<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended September 30, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 0-25355
PFSB BANCORP, INC.
(Name of small business issuer in its charter)
MISSOURI 31-1627743
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 West Lafayette Street, Palmyra, Missouri 63461
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (573) 769-2134
Securities registered pursuant to Section 12 (a) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No _____
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Check if there is no disclosure of delinquent a in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
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The issuer's gross revenues for the fiscal year ended September 30,
2000 were $4,596,423.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates was $5,493,791 based upon the average of the bid and
asked price ($12.16 per share) as quoted on the OTC Bulletin Board for December
1, 2000. Solely for purposes of this calculation, the shares held by the
directors and officers of the registrant are deemed to be held by
non-affiliates.
The number of shares outstanding of the registrant's Common Stock as of
December 1, 2000 was 451,792.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2000 Annual Report to Stockholders and of the Proxy
Statement for the 2001 Annual Meeting of Stockholders are incorporated
by reference in Parts II and III, respectively, of this Form 10-KSB
Transitional Small Business Disclosure Format (check one): Yes ____ No X
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<TABLE>
<CAPTION>
INDEX
Part I
Page
<S> <C> <C>
Item 1. Description of Business ................................................................... 3
Item 2. Description of Properties ................................................................. 27
Item 3. Legal Proceedings ......................................................................... 27
Item 4. Submission of Matters to a Vote of Securities Holders ..................................... 27
Part II
Item 5. Market for Common Equity and Related Stockholder Matters .................................. 28
Item 6. Management's Discussion and Analysis or Plan of Operation ................................. 28
Item 7. Financial Statements ...................................................................... 28
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure ....................................................................... 28
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act .............................................................. 28
Item 10. Executive Compensation .................................................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and Management ............................ 28
Item 12. Certain Relationships and Related Transactions ............................................ 29
Item 13. Exhibits and Reports on Form 8-K .......................................................... 29
</TABLE>
<PAGE>
This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on PFSB Bancorp, Inc.'s current expectations
regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Management's ability to predict results or the effect of future plans
or strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which PFSB Bancorp, Inc. operates, as well as nationwide, PFSB Bancorp, Inc.'s
ability to control costs and expenses, competitive products and pricing, loan
delinquency rates and changes in federal and state legislation and regulation.
These factors should be considered in evaluating the forward-looking statements
and undue reliance should not be placed on such statements. PFSB Bancorp, Inc.
assumes no obligation to update any forward-looking statements.
PART I
Item 1. DESCRIPTION OF BUSINESS
General
PFSB Bancorp, Inc., headquartered in Palmyra, Missouri, was formed in
November 1998 as the holding company for Palmyra Savings in connection with the
conversion of Palmyra Savings from mutual to stock form of ownership. The
conversion was completed on March 31, 1999 through the sale of 559,000 shares of
common stock by PFSB Bancorp at a price of $10.00 per share. PFSB Bancorp's sole
business activity is the ownership of all of Palmyra Savings' capital stock.
PFSB Bancorp does not transact any material business other than through its
subsidiary, Palmyra Savings. PFSB Bancorp is subject to the regulation of the
Office of Thrift Supervision and the Securities and Exchange Commission. PFSB
Bancorp is listed on the OTC Bulletin Board under the symbol PFSI.
Palmyra Savings' principal business is attracting deposits from the
general public and originating loans secured by one-to-four family residential
real estate properties located in its market area. Palmyra Savings is regulated
by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. Palmyra Savings' deposits have been federally insured by the
Federal Deposit Insurance Corporation since 1938 and are currently insured by
the Federal Deposit Insurance Corporation under the Savings Association
Insurance Fund. Palmyra Savings has been a member of the Federal Home Loan Bank
System since 1937.
Market Area
Palmyra Savings conducts business from its main office in Palmyra
(Marion County) and two branch offices located in Canton (Lewis County) and
Kahoka (Clark County). Substantially all of Palmyra Savings' depositors live in
Lewis, Clark and Marion Counties and most of Palmyra Savings' loans are secured
by properties located in these counties. Lewis, Clark and Marion Counties are
rural counties that historically have had higher unemployment and lower income
than the rest of Missouri. The U.S. Service industries represent the largest
group of employers in Lewis and Marion Counties, while farm-related businesses
are the largest employers in Clark County. Manufacturing employment is most
significant in Marion County. Industries located in the region include
chemicals, automobile parts, electric utilities, and state and local government.
Competition
Palmyra Savings faces intense competition in its primary market area
for the attraction of deposits and in the origination of loans. Its most direct
competition for deposits has historically come from the several commercial banks
operating in Palmyra Savings' primary market area and, to a lesser extent, from
other financial institutions, such as brokerage firms and insurance companies.
Particularly in times of high interest rates, Palmyra Savings has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. Palmyra
Savings' competition for loans comes primarily from the commercial banks
operating
3
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in its primary market area. Competition for deposits and the origination of
loans may limit Palmyra Savings' growth in the future.
Lending Activities
General. At September 30, 2000, Palmyra Savings' net loans receivable
totaled $44.5 million, or 63.6% of total assets. Palmyra Savings has
concentrated its lending activities on one- to four-family mortgage loans, with
these loans amounting to 86.6% of loans at September 30, 2000. Palmyra Savings
also originates multi-family, commercial real estate, land and residential
construction loans, as well as loans secured by savings accounts. In addition,
Palmyra Savings purchases participation interests in residential mortgage loans
that are primarily secured by non-owner-occupied duplex properties, multi-family
and commercial real estate loans. Purchased loan interests amounted to $7.1
million, or 15.9% of net loans, at September 30, 2000. A substantial portion of
Palmyra Savings' mortgage loan portfolio is secured by real estate located in
Missouri.
Loan Portfolio Analysis. The following table sets forth the composition
of Palmyra Savings' loan portfolio at the dates indicated. Palmyra Savings had
no concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
2000 1999
-------------------------- -----------------------
Amount Percent Amount Percent
------------ ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.......................................... $39,228 86.61% $37,600 88.79%
Multi-family................................................. 911 2.01 328 0.78
Commercial................................................... 2,744 6.06 2,440 5.76
Construction................................................. 1,466 3.24 1,086 2.56
Land......................................................... 382 0.84 408 0.96
------- ------ ------- ------
Total mortgage loans...................................... $44,731 98.76 $41,862 98.85
Consumer loans:
Education loans.............................................. 45 0.10 112 0.27
Savings account loans........................................ 511 1.13 364 0.86
Other........................................................ 4 0.01 9 0.02
------- ------ ------- ------
Total consumer loans...................................... 560 1.24 485 1.15
------- ------ ------- ------
Total loans, gross........................................ 45,291 100.00% 42,347 100.00%
====== ======
Less:
Undisbursed loan funds....................................... 481 681
Allowance for loan losses.................................... 280 280
Deferred loan fees........................................... 1 1
------- -------
Loan receivable, net...................................... $44,529 $41,385
======= =======
</TABLE>
One- to Four-Family Real Estate Loans. Palmyra Savings' primary lending
activity is the origination of loans secured by one- to four-family residences
located in its market area. Palmyra Savings also purchases participation
interests in one- to four-family mortgage loans that are primarily secured by
non-owner-occupied duplex properties located in other areas of Missouri. At
September 30, 2000, $5.6 million, or 14.2%, of Palmyra Savings' one- to
four-family loans were purchased loans. All one- to four-family mortgage loans
are held in Palmyra Savings' portfolio for long-term investment.
