<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission File Number 0-24084
SHO-ME FINANCIAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 44-0363938
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization
109 N. Hickory Street, Mt. Vernon, Missouri 65712
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (417) 466-2171
__________________________________
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-K. [ ]
As of March 14, 1997, the Registrant had 1,538,325 shares of Common Stock
issued and outstanding.
The Registrant had revenues of $22.6 MM.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the average of the bid and asked price
of such stock as of March 14, 1997, was $34.7 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended December 31, 1996.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual Meeting of
Stockholders to be held in 1997.
<PAGE> 2
PART I
ITEM 1.DESCRIPTION OF BUSINESS
GENERAL
Sho-Me Financial Corp. (the "Company"), a Delaware corporation, was
organized to act as the holding company for 1st Savings Bank, f.s.b. ("1st
Savings" or the "Bank") upon completion of the Bank's conversion from the
mutual to the stock form of organization (the "Conversion"). The Company
received approval from the Office of Thrift Supervision to acquire all of the
common stock of the Bank to be outstanding upon completion of the Conversion.
The Conversion was completed on June 28, 1994. All references to the Company,
unless otherwise indicated, at or before June 28, 1994 refer to the Bank and
its subsidiary on a consolidated basis. The Company's Common Stock is quoted
on the National Association of Securities Dealers Automated Quotations
("Nasdaq") National Market System under the symbol "SMFC".
At December 31, 1996, the Company had total assets of $298.0 million,
deposits of $182.0 million, Federal Home Loan Bank ("FHLB") advances of $84.1
million and stockholders' equity of $30.0 million.
The Bank, the Company's only operating subsidiary, was originally chartered
in 1888 as a Missouri-chartered financial institution headquartered in Mt
Vernon, Missouri. In 1993 the Bank converted to a federally chartered mutual
savings bank. As indicated above, the Bank converted to stock form in 1994. The
Bank is a member of the Federal Home Loan Bank System and its deposits are
insured up to applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC") and are backed by the full faith and credit of the United States.
Due to this, the Bank and Company are subject to comprehensive regulation and
examination by the Office of Thrift Supervision ("OTS") and the FDIC. See
"Regulation."
The principal business of the Bank consists of attracting retail deposits
from the general public and using such deposits along with wholesale funding
from the Federal Home Loan Bank of Des Moines ("FHLB") to invest primarily in
one- to four-family residential mortgage loans. To a lesser extent, the Bank
also originates multi-family, commercial real estate, construction, commercial
and consumer loans. The Bank also purchases mortgage-backed securities and
invests in U.S. Government and agency obligations and other permissible
investments. At December 31, 1996, 85.7% of the Company's assets were loans
receivable. See "Lending Activities - Originations, Purchases, Sales and
Servicing of Loans and Mortgage-Backed Securities."
The Company's revenues are derived primarily from interest earned on
loans, mortgage-backed securities and investments and, to a lesser extent, from
service charges, loan fees, lease income, dividends and loan servicing fee
income.
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The Company offers a variety of deposit accounts having a wide range of
interest rates and terms, which generally includes several types of savings and
checking accounts, IRA's, and certificates of deposit with terms typically
ranging from 91 days to five years. The Company only solicits deposits in its
primary market area and does not accept brokered deposits.
The executive offices of the Company are located at 109 N. Hickory Street, Mt.
Vernon, Missouri 65712, and its telephone number at that address is (417)
466-2171.
FORWARD LOOKING STATEMENTS
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
MARKET AREA
1st Savings' primary market area covers all or a portion of Barry,
Cedar, Christian, Greene, Lawrence, Polk, Stone, and Taney Counties in
southwest Missouri, which are serviced through its headquarters in Mount Vernon
and seven additional full service offices located in Aurora, Bolivar, Republic,
El Dorado Springs, Mount Vernon and Springfield, Missouri. One of the Bank's
two Springfield offices was opened in January of 1996.
Based on the U.S. Bureau of the Census population estimates as of July
1, 1995, the Company's market area had a population of approximately 426,000,
as compared to an approximate population of 377,000 at the end of 1990. The
Census data indicates that the population of the Company's market area
increased by 49,000 people, or 12.9% over the last 4 1/2 years which is a
higher rate than the state average of 4.0%.
