrued interest receivable--Note E 600,396 617,378
Premises and equipment--Note F 1,082,390 521,190
Foreclosed real estate--Note D 104,653 99,521
Other assets 136,000 139,653
----------- -----------
TOTAL ASSETS $70,043,540 $66,444,881
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits--Note G $56,384,648 $53,138,995
Advances from FHLB--Note H 4,250,000 2,500,000
Advances from borrowers for property taxes and insurance 50,784 52,185
Other liabilities 95,527 108,475
----------- -----------
TOTAL LIABILITIES 60,780,959 55,799,655
Commitments and contingencies--Note M and P
Stockholders' Equity--Notes J and N
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 5,590
Additional paid-in capital 4,929,502 4,975,544
Retained earnings - substantially restricted 6,348,256 6,316,932
Accumulated other comprehensive loss (197,448) (228,000)
Unearned ESOP shares (380,120) (424,840)
Unearned SBIP shares (206,270) ---
Treasury stock at cost (107,208 shares) (1,236,929) ---
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 9,262,581 10,645,226
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $70,043,540 $66,444,881
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-13-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Unearned Unearned Total
Common Paid-In Retained Income ESOP SBIP Treasury Stockholders'
Stock Capital Earnings (loss) Shares Shares Stock Equity
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 N 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
Comprehensive income:
Net income --- --- 170,365 --- --- --- --- 170,365
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 $19,250 --- --- --- 30,552 --- --- --- 30,552
------ ---------- ---------- ---------- --------- --------- ----------- -----------
Total comprehensive income --- --- 170,365 30,552 --- --- --- 200,917
------ ---------- ---------- ---------- --------- --------- ----------- -----------
Purchase of Treasury Stock --- --- --- --- --- --- (1,516,429) (1,516,429)
Adoption of SBIP - Note K --- (50,310) --- --- --- (229,190) 279,500 ---
Amortization of SBIP --- --- --- --- --- 22,920 --- 22,920
Dividens paid ($.30 per share) --- --- (139,041) --- --- --- --- (139,041)
Release of ESOP shares --- 4,268 --- --- 44,720 --- --- 48,988
------ ---------- ---------- ---------- --------- --------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 2000 $5,590 $4,929,502 $6,348,256 $ (197,448) $(380,120) $(206,270) $(1,236,929) $ 9,262,581
====== ========== ========== ========== ========= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30
2000 1999
-------------------------
<S> <C> <C>
Interest Income
Mortgage loans $3,159,930 $3,050,082
Consumer and other loans 41,798 33,041
Investment securities 1,052,731 888,652
Mortgage-backed securities 216,622 208,412
Interest-bearing deposits 66,238 111,263
---------- ----------
Total Interest Income 4,537,319 4,291,450
Interest Expense
Deposits--Note G 2,641,861 2,646,497
Advances from FHLB 222,765 18,311
---------- ----------
Total Interest Expense 2,864,626 2,664,808
---------- ----------
Net Interest Income 1,672,693 1,626,642
Provision for Loan Losses--Note D --- ---
---------- ----------
Net Interest Income After Provision
for Loan Losses 1,672,693 1,626,642
Noninterest Income
Service charges and other fees 58,369 69,855
Gain on sale of investments --- 13,750
Gain (loss) on sale of premises and equipment (2,595) 43,838
Net expense of foreclosed real estate (12,024) (4,002)
Other 15,354 21,104
---------- ----------
Total Noninterest Income 59,104 144,545
Noninterest Expense
Employee compensation and benefits 726,660 667,404
Occupancy costs 157,926 142,046
Advertising 49,728 43,318
Data processing 96,898 93,997
Federal insurance premiums 16,843 31,659
Professional fees 143,306 79,342
Directors' fees 62,960 59,830
Other 229,111 191,004
---------- ----------
Total Noninterest Expense 1,483,432 1,308,600
---------- ----------
INCOME BEFORE INCOME TAXES 248,365 462,587
Income Taxes--Note I 78,000 163,000
---------- ----------
NET INCOME $ 170,365 $ 299,587
========== ==========
Basic Income Per Share $ 0.40 $ 0.58
========== ==========
Diluted Income Per Share $ 0.39 $ ---
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30
2000 1999
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $170,365 $299,587