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Palmyra Savings' residential mortgage loans are structured as either
three- or five-year balloon loans with terms up to 30 years, or 20 years for
non-owner occupied properties. The interest rate, fixed for the balloon term, is
established by Palmyra Savings after an assessment of rates offered by
competitors. The borrower is notified in writing 30 days before the end of the
balloon term of the new interest rate that will be effective at the maturity of
the balloon term. If the borrower accepts the new rate, a modification agreement
is executed for another balloon term with an amortization schedule equal to the
original amortization term less the prior balloon term(s). Palmyra Savings'
residential mortgage loans do not have any annual interest rate adjustment
limits, but have a lifetime interest rate adjustment limit of 6%. Palmyra
Savings charges a prepayment penalty of 2% of the outstanding principal balance
if a loan that has been outstanding five years or less is paid off before
maturity. Missouri law prohibits Palmyra Savings from charging a prepayment
penalty on a loan that has been outstanding for more than five years. Palmyra
Savings' residential mortgage loans are generally underwritten, but not
documented, according to secondary market guidelines.
To a limited extent, Palmyra Savings originates mortgage loans secured
by non-owner-occupied residential properties. Most of these loans are secured by
rental properties or second residences. These loans are made on the same general
terms as loans secured by owner-occupied properties, except that loan-to-value
ratios are limited to a maximum of 75% and the terms are generally limited to no
more than 20 years.
The retention of balloon loans in Palmyra Savings' loan portfolio,
which through the use of modification agreements function like adjustable rate
mortgage loans, helps reduce Palmyra Savings' exposure to changes in interest
rates. There are, however, unquantifiable credit risks resulting from the
potential of increased costs due to changed rates to be paid by the borrower. It
is possible that during periods of rising interest rates the risk of default on
adjustable rate mortgage loans may increase as a result of repricing and the
increased payments required by the borrower. In addition, although adjustable
rate mortgage loans allow Palmyra Savings to increase the sensitivity of its
asset base to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations Palmyra Savings has no assurance that yields on
adjustable rate mortgage loans will be sufficient to offset increases in Palmyra
Savings' cost of funds. Palmyra Savings believes these risks, which have not had
a material adverse effect on Palmyra Savings to date, generally are less than
the risks associated with holding fixed-rate loans in portfolio during a rising
interest rate environment.
Palmyra Savings generally requires title insurance or an acceptable
attorney's opinion on the status of its lien on all loans where real estate is
the primary source of security. Palmyra Savings also requires that fire and
casualty insurance and, if appropriate, flood insurance be maintained in an
amount at least equal to the outstanding loan balance.
Palmyra Savings' one- to four-family residential mortgage loans
typically do not exceed 80% of the appraised value of the security property.
According to underwriting guidelines adopted by Palmyra Savings' Board of
Directors, Palmyra Savings can lend up to 95% of the appraised value of the
property securing a one- to four-family residential loan. Generally, Palmyra
Savings self insures the portion of the principal amount between 80% and 90% of
the appraised value of the security property and requires private mortgage
insurance on the portion of the principal amount that exceeds 90% of the
appraised value of the security property. An independent certified appraiser
appraises all non-owner-occupied properties and properties located outside of
Palmyra Savings' primary market area. Otherwise appraisals are performed by
either Eldon R. Mette, Palmyra Savings' President and Chief Executive Officer,
or L. Edward Schaeffer, Palmyra Savings' Chairman of the Board. Only Mr.
Schaeffer is a certified appraiser. If Mr. Mette or Mr. Schaeffer performs the
property appraisal, he will abstain from voting on the loan application.
Palmyra Savings originates fixed and adjustable rate mortgage loans
and most of the residential mortgage loans that it purchases are adjustable rate
mortgage loans.
Multi-family and Commercial Real Estate Loans. Palmyra Savings
occasionally originates and purchases mortgage loans for the acquisition and
refinancing of multi-family and commercial real estate properties. All of
Palmyra Savings' multi-family loans are purchased participation interests
secured by properties located in Missouri, and $582,000, or 21.2%, of Palmyra
Savings' commercial real estate loans are purchased participation interests. All
purchased participation interests are underwritten according to the same
standards that Palmyra Savings would use if it were originating the underlying
loans. Palmyra Savings has no written or oral commitments with any institution
to purchase a predetermined number or type of participation interests.
5
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At September 30, 2000, Palmyra Savings' commercial real estate loans
are secured by churches, storefronts, a nursing home and a restaurant, all
located in Missouri. At September 30, 2000, Palmyra Savings' largest
multi-family or commercial real estate loan that Palmyra Savings originated was
$356,000 and is secured by land located in Marion County, Missouri. The largest
purchased multi-family or commercial real estate participation interest had an
outstanding balance of $435,000 at September 30, 2000 and is secured by a
nursing home located in Shelbina, Missouri.
All multi-family loans and commercial real estate loans originated by
Palmyra Savings are three- or five-year adjustable rate balloon loans with terms
of up to 20 years. Multi-family loans and commercial real estate loans purchased
by Palmyra Savings are also adjustable rate loan generally indexed to the prime
rate and with terms of up to 25 years. Palmyra Savings requires appraisals of
all properties securing multi-family loans and commercial real estate loans. If
the property is located outside of Palmyra Savings' primary market area,
appraisals are performed by an independent appraiser designated by Palmyra
Savings, all of which are reviewed by management. Otherwise, appraisals are
prepared by either Mr. Mette or Mr. Schaeffer as described above.
Multi-family and commercial real estate lending affords Palmyra Savings
an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. However, loans secured
by these properties usually are greater in amount and are more difficult to
evaluate and monitor and, therefore, involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
income producing properties are often dependent on the successful operation and
management of the properties, repayment of these loans may be affected by
adverse conditions in the real estate market or the economy. Palmyra Savings
seeks to minimize these risks by limiting the maximum loan-to-value ratio to up
to 80% for multi-family loans (75% for commercial real estate loans) and
strictly scrutinizing the financial condition of the borrower, the cash flow of
the project, the quality of the collateral and the management of the property
securing the loan. Palmyra Savings also obtains loan guarantees from financially
capable parties based on a review of personal financial statements.
Residential Construction Loans. Palmyra Savings originates residential
construction loans to local home builders and to individuals for the
construction and acquisition of their personal residence.