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The economic well-being of the Company's market area is not reliant on
a single industry. Significant industry segments include tourism, health care,
light manufacturing, and financial services. Major employers include St.
John's Regional Health Center, Cox Medical Centers, Bass Pro Shops, Prime, Inc.
Trucking and various public organizations.
LENDING ACTIVITIES
GENERAL. 1st Savings has been and continues to be a local
community-oriented financial institution which provides a variety of financial
services to meet the depository and credit needs of the communities which it
serves. The Company attracts deposits from its local communities and uses
these deposits along with FHLB advances to fund loans, which are typically
secured by properties located within our primary market area.
Since the Company's stock Conversion, it has focused on increasing its
assets through loan growth. Growth has occurred as a result of increased loan
originations and a reduction in the sale of fixed rate mortgage loans to the
secondary market. Loan originations have increased as a result of enhanced
marketing efforts, expanded product lines, more competitive pricing and the
opening of a loan production office in Springfield, which was merged into the
new Springfield office in January of 1996. In 1996, the Company originated
$118.3 million mortgage and installment loans as compared to $104.6 million and
$84.4 million in 1995 and 1994, respectively.
The Company's primary focus in lending activities is on the
origination of loans secured by mortgages on one- to four-family residences.
To a lesser extent, the Company originates loans secured by multi-family, land,
construction, and commercial real estate as well as business and consumer
loans. The Company has also occasionally purchased a limited amount of whole
loans or loan participation interests originated by other lenders. At December
31, 1996, loans receivable totalled $255.5 million which constituted 85.7% of
the Company's total assets. Approximately $18.5 million of these loans
receivable were purchased from other lenders.
The Executive Committee of the Bank, comprised of the President and
the Executive Vice President, has the responsibility for the supervision of
the loan portfolio with an overview provided by the full Board of Directors.
Loans may be approved by certain officers or the Executive Committee, depending
on the circumstances and the size of the loan, with all loans subject to
ratification by the full Board of Directors. Loans in excess of $500,000
require board approval prior to the closing of the loan. In addition,
foreclosure actions or the taking of deeds-in-lieu of foreclosure are subject
to oversight by the Board of Directors.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real
estate project, is generally the greater of 15% of unimpaired capital and
surplus or $500,000. See "Regulation - Federal Regulation of Savings Banks."
At December 31, 1996, the maximum amount which the Bank could loan to any
one borrower and the borrower's related entities was approximately $4.0
million. At December 31, 1996, the Bank had no loans which exceeded this
limit.
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LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------- ---------------------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------- --------------------------------------- ------------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- -----------------
One- to four-family . . . . . . $204,522 76.94% $170,145 76.23% $122,807 74.64% $ 76,008 67.47% $67,473 67.67%
Multi-family . . . . . . . . . . 21,475 8.08 21,012 9.41 16,027 9.74 12,451 11.05 9,891 9.92
Commercial . . . . . . . . . . . 11,092 4.17 6,111 2.74 4,297 2.61 7,745 6.88 10,009 10.04
Construction and
development . . . . . . . . . . 14,970 5.63 15,637 7.01 13,012 7.91 8,786 7.80 6,304 6.32
-------- ------ -------- ----- -------- ------ -------- ------ ------- ------
Total real estate loans . . . 252,059 94.82 212,905 95.39 156,143 94.90 104,990 93.20 93,677 93.95
======== ------ -------- ----- -------- ------ -------- ------ ------- ------
Other Loans:
- -----------
Consumer Loans:
Deposit account . . . . . . . . 1,235 .46 1,244 .56 1,155 .70 1,296 1.15 1,189 1.19
Student . . . . . . . . . . . . -- -- -- -- 34 .02 73 .06 94 .10
Automobile . . . . . . . . . . 6,410 2.41 5,348 2.40 4,416 2.69 3,823 3.39 2,985 2.99
Home improvement, second
mortgages and mobile homes. . 1,423 .54 598 .27 428 .26 404 .36 553 .55
Other . . . . . . . . . . . . . 1,204 .45 1,221 .54 1,122 .68 558 .50 15 .02
-------- ------ -------- ----- -------- ------ -------- ------ ------- ------
Total consumer loans . . . . 10,272 3.86 8,411 3.77 7,155 4.35 6,154 5.46 4,836 4.85
Commercial business loans . . . 3,493 1.32 1,874 .84 1,240 .75 1,509 1.34 1,201 1.20
-------- ------ -------- ----- -------- ------ -------- ------ ------- ------
Total other loans . . . . . . 13,765 5.18 10,285 4.61 8,395 5.10 7,663 6.80 6,037 6.05
-------- ------ -------- ----- -------- ------ -------- ------ ------- ------
Total loans before net
items . . . . . . . . . . . 265,824 100.00% 223,190 100.00% 164,538 100.00% 112,653 100.00% 99,714 100.00%
====== ====== ====== ====== ======
Less:
- ----
Loans in process . . . . . . . . 8,093 6,693 8,803 4,441 3,101
Net deferred fees and
discounts . . . . . . . . . . . 437 363 281 142 198
Allowance for losses . . . . . . 1,824 1,689 1,614 1,542 1,148
-------- -------- -------- -------- -------
Total loans receivable, net . $255,470 $214,445 $153,840 $106,528 $95,267
======== ======== ======== ======== =======
</TABLE>
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<PAGE> 6
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- -------- --------- ------- --------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- ----------------
Real estate:
One- to four-family(1) . . . . . . $33,804 12.71% $ 25,130 11.26% $ 5,700 3.46% $ 5,091 4.52% $11,722 11.76%
Multi-family . . . . . . . . . . . 527 .20 568 .25 -- -- -- -- 2 --
Commercial . . . . . . . . . . . . 194 .07 197 .09 218 .13 3,850 3.42 5,107 5.12
Construction and development . . . 14,076 5.30 15,039 6.74 12,628 7.68 8,786 7.80 6,304 6.32
-------- ------ -------- ------ -------- ------ -------- ------ ------ ------
Total fixed-rate real
estate loans . . . . . . . . . 48,601 18.28 40,934 18.34 18,546 11.27 17,727 15.74 23,135 23.20
Consumer . . . . . . . . . . . . . . 10,143 3.82 8,388 3.76 7,155 4.35 6,154 5.46 4,836 4.85
Commercial business . . . . . . . . 1,293 .49 1,178 .53 679 .41 1,126 1.00 1,065 1.07
-------- ------ -------- ------ -------- ------ -------- ------ ------ ------
Total fixed-rate loans . . . . . 60,037 22.59 50,500 22.63 26,380 16.03 25,007 22.20 29,036 29.12
-------- ------ -------- ------ -------- ------ -------- ------ ------ ------
Adjustable-Rate Loans:
- ---------------------
Real estate:
One- to four-family . . . . . . . . 170,718 64.22 145,015 64.97 117,107 71.17 70,917 62.95 55,751 55.90
Multi-family . . . . . . . . . . . 20,948 7.88 20,444 9.16 16,027 9.74 12,451 11.05 9,889 9.92
Commercial . . . . . . . . . . . . 10,898 4.10 5,914 2.65 4,079 2.48 3,895 3.46 4,902 4.92
Construction and Development . . . 894 .34 598 .27 384 .24 -- -- -- --
Consumer . . . . . . . . . . . . . 129 .05 23 .01 -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ ------ ------
Total adjustable rate real-estate
loans . . . . . . . . . . 203,587 76.59 171,971 77.05 137,597 83.63 87,263 77.46 70,542 70.74
Commercial business . . . . . . . . 2,200 .82 696 .31 561 .34 383 .34 136 .14
-------- ------ -------- ------ -------- ------ -------- ------ ------ ------
Total adjustable-rate loans . . 205,787 77.41 172,690 77.37 138,158 83.97 87,646 77.80 70,678 70.88
-------- ------ -------- ------ -------- ------ -------- ------ ------ ------
Total loans before net items. . 265,824 100.00% 223,190 100.00% 164,538 100.00% 112,653 100.00% 99,714 100.00%
====== ====== ====== ====== ======
Less:
- ----
Loans in process . . . . . . . . . . 8,092 6,693 8,803 4,441 3,101
Deferred fees and discounts . . . . 437 363 281 142 198
Allowance for loan losses . . . . . 1,824 1,689 1,614 1,542 1,148
-------- -------- -------- -------- -------
Total loans receivable, net . . . $255,470 $214,445 $153,840 $106,528 $95,267
======== ======== ======== ======== =======
</TABLE>
- -------------------
(1) Includes all loans where repricing occurs in more than 60 months.