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 73,505 63,200
Amortization of premiums and discounts (2,933) (2,290)
Loan fee amortization and payoffs (113) (2,665)
Deferred income taxes (25,400) (10,500)
Gain on sale of investments --- (13,750)
Loss (gain) on sale of premises and equipment 2,595 (43,838)
Loss (gain) on sale of foreclosed real estate 9,721 (9,179)
ESOP shares released 48,988 21,731
Amortization of SBIP 22,920 ---
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable 16,981 (173,469)
Other assets 3,653 (84,121)
Other liabilities (6,795) 116,704
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 313,487 161,410
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities,
held-to-maturity --- (5,912,569)
Proceeds from maturities and calls of investment
securities, held-to-maturity 60,000 4,026,957
Purchase of investment securities,
available-for-sale --- (8,676,659)
Proceeds from maturities and calls of investment
securities, available-for-sale 1,000,000 5,545,000
Purchase of mortgage-backed securities --- (1,722,343)
Principal collected on mortgage-backed securities 547,713 654,352
Purchase of FHLB stock (11,700) (17,700)
Loans originated, net of repayments (1,857,652) 929,243
Purchase of mortgage loans (1,401,578) (1,985,032)
Proceeds from sale of education loans 99,018 43,343
Purchase of premises and equipment (638,999) (78,112)
Proceeds from sales of foreclosed real estate 2,826 52,666
Expenditures on foreclosed real estate (1,677) ---
Proceeds from sale of premises and equipment 1,700 99,925
-------- --------
NET CASH USED IN
INVESTING ACTIVITIES (2,200,349) (7,040,929)
</TABLE>
-16-
<PAGE>
PFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cont'd
<TABLE>
<CAPTION>
Year Ended September 30
2000 1999
-------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 3,245,653 $ 415,227
Advances from FHLB
Borrowings 5,750,000 2,500,000
Repayments (4,000,000) (500,000)
Net increase (decrease) in advances for
taxes and insurance (1,402) 1,966
Proceeds from sale of common stock --- 4,981,763
Loan to ESOP --- (447,200)
Payments of dividends (139,041) ---
Purchase of treasury stock (1,516,429) ---
----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 3,338,781 6,951,756
----------- ----------
NET INCREASE IN CASH 1,451,919 72,237
Cash, beginning of period 2,340,403 2,268,166
----------- ----------
CASH, END OF PERIOD $ 3,792,322 $2,340,403
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for
Interest on deposits $ 2,635,046 $2,646,656
=========== ==========
Interest on FHLB advances $ 215,560 $ 14,669
=========== ==========
Income tax $ 93,407 $ 175,000
=========== ==========
Noncash investing and financing activities are as follows
Loans to facilitate sales of real estate $ 154,994 $ 42,300
=========== ==========
Foreclosed real estate acquired by foreclosure or deed in lieu of
foreclosure $ 66,580 $ 185,308
=========== ==========
Adoption of SBIP shares of common stock $ 279,500 $ ---
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<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.
-18-
<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.
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.
-19-
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
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 other than purchased participation interests in
residential, multi-family and commercial real estate loans, generally secured by
property located in Missouri. 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. Diluted income
per share include the effects of all dilutive potential common shares
outstanding during each period.
New Accounting Standards: In June 1998, the Financial Accounting Standards
------------------------
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS No. 137, 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.
In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments and Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. This Statement will be effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Company does not expect the
statement to have a significant effect on the consolidated financial statements.
Reclassification: Certain amounts in the prior periods consolidated financial
----------------
statements have been reclassified to conform with the current year presentation.