Palmyra Savings' construction loans to builders generally have fixed
interest rates and are for a term of six months. Loans to builders are typically
made with a maximum loan to value ratio of 80%. These loans are usually made to
the builder before there is an identified buyer for the completed home. Palmyra
Savings lends to a limited number of local builders with whom it has long
standing relationships and limits each builder to no more than three homes under
construction at a time. At September 30, 2000, the largest amount of
construction loans outstanding to one builder was $150,000, all of which was for
speculative construction. Construction loans to individuals are made on the same
terms as Palmyra Savings' one- to four-family mortgage loans, but provide for
the payment of interest only during the construction phase, which is usually six
months. At the end of the construction phase, the loan converts to a permanent
mortgage loan.
Prior to making a commitment to fund a construction loan, Palmyra
Savings requires an appraisal of the property by a staff appraiser. Palmyra
Savings also reviews and inspects each project prior to disbursement of funds
during the term of the construction loan. Loan proceeds are disbursed after
inspection of the project based on percentage of completion.
Construction lending affords Palmyra Savings the opportunity to earn
higher interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. These loans are generally more difficult to evaluate and monitor. If
the estimate of construction cost proves to be inaccurate, Palmyra Savings may
be required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value upon completion proves to be
inaccurate, Palmyra Savings may be confronted with a project whose value is
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the payoff for the loan is dependent
on the builder's ability to sell the property prior to the time that the
construction loan is due.
6
<PAGE>
Palmyra Savings has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to residential properties. It is
also Palmyra Savings' general policy to obtain regular financial statements from
builders so that it can monitor their financial strength.
Land Loans. Palmyra Savings occasionally originates loans secured by
unimproved land, including small residential subdivisions in Palmyra Savings'
primary market area. These loans have terms of three to 20 years and generally
have adjustable interest rates. The largest land loan at that date was $97,000.
Consumer Loans. Historically, Palmyra Savings' consumer lending
activities have been limited to guaranteed education loans and savings account
loans. Palmyra Savings does not expect to become an active consumer lender, but
intends to begin engaging, to a limited extent, in direct mobile home lending
without the security of the underlying real estate. Currently, Palmyra Savings
engages in a limited amount of direct mobile home lending but only with the
security of the underlying real estate.
Palmyra Savings originates insured education loans to out-of-state
residents attending school in Missouri or to Missouri residents attending school
outside of Missouri under federally sponsored programs. Palmyra Savings receives
quarterly interest payments from the U.S. government on the outstanding loan
while the borrower is attending school. When the borrower is required to repay
the loan after graduation, Palmyra Savings sells the loan at par to the Missouri
Higher Education Loan Authority.
Palmyra Savings also offers loans secured by savings deposits at
Palmyra Savings. Generally, these loans are made at an interest rate that is 3%
above the account rate for up to 90% of the account balance and for a term of up
to five years. If the loan is secured by a certificate of deposit, the loan term
is generally matched with the remaining term on the certificate.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Loans to One Borrower. The maximum amount that Palmyra Savings may lend
to one borrower is limited by federal regulations. At September 30, 2000,
Palmyra Savings' regulatory limit on loans to one borrower was $1.3 million. At
that date, Palmyra Savings' largest amount of loans to one borrower, including
the borrower's related interests, was $628,000 and consisted of residential
mortgage loans. These loans were performing according to their original terms at
September 30, 2000.
7
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PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 2000 regarding the dollar amount of loans maturing
in Palmyra Savings' portfolio based on their contractual terms to maturity, but
does not include potential prepayments. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
becoming due within one year. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income and allowance for loans losses.
For purposes of the table, the contractual maturities of Palmyra Savings' three-
and five-year balloon mortgage loans are reported over their respective
amortization periods up to 30 years rather than as maturing at the end of the
3-year or 5-year balloon term. Given Palmyra Savings' experience with its
borrowers, Palmyra Savings believes this presentation is appropriate.
<TABLE>
<CAPTION>
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Year 10 Years Total
--------- ---------- --------- --------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...................... $ 2,402 $ 3,315 $ 3,372 $ 8,529 $ 21,610 $ 39,228
Multi-family............................. 23 51 60 186 590 910
Commercial............................... 192 211 228 568 1,545 2,744
Construction............................. 1,466 -- -- -- -- 1,466
Land..................................... 114 34 30 84 120 382
Consumer loans:
Education................................ 34 6 5 -- -- 45
Savings account loans.................... 298 78 43 8 85 512
Other.................................... 2 2 -- -- -- 4
------- ------- ------- ------- -------- --------
Total........................... $ 4,531 $ 3,697 $ 3,738 $ 9,375 $ 23,950 $ 45,291
======= ======= ======= ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2001, which have fixed interest rates and have floating or
adjustable interest rates.
Floating-
or
Fixed- Adjustable-
Rate Rates
----------- ------------
(Dollars in Thousands)
Mortgage loans:
One- to four-family...................... $ 1,718 $ 35,108
Multi-family............................. -- 887
Commercial............................... 11 2,541
Land..................................... 44 224
Consumer loans:
Education................................ 11 --
Savings account loans.................... 214 --
Other.................................... 2 --
------- --------
Total........................... $ 2,000 $ 38,760
======= ========
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Scheduled contractual principal repayments of loans do not reflect the
actual life of the loans. The average life of a loan is substantially less than
its contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give Palmyra Savings the right to declare loans immediately due
and payable in the event, among other things, that the borrower sells the real
property with the mortgage and the loan is not repaid. The average life of a
mortgage loan tends to increase, however, when current mortgage loan market
rates are substantially higher than rates on existing mortgage loans and,
conversely, tends to decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. Palmyra Savings' lending activities
follow written, non-discriminatory, underwriting standards and loan origination
procedures established by Palmyra Savings' Board of Directors and management.
Loan originations come from a number of sources. The customary sources of loan
originations are realtors, referrals and existing customers. Palmyra Savings
does not utilize mortgage brokers or other third-party originators. All loans
are approved by Palmyra Savings' Board of Directors except for savings account
loans which may be approved by a branch manager.
Loan Originations, Purchases and Sales. Palmyra Savings primarily
originates three- and five-year balloon mortgage loans with amortization terms
of up to 30 years. Occasionally, Palmyra Savings originates fully amortizing
fixed rate loans with terms of fifteen years or less.
Palmyra Savings generally retains for its portfolio all of the loans
that it originates and purchases. Occasionally, Palmyra Savings purchases
participation interests in one- to four-family mortgage loans that are primarily
secured by non-owner-occupied duplex properties, multi-family loans and
commercial real estate loans. Generally, Palmyra Savings limits its
participation interest in a loan to up to 80%. In the case of participations in
one- to four-family mortgage loans, Palmyra Savings participates 80% and the
lead lender retains the servicing rights. Palmyra Savings pays no fee on the
loans it purchases.
Palmyra Savings holds all loans for long-term investment purposes,
except for government guaranteed student loans which are sold to the Missouri
Higher Education Loan Authority at par when the borrower is required to begin
repaying the loan.