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<PAGE> 7
The following schedule illustrates the interest rate sensitivity of
the Company's loan portfolio at December 31, 1996. Loans which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------------------------
Commercial and
Construction
One- to four-family Multi-family and Development
-------------------------- -------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------------ ------------- ---------- --------------------------------------
(Dollars in Thousands)
Due During
Periods Ending
December 31,
- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996(1) . . . . . . . . . $ --- ---% $ --- ---% $ 325 9.00% $ 238 10.48
1997 . . . . . . . . . . 1,291 9.14 527 9.00 13,212 8.88 2,943 9.15
1998-1999 . . . . . . . . 351 8.28 --- --- 427 8.76 3,614 10.06
2000-2001 . . . . . . . . 926 7.82 207 8.04 170 8.78 3,333 9.57
2002-2006 . . . . . . . . 5,515 7.99 313 7.38 1,429 8.46 135 9.61
2007-2015 . . . . . . . . 43,196 7.92 10,746 8.39 9,229 9.28 --- ---
2015 and following . . . 153,242 7.91 9,684 8.47 1,270 8.88 8 10.00
<CAPTION>
Commercial
Business Total
---------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ------------- ----------- ------------
(Dollars in Thousands)
Due During
Periods Ending
December 31,
- ---------------
<S> <C> <C> <C> <C>
1996(1) . . . . . . . . . $ 165 10.32% $ 728 9.78
1997 . . . . . . . . . . 2,319 9.11 20,292 8.97
1998-1999 . . . . . . . . 424 9.63 4,816 9.78
2000-2001 . . . . . . . . 436 9.29 5,072 9.14
2002-2006 . . . . . . . . 149 10.25 7,541 8.13
2007-2015 . . . . . . . . --- 63,171 8.20
2015 and following . . . --- --- $164,204 7.95
========
</TABLE>
- --------------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $93.3 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $171.8
million.
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ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. The Company focuses
its lending efforts primarily on originating loans for the acquisition,
refinance or construction of one- to four-family residences. These loans are
originated as a result of customer and real estate agent referrals, existing
and walk-in customers, builders and from responses to the Company's marketing
campaign. At December 31, 1996, mortgage loans secured by one- to four-family
residences totalled $204.5 million, or 76.9% of gross loans receivable.
1st Savings currently offers both fixed-rate and adjustable-rate
mortgage ("ARM") loans. During the year ended December 31, 1996, the Company
originated $57.9 million of ARM loans and $19.0 million of fixed-rate real
estate loans which were secured by one- to four-family residences. Of the
fixed-rate originations, $589,000, or 3.1% were loans originated for sale and
were subsequently sold to the secondary market. Substantially all of the one-
to four-family residential mortgage originations are located within the
Company's primary market area.
The Company currently originates one- to four-family residential
mortgage loans in amounts up to 97% of the appraised value of the security
property and generally requires that private mortgage insurance be obtained in
an amount sufficient to reduce the Company's exposure to or below 80% of such
value. Typically, such loans are originated in conformity with secondary
market standards and are based on a 15 to 30 year amortization schedule with
monthly principal and interest payments. The interest rates charged on these
loans are competitively priced based on local market conditions, the
availability of funding, and anticipated profit margins.
The Company currently originates ARM loans which adjust annually,
after an initial period of one, three, five or seven years. Typically,
originated ARM loans are secured by owner occupied properties which reprice at
a margin of 2.75% over the yield on the monthly average yield on United States
Treasury securities adjusted to a constant maturity of one year while ARM loans
secured by non-owner occupied properties generally reprice at a margin of 3.0%
to 3.5% over this same index. Most of the Company's ARM loan originations are
subject to annual and lifetime interest rate caps. Typically, the maximum
annual interest rate adjustment on originated ARMs is limited to a 200 basis
point adjustment while the maximum lifetime adjustment is limited to either 500
or 600 basis points over the initial interest rate. As a consequence of using
caps, the interest rates on the Company's ARMs may not be as rate sensitive as
the Company's cost of funds. Borrowers of adjustable rate loans are qualified
at the fully-indexed rate of interest and delinquency rates on ARM loans have
approximated those for the fixed rate loan portfolio.
The Company also originates permanent mortgage loans for the
construction of rental or owner-occupied one- to four-family residences.