-20-
<PAGE>
NOTE B--INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Unrealized
Amortized -------------------- Fair
Cost Gains Losses Value
------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government agency obligations
September 30, 2000 $ 9,181,999 $ --- $312,200 $8,869,799
=========== ====== ======== ==========
September 30, 1999 $10,178,351 $ --- $362,000 $9,816,351
=========== ====== ======== ==========
Held-to-Maturity:
September 30, 2000
U.S. Government agency obligations $ 6,916,755 $ --- $211,355 $6,705,400
State and local obligations 510,000 2,182 291 511,891
----------- ------ -------- ----------
$ 7,426,755 $2,182 $211,646 $7,217,291
=========== ====== ======== ==========
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
=========== ====== ======== ==========
</TABLE>
The scheduled contractual maturities of debt securities at September 30, 2000,
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 $ --- $ --- $ 110,000 $ 110,253
After one year through five years 4,793,811 4,664,458 5,363,368 5,243,005
After five years through ten years 4,388,188 4,205,341 1,153,387 1,114,173
After ten years --- --- 800,000 749,860
----------- ----------- ----------- -----------
$9,181,999 $8,869,799 $7,426,755 $7,217,291
=========== =========== =========== ===========
</TABLE>
During 1999, securities available-for-sale were called for redemption with
proceeds of resulting in gross realized gain of $6,509. There were no securities
called during 2000.
During 1999, securities held-to-maturity were called for redemption with
proceeds of $3,830,000, resulting in a gross realized gain of $7,242. There were
no securities called during 2000.
Investment securities were pledged to secure deposits as required or permitted
by law, with an amortized cost of $1,795,439 and $1,994,074 and fair value of
$1,721,014 and $1,964,949 at September 30, 2000 and 1999, respectively.
-21-
<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
--------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 2000
GNMA $ 325,555 $ 5,011 $ 470 $ 330,096
FNMA 1,128,539 2,904 43,427 1,088,016
FHLMC 1,620,932 2,995 56,558 1,567,369
SBA 24,125 --- 2,006 22,119
---------- ------- -------- ----------
$3,099,151 $10,910 $102,461 $3,007,600
========== ======= ======== ==========
September 30, 1999
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
========== ======= ======== ==========
</TABLE>
The amortized cost and fair value of mortgage-backed securities at September 30,
2000, 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 $ 2,957 $ 2,662
After one year through five years 249,878 245,944
After five years through ten years 538,651 521,482
After ten years 2,307,665 2,237,512
---------- ----------
$3,099,151 $3,007,600
========== ==========
</TABLE>
Mortgage-backed securities were pledged to secure deposits as required or
permitted by law, with an amortized cost of $608,024 and $703,369 and fair value
of $602,686 and $700,825 at September 30, 2000 and 1999, respectively.
-22-
<PAGE>
NOTE D--LOANS RECEIVABLE
Loans receivable consist of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
-------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family residences $39,227,919 $37,600,376
Multi-family 910,650 327,880
Commercial 2,743,993 2,439,996
Construction 1,465,712 1,085,712
Land 382,273 408,469
----------- -----------
44,730,547 41,862,433
Less undisbursed portion of mortgage loans 480,733 681,161
----------- -----------
44,249,814 41,181,272
Consumer and other loans:
Savings 511,498 364,434
Education 44,802 111,885
Other 4,469 8,782
----------- -----------
560,769 485,101
----------- -----------
44,810,583 41,666,373
Less:
Net deferred loan-origination fees 1,409 1,522
Allowance for loan losses 280,000 280,000
----------- -----------
281,409 281,522
----------- -----------
Loans receivable $44,529,174 $41,384,851
=========== ===========
</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 $547,000 and $543,000 at September 30, 2000 and 1999,
respectively.
The Company had loans serviced by others amounting to $7,077,655 and $6,873,192
at September 30, 2000 and 1999, respectively.
Allowance for loan losses was $280,000 at September 30, 2000 and 1999. There was
no provision for loan losses for years ended September 30, 2000 or 1999.