9
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The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------------
2000 1999
------------- --------------
(In thousands)
<S> <C> <C>
Total loans receivable, net, at beginning of period........................................... $ 41,385 $40,513
Loans originated:
Mortgage loans:
One- to four-family.................................................................. 8,462 $12,517
Multi-family......................................................................... 600 --
Commercial........................................................................... 791 1,509
Construction......................................................................... 1,691 1,490
Land................................................................................. 123 208
--------- ---------
Total mortgage loans........................................................ 11,667 15,724
Consumer loans:
Education............................................................................ 34 55
Savings account...................................................................... 505 296
Other................................................................................ -- 1
--------- ---------
Total consumer loans........................................................ 539 352
--------- ---------
Total loans originated............................................. 12,206 16,076
Loans purchased:
One- to four-family.................................................................. 255 1,231
Multi-family......................................................................... 598 --
Commercial........................................................................... 182 450
Construction......................................................................... 366 304
--------- ---------
Total loans purchased....................................................... 1,401 1,985
Loans sold:
Education................................................................................... (99) (43)
Principal repayments.......................................................................... (10,164) (17,232)
Increase (decrease) in other items, net....................................................... (200) 86
--------- ---------
Net increase (decrease) in loans receivable, net.............................................. 3,144 872
--------- ---------
Total loans receivable, net, at end of period................................................. $ 44,529 $41,385
========= =========
</TABLE>
Loan Commitments. Palmyra Savings issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Commitments are made in
writing on specified terms and conditions and are honored for up to 30 days from
approval. At September 30, 2000, Palmyra Savings had loan commitments totaling
$414,000, not including undisbursed portions of mortgage loans and consumer
loans of $1.7 million.
Loan Fees. In addition to interest earned on loans, Palmyra Savings
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
Palmyra Savings charges loan origination fees for fixed-rate loans
which are calculated as a percentage of the amount borrowed. In accordance with
applicable accounting procedures, loan origination fees and discount points in
10
<PAGE>
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. At September 30, 2000, Palmyra Savings had $1,000 of deferred loan fees.
Palmyra Savings recognized $-0- and $3,000 of deferred loan fees during the
years ended September 30, 2000 and 1999, respectively, in connection with loan
refinancings, payoffs, sales and ongoing amortization of outstanding loans.
Nonperforming Assets and Delinquencies. All loan payments are due on
the first day of each month. When a borrowers fails to make a required loan
payment, Palmyra Savings attempts to cure the deficiency by contacting the
borrower and seeking the payment. A late notice is mailed on the fifth day of
the month and a second late notice is mailed on the 15th day of the month. In
most cases, deficiencies are cured promptly. If a delinquency continues beyond
the 25th day of the month, additional contact is made either through additional
notices or other means and Palmyra Savings will attempt to work out a payment
schedule. While Palmyra Savings generally prefers to work with borrowers to
resolve the problems, Palmyra Savings will institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Palmyra Savings' Board of Directors is informed monthly of the amounts
of loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by Palmyra Savings.
Palmyra Savings ceases accruing interest on mortgage loans when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. Palmyra Savings does not accrue
interest on mortgage loans past due 90 days or more when the estimated value of
collateral and collection efforts are deemed insufficient to ensure full
recovery. In the case of consumer loans, Palmyra Savings continues to accrue
interest even if the loan is past due 90 days or more as the risk of loss to
Palmyra Savings is minimal because Palmyra Savings' consumer loan portfolio
consists primarily of government guaranteed education loans and savings account
loans.
11
<PAGE>
The following table sets forth information with respect to Palmyra
Savings' nonperforming assets at the dates indicated. Palmyra Savings had no
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------
2000 1999
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family............................................................ $ 151 $ 137
Commercial..................................................................... -- --
------ ------
Total mortgage loans.................................................. 151 137
Consumer loans.......................................................................... -- --
------ ------
Total........................................................................ 151 137
Accruing loans contractually past due 90 days or more................................... -- --
------ ------
Total of nonaccrual and 90 days past due loans.......................................... 151 137
Real estate owned....................................................................... 105 100
------ ------
Total nonperforming assets................................... $ 256 $ 237
====== ======
Nonaccrual and 90 days or more past due loans as a percentage........................... .34% 0.33%
of loans receivable, net
Nonaccrual and 90 days or more past due loans as a percentage of total assets......... .21% 0.21%
Nonperforming assets as a percentage of total assets.................................... .36% 0.36%
</TABLE>
Interest income that would have been recorded for 2000 had nonaccruing
loans been current in accordance with their original terms amounted to
approximately $13,000. The amount of interest included in interest income in
2000 on these loans amounted to approximately $7,000.
Real Estate Owned. Real estate acquired by Palmyra Savings as a result
of foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at fair market value
at the date of foreclosure. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At September 30, 2000, Palmyra Savings had foreclosed real estate
of $105,000.
Asset Classification. The Office of Thrift Supervision has adopted
various regulations regarding problem assets of savings institutions. The
regulations require that each insured institution review and classify its assets
on a regular basis. In addition, in connection with examinations of insured
institutions, Office of Thrift Supervision examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful can be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by Palmyra Savings.
12
<PAGE>
The aggregate amounts of Palmyra Savings' classified and special
mention assets at the dates indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
-----------------------------
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Classified assets:
Loss....................................................................... $ -- $ --
Doubtful................................................................... -- --
Substandard................................................................ 151 137
Special mention............................................................ -- --
----------- ---------
$ 151 $ 137
=========== =========
</TABLE>
At September 30, 2000, assets designated substandard consisted of five
one- to four-family mortgage loans totalling $151,000.
Allowance for Loan Losses. In originating loans, Palmyra Savings
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions.
At September 30, 2000, Palmyra Savings had an allowance for loan losses
of $280,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations. Furthermore, while Palmyra
Savings believes it has established its existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing Palmyra Savings' loan portfolio, will
not request Palmyra Savings to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect Palmyra Savings' financial condition and results of operations.