Generally, these loans begin monthly principal and interest payments, based on
a 15 to 30 year amortization schedule, after an initial six month period
(during construction) of interest-only payments. At December 31, 1996, the
Company had $6.7 million in this type of construction- permanent mortgage loan.
The underwriting standards used for these loans were consistent with the
standards used for other owner and non-owner occupied one- to four-family
residential loans.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing
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<PAGE> 9
the loan. During 1996, properties securing real estate loans made by 1st
Savings had either appraisals or evaluations performed on them by in- house or
independent fee appraisers approved and qualified by the Board of Directors.
1st Savings generally requires borrowers to obtain title insurance and fire,
property and flood insurance (if indicated) in an amount not less than the
amount of the loan. Real estate loans originated by the Company generally
contain a "due on sale" clause allowing the Company to declare the unpaid
principal balance due and payable upon the sale of the security property.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. The
Company is also actively engaged in originating permanent loans secured by
multi-family and commercial real estate including apartment and office
buildings, strip shopping centers, retail establishments and other business's
generally located in the Company's primary market area. At December 31, 1996,
the Company had $21.5 million and $11.1 million, respectively, of multi-family
and commercial real estate loans, which represented 8.08% and 4.17%,
respectively, of gross loans receivable.
Multi-family and commercial real estate loans originated by 1st
Savings generally are based on an amortization schedule of 15 to 25 years with
monthly principal and interest payments. Generally, the interest rate charged
on these loans adjusts annually based upon the monthly average yield on United
States Treasury securities adjusted to a constant maturity of one year plus a
margin of 3.0% to 3.5%, subject to annual and lifetime interest-rate adjustment
caps. Generally, multi-family and commercial real estate loans do not exceed
75% of the lower of the appraised value or purchase price of the property
securing the loan. Before credit is extended, 1st Savings analyzes the
financial condition of the borrower, the borrower's credit history, the
reliability and predictability of the cash flow generated by the property
securing the loan and the value of the property itself. Generally, personal
guaranties are required from the borrower in addition to the secured property
as collateral for such loans. In addition, personal financial statements are
generally required to be provided on at least an annual basis. Appraisals on
properties securing multi-family and commercial real estate loans originated by
the Company are generally performed by independent fee appraisers approved by
the Board of Directors.
Generally loans secured by multi-family and commercial real estate
involve a greater degree of credit risk than one- to four-family residential
mortgage loans. These loans typically involve large balances to single
borrowers or groups of related borrowers. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the secured property, repayment of such
loans may be subject to adverse conditions in the real estate market or the
economy. If the cash flow from the project securing the Company's loan is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired.
The Company's largest borrower has several loans secured by rental
property, including an apartment complex, which totaled $3.8 million at
December 31, 1996. These loans, as well as all six of the Company's other
loans in excess of $1.0 million were performing as agreed at December 31, 1996.
CONSTRUCTION AND DEVELOPMENT LENDING. In addition, the Company also
originates real estate loans secured by projects or land that is under
construction or being developed. At
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<PAGE> 10
December 31, 1996, the Company had $15.0 million, or 5.63% of gross loans
receivable in construction and development loans outstanding.
1st Savings offers loans to selected well-established builders in its
primary market area to build residential properties in anticipation of the sale
of the residence ("Speculative Construction") or in limited instances when the
house has been presold. Such loans, which total $7.0 million or 2.65% of gross
loans receivable, generally are originated with interest accrued quarterly and
have terms of six to twelve months. Speculative Construction loans are
generally originated in amounts up to 85% of the appraised value. The Company
seeks to make construction loans to those builders with which it has a
long-standing history of satisfactory performance. New builders typically
borrow from the Company in limited amounts and may borrow additional amounts
based on financial capacity and proven experience with the Company. The
Company also offers construction/permanent loans. See "- One- to Four-Family
Residential Mortgage Lending."
1st Savings also offers loans to customers and established
builders/developers in its primary market area to purchase land and/or finance
land development loans. Such loans, which total $7.9 million or 2.98% of gross
loans receivable consist primarily of loans for residential lots. Generally,
land development loans are made for a term of one year and require quarterly
interest payments. These loans are originated in amounts up to 75% of the
appraised value of the secured property.