-23-
<PAGE>
NOTE D--LOANS RECEIVABLE - Cont'd
There was no impaired loans at September 30, 2000 and 1999. The average recorded
investment in impaired loans during the year ended September 30, 2000 and 1999
was $-0- and $8,696, respectively. The related interest income that would have
been recorded had the loans been current in accordance with their original terms
amounted to approximately $-0- and $7,000 at September 30, 2000 and 1999,
respectively. The amount of interest included in interest income on such loans
for the year ended September 30, 2000 and 1999, amounted to approximately $-0-
and $7,000, respectively.
There was no allowance for losses on foreclosed real estate at September 30,
2000 and 1999.
NOTE E--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
----------------------
<S> <C> <C>
Loans $250,874 $261,260
Investments securities 321,766 323,489
Mortgage-backed securities 27,756 32,629
-------- --------
$600,396 $617,378
======== ========
</TABLE>
NOTE F--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
----------------------
<S> <C> <C>
Land $ 74,340 $ 72,958
Building and improvements 1,000,480 448,595
Furniture and equipment 493,979 438,492
---------- --------
1,568,799 960,045
Less accumulated depreciation and amortization 486,409 438,855
---------- --------
$1,082,390 $521,190
========== ========
</TABLE>
-24-
<PAGE>
NOTE G--DEPOSITS
Deposit account balances are summarized as follows at September 30:
<TABLE>
<CAPTION>
Weighted
Average Rate
At September 30, 2000 1999
----------------------------------------------
2000 Amount % Amount %
----------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
NOW 2.49 % $ 2,635,832 4.7 % $ 2,039,278 3.8 %
Money Market 4.00 1,271,609 2.3 1,281,203 2.4
Passbook savings 3.00 7,885,991 14.0 8,473,576 16.0
----------- ---- ----------- -----
2.99 11,793,432 21.0 11,794,057 22.2
Certificates of deposit:
4.00 to 4.99% 4.87 3,957,312 7.0 15,841,502 29.8
5.00 to 5.99% 5.50 17,608,359 31.2 18,456,977 34.7
6.00 to 6.99% 6.45 16,883,234 29.9 7,046,459 13.3
7.00 to 7.99% 7.00 6,142,311 10.9 --- ---
---------- ---- ----------- -----
6.01 44,591,216 79.0 41,344,938 77.8
----------- ---- ----------- -----
5.46 % $56,384,648 100.0 % $53,138,995 100.0 %
=========== ===== =========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $3,449,658 and $2,406,000 at September 30, 2000 and
1999, respectively. Deposits over $100,000 are not federally insured.
The Company held deposits of approximately $1,794,000 and $1,648,000 for its
directors, officers and employees at September 30, 2000 and 1999, respectively.
At September 30, 2000, contractual maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Stated Year Ended September 30
Interest Rate 2001 2002 2003 2004 2005
---------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4.00 to 4.99% $ 3,015,873 $ 941,439 $ --- $ --- $ ---
5.00 to 5.99% 13,752,439 1,279,511 649,148 1,439,662 487,599
6.00 to 6.99% 9,251,332 2,118,290 3,434,537 557,482 1,521,593
7.00 to 7.99% 4,589,313 1,552,998 --- --- ---
----------- ---------- ---------- ---------- ----------
$30,608,957 $5,892,238 $4,083,685 $1,997,144 $2,009,192
=========== ========== ========== ========== ==========
</TABLE>
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Year Ended September 30
2000 1999
-------------------------
<S> <C> <C>
NOW, Money Market and Passbook savings accounts $ 415,136 $ 370,347
Certificate accounts 2,272,888 2,276,150
----------- ----------
$ 2,688,024 $2,646,497
=========== ==========
</TABLE>
-25-
<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>
2000 1999
----------------------
<S> <C> <C>
5.84% due on or before February 9, 2000 $ --- $1,000,000
5.94% due on or before March 22, 2000 --- 1,500,000
6.47% due on or before October 18, 2000 500,000 ---
6.35% due on or before December 15, 2000 1,000,000 ---
6.93% due on or before January 29, 2001 1,000,000 ---
6.87% due on or before February 5, 2001 1,000,000 ---
6.88% due on or before April 30, 2001 750,000 ---
---------- ----------
$4,250,000 $2,500,000
========== ==========