13
<PAGE>
The following table sets forth an analysis of Palmyra Savings' allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
2000 1999
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period................................................... $ 280 $ 280
Provision for loan losses.......................................................... -- --
Recoveries......................................................................... -- --
Charge-offs........................................................................ -- --
-------- --------
Allowance at end of period......................................................... $ 280 $ 280
======== ========
Allowance for loan losses as a percentage of total loans outstanding
at the end of the period........................................................ 0.62% 0.66%
Net charge offs (recoveries) as a percentage of average loans outstanding
during the period............................................................... -- --
Allowance for loan losses as a percentage of nonperforming loans
at the end of the period........................................................ 186.02% 203.75%
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
2000 1999
---------------------- -----------------------
Percent Percent
of Loans in of Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......................................... $ 164 86.61% $155 88.79%
Multi-family................................................ 18 2.01 7 0.78
Commercial.................................................. 55 6.06 49 5.76
Construction................................................ -- 3.24 1 2.56
Land........................................................ 8 0.84 8 0.96
Consumer....................................................... -- 1.24 -- 1.15
Unallocated.................................................... 35 -- 60 --
----- ------ ---- ------
Total allowance for loan losses.............................. $ 280 100.00% $280 100.00%
===== ====== ==== ======
</TABLE>
Investment Activities
Palmyra Savings is permitted under federal law to invest in various
types of liquid assets, including U.S. Government obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
Federal Home Loan Bank of Des Moines, certificates of deposit of federally
insured institutions, certain bankers' acceptances and federal funds. Within
certain regulatory limits, Palmyra Savings may also invest a portion of its
assets in commercial paper and corporate debt securities. Savings institutions
like Palmyra Savings are also required to
14
<PAGE>
maintain an investment in FHLB stock. Palmyra Savings is required under federal
regulations to maintain a minimum amount of liquid assets.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Palmyra Savings does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
All of Palmyra Savings' investment securities carry market risk insofar as
increases in market rates of interest may cause a decrease in their market
value. They also carry prepayment risk insofar as they may be called prior to
maturity in times of low market interest rates, so that Palmyra Savings may have
to invest the funds at a lower interest rate. Palmyra Savings' investment policy
does not permit engaging directly in hedging activities or purchasing high risk
mortgage derivative products. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, Palmyra Savings' liquidity position, and anticipated
cash needs and sources. The effect that the proposed investment would have on
Palmyra Savings' credit and interest rate risk and risk-based capital is also
considered. Palmyra Savings purchases investment securities to provide necessary
liquidity for day-to-day operations. Palmyra Savings also purchases investment
securities when investable funds exceed loan demand.
The following table sets forth the amortized cost and fair value of Palmyra
Savings 's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
2000 1999
---------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government agency securities....................... $ 8,870 $ 8,870 $ 9,816 $ 9,816
-------- ------- ------- -------
Total available for sale............................. 8,870 8,870 9,816 9,816
-------- ------- ------- -------
Held to maturity:
U.S. Government agency securities....................... 6,917 6,705 6,914 6,682
Municipal............................................... 510 512 570 573
Mortgage-backed securities.............................. 3,099 3,008 3,650 3,574
-------- ------- ------- -------
Total held to maturity............................... 10,526 10,225 11,134 10,829
-------- ------- ------- -------
Total................................................ $ 19,396 $ 19,095 $20,950 $20,645
======== ======== ======= =======
</TABLE>
Palmyra Savings purchases mortgage-backed securities when investable
funds exceed loan demand. All of Palmyra Savings' mortgage-backed securities are
issued or guaranteed by agencies of the U.S. Government. Accordingly, they carry
lower credit risk than mortgage-backed securities of a private issuer. However,
mortgage-backed securities carry market risk, the risk that increases in market
interest rates may cause a decrease in market value,
15
<PAGE>
and prepayment risk, the risk that the securities will be repaid prior to
maturity and that Palmyra Savings will have to reinvest the funds at a lower
interest rate.
Occasionally, Palmyra Savings invests in municipal obligations of local
entities, such as the water authority, school districts, firehouses and jail.
Generally, these obligations are not rated by a nationally recognized credit
rating service.
At September 30, 2000, Palmyra Savings did not own any securities,
other than U.S. Government and agency securities, which had an aggregate book
value in excess of 10% of PFSB Bancorp's stockholders' equity at that date.
The following table sets forth certain information regarding the
carrying value, weighted average yields and maturities or periods to repricing
of Palmyra Savings' debt securities at September 30, 2000, all of which are
available for sale. Certain U.S. Government agency obligations and municipal
obligations are exempt from state taxation, but their yields have not been
computed on a tax equivalent basis for purposes of the table.
<TABLE>
<CAPTION>
Less Than One to After Five to After
One Year Five Years Ten Years Ten Years Totals
------------------ -------------------- ------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency
securities................. $ -- -- $ 9,783 5.93% $ 5,204 5.98% $ 800 7.00% $15,787 6.00%
Municipal..................... 110 5.03% 245 5.29% 155 5.48% -- -- 510 5.29%
Mortgage-backed securities.... 3 9.09% 250 7.64% 538 6.42% 2,308 6.52% 3,099 6.60%
----- ------- ------- ------- -------
Total................ $ 113 5.14% $10,278 5.95% $ 5,897 6.01% $ 3,108 6.65% $19,396 6.07%
===== ======= ======= ======= =======
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for Palmyra
Savings' lending and other investment activities. In addition, Palmyra Savings
also generates funds internally from loan principal repayments and prepayments
and maturing investment securities. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and money market
conditions. Palmyra Savings may use borrowings from the Federal Home Loan Bank
of Des Moines to compensate for reductions in the availability of funds from
other sources. Presently, Palmyra Savings has no other borrowing arrangements.
Deposit Accounts. Nearly all of Palmyra Savings' depositors reside in
Missouri. Palmyra Savings' deposit products include money market accounts,
passbook accounts, and term certificate accounts. Deposit account terms vary
with the principal difference being the minimum balance deposit, early
withdrawal penalties and the interest rate. Palmyra Savings reviews its deposit
mix and pricing weekly. Palmyra Savings does not utilize brokered deposits, nor
has it aggressively sought jumbo certificates of deposit.
Palmyra Savings believes it is competitive in the interest rates it
offers on its deposit products. Palmyra Savings determines the rates paid based
on a number of factors, including rates paid by competitors, Palmyra Savings'
need for funds and cost of funds, borrowing costs and movements of market
interest rates.
In the unlikely event Palmyra Savings is liquidated, depositors will be
entitled to full payment of their deposit accounts before any payment is made to
PFSB Bancorp as the sole stockholder of Palmyra Savings.
16
<PAGE>
The following table indicates the amount of Palmyra Savings' jumbo
certificate accounts by time remaining until maturity as of September 30, 2000.
Jumbo certificate accounts have principal balances of $100,000 or more.
Certificates
Maturity Period of Deposits
--------------- --------------
(In thousands)
Three months or less.......................... $ 206
Over three through six months................. 784
Over six through twelve months................ 1,052
Over twelve months............................ 1,408
------
Total................................ $3,450
======
Deposit Flow. The following table sets forth the balances, with
interest credited, and changes in dollar amounts of deposits in the various
types of accounts offered by Palmyra Savings between the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
2000 1999
---------------------------------- -----------------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
--------- ------------ ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Passbook accounts............................. $ 7,886 13.99% (588) $ 8,474 15.94%
NOW accounts.................................. 2,636 4.67 597 2,039 3.84
Money market deposits......................... 1,272 2.26 (9) 1,281 2.41
Fixed-rate certificates maturing:
Within 1 year........................ 30,609 54.28 6,745 23,864 44.91
After 1 year, but within 2 years..... 5,892 10.45 (3,232) 9,124 17.17
After 2 years, but within 5 years ... 8,090 14.35 (267) 8,357 15.73
------- ------- ------ ------- ------
Total....................... $56,385 100.00% $3,246 $53,139 100.00%
======= ======= ====== ======= ======
</TABLE>
Time Deposits by Maturities. The following table sets forth the amount
of time deposits in Palmyra Savings categorized by maturities at September 30,
2000.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------
After After
One to Two to Three After
Less than Two Three to Four Four
One Year Years Years Years Years Total
---------- -------- -------- --------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
4.00 - 4.99%.................................. $ 3,016 $ 941 $ -- $ -- $ -- $ 3,957
5.00 - 5.99%.................................. 13,752 1,280 649 1,440 488 17,609
6.00 - 6.99%.................................. 9,252 2,118 3,435 557 1,521 16,883
7.00 - 7.99%.................................. 4,589 1,553 -- -- -- 6,142
------- ------- ------- ------- ------- -------
Total........................................ $30,609 $ 5,892 $ 4,084 $ 1,997 $ 2,009 $44,591
======= ======= ======= ======= ======= =======
</TABLE>
17
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits in
Palmyra Savings classified by rates as of the dates indicated.