</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
2000 1999
-------------------------
<S> <C> <C>
Current $103,400 $173,500
Deferred benefit (25,400) (10,500)
-------- --------
$ 78,000 $163,000
======== ========
</TABLE>
In addition, the Company recorded deferred income tax to equity relating to
unrealized gains and losses on investment securities available-for-sale of
$19,250 and $152,067 for the years ended September 30, 2000 and 1999,
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
2000 1999
------------------------------------------
Amount % Amount %
------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense at statutory rates $84,444 34.0% $157,280 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal benefit 9,900 4.0 15,114 3.3
Tax exempt income, net of related expenses (9,859) (4.0) (9,163) (2.0)
Rate differential from federal graduated tax rates (6,444) (2.6) --- (0.0)
Other, net (41) (0.0) (231) (0.1)
------- ---- -------- ----
$78,000 31.4% $163,000 35.2%
======= ==== ======== ====
</TABLE>
-26-
<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> 2000 1999
--------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 64,100 $ 50,850
Deferred loan fees 500 560
Accrued vacation 7,400 3,710
Unearned SBIP 8,500 ---
Unrealized loss on available-for-sale securities 114,750 134,000
Deferred tax liabilities
Depreciation (40,900) (40,920)
FHLB stock dividend (45,200) (45,200)
-------- --------
NET DEFERRED TAX ASSET $109,150 $103,000
======== ========
</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, 2000 that the Bank meets all capital adequacy requirements to which it is
subject.
Based on its regulatory capital ratios at September 30, 2000 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.
-27-
<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, 2000
Total Risk-Based Capital
(to Risk Weighted Assets) $8,937 26.97 % * $2,651 8.0 % * $3,314 10.0 %
Tier 1 Capital
(to Risk Weighted Assets) 8,657 26.13 * 1,325 4.0 * 4,214 6.0
Tier 1 Capital
(to Adjusted Assets) 8,657 12.32 * 2,107 3.0 * 3,512 5.0
Tangible Capital
(to Adjusted Assets) 8,657 12.32 * 1,054 1.5 N/A N/A
As of September 30, 1999
Total Risk-Based Capital
(to Risk Weighted Assets) $8,657 28.11 * $2,464 8.0 * $3,080 10.0
Tier 1 Capital
(to Risk Weighted Assets) 8,377 27.20 * 1,232 4.0 * 4,000 6.0
Tier 1 Capital
(to Adjusted Assets) 8,377 12.56 * 2,000 3.0 * 3,334 5.0
Tangible Capital
(to Adjusted Assets) 8,377 12.56 * 1,000 1.5 N/A N/A
</TABLE>
* Greater than or equal to
Reconciliation of equity and regulatory risk-based capital is as follows at
September 30:
<TABLE>
<CAPTION>
2000 1999
------------------
(In thousands)
<S> <C> <C>
Equity $8,460 $8,149
Unrealized loss on securities, net of taxes 197 228
General valuation allowance 280 280
------ ------
Regulatory risk-based capital $8,937 $8,657
====== ======
</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 $9,500, and $9,019 for the years ended September 30, 2000 and 1999,
respectively.
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.
-28-
<PAGE>
NOTE K--EMPLOYEE BENEFITS - Cont'd
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, 2000
and 1999 was $35,543 and $21,731 respectively. The fair value of unreleased
shares based on the market price of the Company's stock was $460,896 and
$419,530 at September 30, 2000 and 1999 respectively.
The number of ESOP shares are summarized as follows at September 30:
<TABLE>
<CAPTION>
2000 1999
----------------
<S> <C> <C>
Shares released for allocation 6,708 2,236
Unreleased shares 38,012 42,484
------- ------
44,720 44,720
======= ======
</TABLE>
The Company has entered into three year employment agreements with certain
members of management. Under the agreements, the Company will pay the members
their initial base salaries, which may be increased at the discretion of the
Board of Directors. Additionally, the agreements provide for severance payments
if employment is terminated following a change in control. These payments will
be equal fo 2.99 times their average annual compensation paid during the five
years immediately preceding the change in control.
The Board of Directors adopted and the shareholders subsequently approved
(January 27, 2000) the PFSB Bancorp, Inc. Bancorp, Inc. 2000 Stock-Based
Incentive Plan ("SBIP"). The purpose of the SBIP 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 SBIP 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 SBIP 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 SBIP. The SBIP will be
administered by a committee consisting of members of the Board of Directors who
are not employees of the Company or its affiliates.
-29-
<PAGE>
NOTE K--EMPLOYEE BENEFITS - Cont'd
On April 6, 2000, the Company granted options for 44,720 shares at $10.25 per
share and awarded the 22,360 shares reserved for restricted stock awards.
The options will enable the recipient to purchase stock at the exercise price
above. The options will vest over three years following date of grant and are
exercisable for up to 10 years. No options have vested at September 30, 2000.
The restricted stock award does not require any payment by the recipient and
will vest over five years beginning after the award. The Company funded the
restricted stock award with Treasury Stock which was purchased at a price above
the fair market value of the Company's stock at the award date resulting in an
increase in additional paid-in capital of $50,316. Amortization of the award
resulted in a charge to compensation and benefit expense of $22,920 in 2000.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize, as expense over the vesting period, the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 allows entities to disclose pro forma net income and income per share as if
the fair value-based method defined in SFAS No. 123 has been applied, while
continuing to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, under which
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
The Company has elected to apply the recognition provisions of APB Opinion No.
25 and provided the pro forma disclosure provisions of SFAS No. 123. Had
compensation expense for the Company's incentive and nonstatutory stock options
been determined based upon the fair value of the grant date consistent with the
methodology prescribed under SFAS No. 123, the Company's net earnings and
diluted earnings per share would have been reduced by approximately $32,818 and
$0.04 per share for the year ended September 30, 2000.
Following is a summary of the fair values of options granted using the
Black-Sholes option-pricing model for the year ended September 30, 2000:
<TABLE>
<S> <C>
Fair value at grant date $7.23
Assumptions:
Dividend yield 0.75%
Volatility 39.37%
Risk-free interest rate 6.02%
Expected life 10 years
</TABLE>
Pro forma net earnings reflect only options granted and vested in fiscal 2000.
Therefore, the full impact of calculating compensation expense for stock options
under SFAS is not reflected in the pro forma net earnings amount presented above
because compensation expense is reflected over the options' vesting period.
NOTE L--INCOME PER SHARE
The shares used in calculation of basic and diluted income per share area as
follows:
<TABLE>
<CAPTION>
Year Ended September 30
2000 1999
-----------------------
<S> <C> <C>
Weighted average common shares outstanding 429,317 514,754
Stock options and SBIP 2,786 ---
------- -------
432,103 514,754
======= =======
</TABLE>
-30-
<PAGE>
NOTE M--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:
<TABLE>
<CAPTION>
2000 1999
----------------------
<S> <C> <C>
Undisbursed portion of mortgage loans $ 480,733 $681,161
Undisbursed portion of purchased loans 1,228,231 ---
Commitments to originate mortgage loans with variable or pending interest 392,300 787,900
rates
Commitments to originate mortgage loan with fixed interest rate of 9.25% and
8.125% at September 30, 2000 and 1999, respectively 22,000 3,500
Undisbursed portion of nonmortgage loans 7,686 10,278
---------- ----------
TOTAL $2,130,950 $1,482,839
========== ===========
</TABLE>
At September 30, 2000 and 1999 the Company had amounts on deposit at banks and
federal agencies in excess of federally insured limits of approximately
$3,504,000 and $2,027,000, respectively.
NOTE N--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, 2000, 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.
-31-
<PAGE>
NOTE N--CONVERSION TO STOCK OWNERSHIP - Cont'd
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.
NOTE O--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, 2000 and 1999, 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.