At September 30,
--------------------
2000 1999
---------- ---------
(In thousands)
4.00 - 4.99%................................... $ 3,957 $15,842
5.00 - 5.99%................................... 17,609 18,457
6.00 - 6.99%................................... 16,883 7,046
7.00 - 7.99%................................... 6,142 --
-------- -------
Total................................. $ 44,591 $41,345
======== =======
Deposit Activity. The following table sets forth the deposit activity of
Palmyra Savings for the periods indicated.
Year Ended
September 30,
---------------------
2000 1999
---------- ----------
(In thousands)
Beginning balance............................... $ 53,139 $52,724
Net withdrawals
before interest credited....................... 1,245 (1,480)
Interest credited............................... 2,001 1,895
Net increase in deposits........................ 3,246 415
-------- -------
Ending balance.................................. $ 56,385 $53,139
======== =======
Borrowings. Palmyra Savings has the ability to use advances from the
Federal Home Loan Bank of Des Moines to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Des
Moines functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
Federal Home Loan Bank of Des Moines, Palmyra Savings is required to own capital
stock in the Federal Home Loan Bank of Des Moines and is authorized to apply for
advances on the security of the capital stock and certain of its mortgage loans
and other assets, principally securities that are obligations of, or guaranteed
by, the U.S. Government or its agencies, provided certain creditworthiness
standards have been met. Advances are made under several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. At September 30, 2000, Palmyra Savings had an
available credit line of $24.8 million from the Federal Home Loan Bank of Des
Moines under which Palmyra Savings had outstanding advances of $4.3 million.
18
<PAGE>
The following tables set forth certain information regarding Palmyra
Savings' use of Federal Home Loan Bank of Des Moines advances during the periods
and at the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
2000 1999
----------- ----------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of advances outstanding at any month end........................... $ 4,250 $2,500
Approximate average short-term advances outstanding............................... 3,519 423
Approximate weighted average rate paid on advances................................ 6.33% 4.33%
</TABLE>
At September 30,
--------------------
2000 1999
-------- ---------
(Dollars in thousands)
Balance outstanding at end of period................... $ 4,250 $2,500
Weighted average rate paid on advances................. 6.72% 5.90%
Subsidiary Activities
PFSB Bancorp's sole subsidiary is Palmyra Savings. Palmyra Savings has one
subsidiary, PSA Service Corporation. In 1981 Palmyra Savings formed PSA Service
Corporation as a wholly owned subsidiary to sell mortgage life insurance to
Palmyra Savings' borrowers. PSA Service Corporation also offers safe deposit box
services in Palmyra Savings' Canton branch office. Under Office of Thrift
Supervision regulations, Palmyra Savings generally may invest up to 3% of its
assets in service corporations, provided that at least one-half of investment in
excess of 1% is used primarily for community, inner-city and community
development projects.
Personnel
As of September 30, 2000, Palmyra Savings had 18 full-time employees and no
part-time employees, none of whom is represented by a collective bargaining
unit. Palmyra Savings believes its relationship with its employees is good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, PFSB Bancorp is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision. Palmyra Savings is subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator, and the Federal Deposit Insurance Corporation, as
the deposit insurer. Palmyra Savings is a member of the Federal Home Loan Bank
System and, with respect to deposit insurance, of the Savings Association
Insurance Fund managed by the Federal Deposit Insurance Corporation. Palmyra
Savings must file reports with the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation concerning its activities and financial condition
in addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The Office of Thrift Supervision and/or the Federal Deposit
Insurance Corporation conduct periodic examinations to test Palmyra Savings'
safety and soundness and compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate
19
<PAGE>
loan loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or the Congress, could have a material
adverse impact on PFSB Bancorp, Palmyra Savings and their operations. Certain of
the regulatory requirements applicable to Palmyra Savings and to PFSB Bancorp
are referred to below or elsewhere in this report. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth in this report does not purport to be a complete description
of such statutes and regulations and their effects on Palmyra Savings and PFSB
Bancorp.
Holding Company Regulation
PFSB Bancorp is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as PFSB Bancorp was not generally restricted as to the
types of business activities in which it may engage, provided that Palmyra
Savings continued to be a qualified thrift lender. See "Federal Savings
Institution Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides
that no company may acquire control of a savings association after May 4, 1999
unless it engages only in the financial activities permitted for financial
holding companies under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies that
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing,
or subject to an application filed, prior to May 4, 1999, such as PFSB Bancorp,
so long as Palmyra Savings continues to comply with the QTL Test. Upon any non-
supervisory acquisition by PFSB Bancorp of another savings institution or
savings bank that meets the qualified thrift lender test and is deemed to be a
savings institution by the Office of Thrift Supervision, PFSB Bancorp would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain activities authorized by Office of Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of PFSB Bancorp and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. Palmyra Savings must
notify the Office of Thrift Supervision 30 days before declaring any dividend to
PFSB Bancorp. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
20
<PAGE>
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of the interest rate risk capital charge. At September
30, 2000, Palmyra Savings met each of its capital requirements.
The following table presents Palmyra Savings' capital position at September
30, 2000.
<TABLE>
<CAPTION>
Capital
Excess ----------------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------------------ -------------- ------------------ ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............... $ 8,657 $ 1,054 $ 7,603 12.32% 1.5
Core (Leverage)........ 8,657 1,325 7,332 26.13% 4.0
Risk-based............. 8,937 2,651 6,286 26.97% 8.0
</TABLE>
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator for an
institution that is
21
<PAGE>
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the Office of Thrift Supervision within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. Palmyra Savings is a member of the Savings
Association Insurance Fund. The Federal Deposit Insurance Corporation maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of three subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semiannually by the Federal Deposit Insurance Corporation and currently range
from zero basis points for the healthiest institutions to 27 basis points for
the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the Savings Association
Insurance Fund. During 1999, FICO payments for Savings Association Insurance
Fund members approximated 6.1 basis points, while Bank Insurance Fund members
paid 1.2 basis points. By law, there is equal sharing of FICO payments between
Savings Association Insurance Fund and Bank Insurance Fund members beginning on
January 1, 2000.
Palmyra Savings was not required to pay any premiums for fiscal 2000.