-32-
<PAGE>
NOTE O--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, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------
(Dollars in thousands)
ASSETS
<S> <C> <C> <C> <C>
Cash and due from depository institutions $ 3,792 $ 3,792 $ 2,340 $ 2,340
Investment securities available-for-sale 8,870 8,870 9,816 9,816
Investment securities held-to-maturity 7,427 7,217 7,484 7,255
Mortgage-backed securities held-to-maturity 3,099 3,008 3,650 3,574
Stock in FHLB 403 403 391 391
Loans receivable, net 44,529 44,397 41,385 41,348
Accrued interest receivable 600 600 617 617
LIABILITIES
Transaction accounts 11,793 11,793 11,794 11,794
Certificates of deposit 44,591 44,228 41,345 41,493
Advances from FHLB 4,250 4,250 2,500 2,500
Advances from borrowers for property taxes
and insurance 51 51 52 52
</TABLE>
NOTE P--COMMITMENTS AND CONTINGENCIES
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 Q--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.
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<PAGE>
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Cont'd
<TABLE>
<CAPTION>
September 30
2000 1999
-------------------------
CONDENSED BALANCE SHEET
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 358,296 $ 2,081,156
ESOP note receivable 400,038 432,079
Investment in subsidiary 8,459,542 8,149,391
Due from subsidiary 51,815 ---
Deferred taxes 8,580 ---
------------ -----------
TOTAL ASSETS $ 9,278,271 $10,662,626
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities $ 15,690 $ 17,400
Stockholders' equity 9,262,581 10,645,226
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,278,271 $10,662,626
============ =============
</TABLE>
<TABLE>
<CAPTION>
Inception
Year March 31, 1999
Ended to
September 30, September 30,
2000 1999
------------------------------
CONDENSED STATEMENT OF INCOME
<S> <C> <C>
Interest Income $ 76,821 $ 49,890
Expenses 161,367 41,536
---------- ---------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (84,546) 8,354
Equity in undistributed earnings of subsidiary 230,611 163,347
---------- ---------
INCOME BEFORE INCOME TAXES 146,065 171,701
Income taxes (benefit) (24,300) 3,400
---------- ---------
NET INCOME $ 170 365 $ 168,301
========== ========
</TABLE>
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<PAGE>
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Cont'd
<TABLE>
<CAPTION>
Inception
Year March 31, 1999
Ended To
September 30, September 30,
2000 1999
-------------------------------
CONDENSED STATEMENT OF CASH FLOWS
<S> <C> <C>
Cash flows from operating activities
Net income $ 170,365 $ 168,301
Adjustments to reconcile net income
to net cash provided by operating activities
Equity in income of the subsidiary (230,611) (163,347)
Deferred income taxes (8,580) ---
Amortization of SBIP 22,920 ---
Change to assets and liabilities
increasing (decreasing) cash flows
Due from subsidiary (51,815) ---
Increase (decrease) in accrued liabilities (1,709) 17,400
------------ ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (99,430) 22,354
Cash flows from investing activities
Purchase of common stock of the subsidiary --- (2,490,882)
------------ ------------
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)
Payments of dividends (139,041) ---
Purchase of treasury stock (1,516,429) ---
Principal collected from ESOP 32,040 15,121
------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,623,430) 4,549,684
------------ -------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (1,722,860) 2,081,156
Cash and cash equivalents at beginning of period 2,081,156 ---
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 358,296 $ 2,081,156
=========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for Income Tax $ 374 $ ---
============ ============
Noncash investing and financing activities are as follows:
Allocation of SBIP shares of common stock $ 279,500 ---
========== ===========
</TABLE>
-35-
<PAGE>
DIRECTORS AND OFFICERS
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
CORPORATE INFORMATION
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
Mexico, Missouri 65265
180 S. Johnson St.
Kahoka, Missouri 63445-0029
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<PAGE>
STOCKHOLDERS INFORMATION
The Annual Meeting of Stockholders will be held at the main office of Palmyra
Savings, 123 West Lafayette Street, Palmyra, Missouri, on January 25, 2001, at
2:00 p.m., Central Time.
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
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
ANNUAL AND OTHER REPORTS
A COPY OF THE FORM 10-KSB (WITHOUT EXHIBITS) 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).
------------------
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