Payments toward the FICO bonds amounted to $11,000. The Federal Deposit
Insurance Corporation has authority to increase insurance assessments. A
significant increase in Savings Association Insurance Fund insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of Palmyra Savings. Management cannot predict what insurance
assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of Palmyra Savings does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At September
30, 2000, Palmyra Savings' limit on loans to one borrower was $1.3 million , and
Palmyra Savings' largest aggregate outstanding balance of loans to one borrower
was $628,000.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2000, Palmyra Savings maintained 81% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded
22
<PAGE>
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. Under
current regulation, an application to and the prior approval of the Office of
Thrift Supervision is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under Office of Thrift Supervision regulations (i.e., generally, examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with Office of Thrift Supervision. If an
application is not required, the institution must still provide prior notice to
Office of Thrift Supervision of the capital distribution if, like Palmyra
Savings, it is a subsidiary of a holding company. In the event Palmyra Savings'
capital fell below its regulatory requirements or the Office of Thrift
Supervision notified it that it was in need of more than normal supervision,
Palmyra Savings' ability to make capital distributions could be restricted. In
addition, the Office of Thrift Supervision could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the Office of Thrift Supervision determines that such
distribution would constitute an unsafe or unsound practice.
Liquidity. Palmyra Savings is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the Office of Thrift Supervision to any amount within the range
of 4% to 10%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. Palmyra Savings' liquidity ratio for September 30, 2000
was 24.14%, which exceeded the applicable requirements. Palmyra Savings has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
Palmyra Savings' latest quarterly thrift financial report. The assessments paid
by Palmyra Savings for the fiscal year ended September 30, 2000 totaled 25,000.
Transactions with Related Parties. Palmyra Savings' authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including PFSB Bancorp and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
Palmyra Savings' authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans Palmyra Savings may make to insiders based, in
part, on Palmyra Savings' capital position and requires certain board approval
procedures to be followed.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
23
<PAGE>
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
Federal Home Loan Bank System
Palmyra Savings is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. Palmyra
Savings, as a member of the Federal Home Loan Bank, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
Palmyra Savings was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at September 30, 2000 of $402,900.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, Palmyra Savings' net interest income
would likely also be reduced. Recent legislation has changed the structure of
the Federal Home Loan Banks funding obligations for insolvent thrifts, revised
the capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $42.8 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $42.8 million, the reserve requirement is $1.284
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $42.8
million. The first $5.5 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. At September 30, 2000, Palmyra Savings complied with the foregoing
requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Office of Thrift
Supervision regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions nor does it limit
24
<PAGE>
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the Office
of Thrift Supervision, in connection with its examination of an institution, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of applications by such
institution. The Community Reinvestment Act requires public disclosure of an
institution's Community Reinvestment Act rating. Palmyra Savings' latest
Community Reinvestment Act rating, received from the Office of Thrift
Supervision was "Satisfactory."
FEDERAL AND STATE TAXATION
Federal Taxation
General. PFSB Bancorp and Palmyra Savings report their income using the
accrual method of accounting and are taxed under federal income tax laws in the
same manner as other corporations with some exceptions, including particularly
Palmyra Savings' reserve for bad debts discussed below. PFSB Bancorp's and
Palmyra Savings' tax years end on September 30 of each year. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to Palmyra Savings or
PFSB Bancorp.
Bad Debt Reserve. Historically, savings institutions such as Palmyra
Savings which met certain definitional tests primarily related to their assets
and the nature of their business were permitted to establish a reserve for bad
debts and to make annual additions thereto, which may have been deducted in
arriving at their taxable income. Palmyra Savings' deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on Palmyra
Savings' actual loss experience, or a percentage equal to 8% of Palmyra Savings'
taxable income, computed with certain modifications and reduced by the amount of
any permitted additions to the non-qualifying reserve. Due to Palmyra Savings'
loss experience, Palmyra Savings generally recognized a bad debt deduction equal
to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a portion
of their bad debt reserves added since the base year, defined as the last
taxable year beginning before January 1, 1988. Palmyra Savings has no post-1987
reserves that would be recaptured. For taxable years beginning after December
31, 1995, Palmyra Savings's bad debt deduction will be determined under the
experience method using a formula based on actual bad debt experience over a
period of years. The unrecaptured base year reserves will not be recaptured as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be treated
under the provisions of present law referred to below that require recapture in
the case of certain excess distributions to Stockholders.
Distributions. To the extent that Palmyra Savings makes "nondividend
distributions" to PFSB Bancorp, the distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987, or a lesser amount if Palmyra Savings' loan portfolio decreased since
December 31, 1987, and then from the supplemental reserve for losses on loans.
An amount based on the supplemental reserve for loan losses will be included in
Palmyra Savings' taxable income. Nondividend distributions include distributions
in excess of Palmyra Savings' current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Palmyra Savings' current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from Palmyra Savings' bad
debt reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
conversion, Palmyra Savings makes a "nondividend distribution," then
approximately one and one-half times the amount based on the supplemental
reserve for loan losses would be includable in gross income for federal income
tax purposes, assuming a 34% corporate federal income tax rate. Palmyra Savings
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserve.
25
<PAGE>
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a
tax on alternative minimum taxable income at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the alternative minimum
taxable income. In addition, only 90% of alternative minimum taxable income can
be offset by net operating loss carry-overs. Alternative minimum taxable income
is increased by an amount equal to 75% of the amount by which Palmyra Savings'
adjusted current earnings exceeds its alternative minimum taxable income
determined without regard to this preference and prior to reduction for net
operating losses. For taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of
alternative minimum taxable income (with certain modification) over $2.0 million
is imposed on corporations, including Palmyra Savings, whether or not an
alternative minimum tax is paid.
Dividends-Received Deduction. PFSB Bancorp may exclude from its income
100% of dividends received from Palmyra Savings as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which PFSB Bancorp and Palmyra Savings will not file a consolidated tax
return, except that if PFSB Bancorp or Palmyra Savings owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
Audits. The Internal Revenue Service has not audited Palmyra Savings'
federal income tax returns for the past five years.
Missouri Taxation
Missouri-based thrift institutions, like Palmyra Savings, pay a special
financial institutions tax at the rate of 7% of net income, without regard to
net operating loss carryforwards. This tax is in lieu of certain other state
taxes on thrift institutions, on their property, capital or income, except taxes
on tangible personal property owned by Palmyra Savings and held for lease or
rental to others and on real estate, contributions paid to the Unemployment
Compensation Law of Missouri, social security taxes, sales taxes and use taxes.
In addition, Palmyra Savings is entitled to a credit against this tax for all
taxes paid to the State of Missouri or any political subdivision, except taxes
on tangible personal property owned by Palmyra Savings and held for lease or
rental to others and on real estate, contributions paid under the Unemployment
Compensation Law of Missouri, social security taxes, sales and use taxes, and
taxes imposed by the Missouri Financial Institutions Tax Law. Missouri thrift
institutions do not pay the regular corporate income tax. Palmyra Savings' state
income tax returns have not been audited for the past five years.
As a Missouri corporation, the Company is subject to annual franchise
and income taxes imposed by the State of Missouri. Franchise taxes are assessed
at a rate of 1/20 of 1% of the par value of outstanding shares and surplus.
Income taxes are assessed at a rate of 6.25% of federal taxable income derived
from Missouri sources.
For additional information regarding taxation, see Note I of Notes to
Consolidated Financial Statements contained in the Annual Report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of PFSB Bancorp and Palmyra Savings.
<TABLE>
<CAPTION>
Name Age (1) Position
---- --------- ------------
<S> <C> <C>
Eldon R. Mette.................... 63 President and Chief Executive Officer of PFSB Bancorp and
Palmyra Savings
Ronald L. Nelson.................. 47 Vice President, Treasurer and Secretary of PFSB Bancorp and
Palmyra Savings
</TABLE>
----------------------------
(1) As of September 30, 2000
26
<PAGE>
The executive officers of PFSB Bancorp and Palmyra Savings are elected
annually and hold office until their successors have been elected and qualified
or until they are removed or replaced.
Eldon R. Mette has been employed with Palmyra Savings since 1969.
Before becoming President in January 1999, Mr. Mette served as Executive Vice
President since September 1969.
Ronald L. Nelson has been employed with Palmyra Savings since 1973. He
has served as Vice President and Treasurer since 1978, and secretary since 1999.
ITEM 2. DESCRIPTION OF PROPERTIES
Properties
The following table sets forth information relating to Palmyra Saving's
offices as of September 30, 2000.
<TABLE>
<CAPTION>
Year Net Book Owned/ Approximate
Location Opened Value(1) Leased Square Footage
------------------------------------ --------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Main Office 1975 $194,989 Owned 2,816
-----------
123 W. Lafayette Street
Palmyra, Missouri
Branch Offices 1992 235,880 Owned 2,904
--------------
600 Washington Street(2)
Canton, Missouri
180 S. Johnson Street (2) 1976 651,521 Owned 2,484
Kahoka, Missouri
</TABLE>
--------------
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by Palmyra Savings and PSA Service Corporation.
(2) Location of an automated teller machine.
ITEM 3. LEGAL PROCEEDINGS
PFSB Bancorp is not a party to any pending legal proceedings.
Periodically, there have been various claims and lawsuits involving Palmyra
Savings, such as claims to enforce liens, condemnation proceedings on properties
in which Palmyra Savings holds security interests, claims involving the making
and servicing of real property loans and other issues incident to Palmyra
Savings' business. Palmyra Savings is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of Palmyra Savings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information regarding the market for PFSB Bancorp's common equity
and related stockholder matters is incorporated herein by reference to PFSB
Bancorp's 2000 Annual Report to Stockholders on page 2.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information regarding management's discussion and analysis of
financial condition and results of operation is incorporated herein by reference
to PFSB Bancorp's 2000 Annual Report to Stockholders on pages 5 through 11.
ITEM 7 FINANCIAL STATEMENTS
The information regarding financial statements is incorporated herein
by reference to PFSB Bancorp's 2000 Annual Report to Stockholders on pages 12
through 35.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information regarding change in accountants is incorporated herein
by reference to PFSB Bancorp's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on January 25, 2001 at page 8.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information relating to the directors and officers of PFSB Bancorp
and information regarding compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to PFSB Bancorp's Proxy Statement for the 2001
Annual Meeting of Stockholders to be held on January 25, 2001 at pages 4, 5 and
8 and to Part I, Item 1, "Business--Executive Officers of the Registrant" of
this report.
ITEM 10. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein
by reference to PFSB Bancorp's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on January 25, 2001 at pages 6 through 8.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to PFSB Bancorp's
Proxy Statement for the 2001 Annual Meeting of Stockholders to be held on
January 25, 2001 at page 8.
28
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to PFSB Bancorp's Proxy
Statement for the 2001 Annual Meeting of Stockholders to be held on January 25,
2001 at page 8.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report by means
of incorporation to PFSB Bancorp's 1999 Annual Report to
Stockholders:
. Independent Auditors' Report
. Consolidated Statements of Financial Condition as
of September 30, 2000 and 1999
. Consolidated Statements of Income for the Years
Ended September 30, 2000 and 1999
. Consolidated Statements of Equity for the Years
Ended September 30, 2000 and 1999
. Consolidated Statements of Cash Flows for the Years
Ended September 30, 2000 and 1999
. Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they
are not required or applicable, or the required information
is shown in the consolidated financial statements or the
notes thereto.
(3) Exhibits
3.1 Articles of Incorporation of PFSB Bancorp, Inc.(1)
3.2 Bylaws of PFSB Bancorp, Inc.(1)
4.0 Form of Stock Certificate of PFSB Bancorp, Inc.(1)
10.1 Employment Agreement between PFSB Bancorp, Inc.,
Palmyra Savings and Eldon R. Mette(2)
10.2 Employment Agreement between PFSB Bancorp, Inc.,
Palmyra Savings and Ronald L. Nelson(2)
10.3 PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan
(3)
13.0 PFSB Bancorp, Inc. 2000 Annual Report to
Stockholders
21.0 Subsidiary information is incorporated herein by
reference to Part I, Item 1, "Business--Subsidiary
Activities"
23.0 Consent of Moore, Horton & Carlson, P.C.
27.0 Financial Data Schedule
--------------------
29
<PAGE>
(1) Incorporated herein by reference from the Exhibits to Form
SB-2, Registration Statement and amendments thereto,
initially filed on December 18, 1998, Registration No. 333-
69191.
(2) Incorporated herein by reference from the exhibits to the
Form 10-QSB filed May 17, 1999.
(3) Incorporated herein by reference from the Definitive Proxy
Statement for the 2000 Annual Meeting of Stockholders, as
filed on December 15, 1999.
(b) Reports on Form 8-K
None.
30
<PAGE>
CONFORMED
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PFSB BANCORP, INC.
Date: December 21, 2000 By: /s/ Eldon R. Mette
-----------------------------------
Eldon R. Mette
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Eldon R. Mette President and Chief Executive December 21, 2000
------------------------------------
Eldon R. Mette Officer (principal executive officer)
/s/ Ronald L. Nelson Vice President, Secretary and December 21, 2000
------------------------------------
Ronald L. Nelson Treasurer (principal financial and
accounting officer)
Chairman of the Board December __, 2000
------------------------------------
L. Edward Schaeffer
/s/ Glenn J. Maddox Director December 21, 2000
------------------------------------
Glenn J. Maddox
/s/ Albert E. Davis Director December 21, 2000
------------------------------------
Albert E. Davis
/s/ Robert M. Dearing Director December 21, 2000
------------------------------------
Robert M. Dearing
/s/ James D. Lovegreen Director December 21, 2000
------------------------------------
James D. Lovegreen
/s/ Donald L. Slavin Director December 21, 2000
------------------------------------
Donald L. Slavin
</TABLE>
31