Construction and land development lending generally affords
the Company an opportunity to receive higher interest rates and fees with
shorter terms to maturity than those obtainable from residential lending.
Nevertheless, construction and land development lending is generally
considered to involve a higher level of credit risk than one- to four-family
residential lending due to (i) the concentration of principal among relatively
few borrowers and development projects, (ii) the increased difficulty at the
time the loan is made of accurately estimating building or development costs
and the selling price of the finished product, (iii) the increased difficulty
and costs of monitoring and disbursing funds for the loan, (iv) the higher
degree of sensitivity to increases in market rates of interest and changes in
local economic conditions, and (v) the increased difficulty of working out
problem loans. Due in part to these risk factors, the Company may be required
from time to time to modify or extend the terms of some of these types of
loans. In an effort to reduce these risks, the application process includes a
submission to the Company of accurate plans, specifications and costs of the
project to be constructed. These items are also used as a basis to determine
the appraised value of the subject property. Loan amounts are approved based
on the lesser of current appraised value and/or the cost of construction.
CONSUMER AND COMMERCIAL BUSINESS LENDING. 1st Savings offers a
variety of secured consumer loans, including automobile, home improvement,
second mortgages, and loans secured by savings deposits. The Company also
originates secured and unsecured loans to existing customers and commercial
businesses, as well as letters-of-credit and lines-of-credit. The Company
currently originates substantially all of its consumer and commercial business
loans in its primary market area. All loans are originated on a direct basis,
where credit is extended directly to the borrower. Nearly all originated
consumer loans have fixed rates and are for terms of up to five years.
Commercial business loans may have adjustable or fixed interest rates and are
generally for terms up to five years.
-9-
<PAGE> 11
At December 31, 1996, the Company's consumer and commercial business
loan portfolio totaled $13.8 million, or 5.18% of loans receivable. At December
31, 1996, $11.4 million, or 83.1% of the consumer and business loan portfolio
had fixed rate loans while 16.9% had adjustable interest rates.
CONSUMER LENDING.
Automobile loans represent the largest component (46.6% of installment
loans) of the Company's consumer loan portfolio at December 31, 1996, and
totaled $6.4 million, or 2.4% of gross loans receivable. Typically, automobile
loans are made for terms of up to 60 months for new vehicles and up to 48
months for used vehicles. Loans secured by automobiles have fixed rates and
are generally made in amounts up to 80% of the purchase price of the vehicle.
Consumer loan terms vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower. The
underwriting standards employed for consumer loans include employment
stability, an application, a determination of the applicant's payment history
on other debts, and an assessment of ability to meet existing and proposed
obligations. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, especially in the case of consumer loans which are unsecured or
are secured by rapidly depreciable or mobile assets, such as automobiles. In
the event of repossession or default, there may be no secondary source of
repayment or the underlying value of the collateral could be insufficient to
repay the loan. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Although, at December
31, 1996, the Company had 8 consumer loans, totaling $31,000, or .23% of the
consumer loan portfolio which were 60 days or more delinquent, there can be no
assurance that delinquency levels will remain at current levels.
COMMERCIAL BUSINESS LENDING.
At December 31, 1996, the Company also had $3.5 million in commercial
business loans outstanding, or 1.3% of loans receivable. The Company's
commercial business lending activities encompass loans with a variety of
purposes and security, including loans to finance accounts receivable,
inventory and equipment.
Commercial business loan terms vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower.
Generally, commercial business loans are originated with initial terms of up to
three years with either a fixed or adjustable interest rate. 1st Savings'
commercial business loans are evaluated based on the loan application, a
determination of the applicant's payment history on other debts, business
stability and an assessment of ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also
-10-
<PAGE> 12
includes a comparison of the value of the security, if any, in relation to the
proposed loan amount.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment
and other income, and which are secured by real property whose value tends to
be more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment
from the cash flow of the borrower's business. As a result, the availability
of funds for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the collateral
securing the loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS AND MORTGAGE-BACKED
SECURITIES
Real estate loans are generally originated by 1st Savings' staff of
salaried or commissioned loan officers. Loan applications are taken and are
partially processed at each of the Company's full-service locations, while loan
documents are prepared at two of the Company's locations.
While the Company originates both adjustable-rate and fixed-rate
loans, the ability to originate loans is dependent upon the relative customer
demand for loans in its market. In 1996, the Company originated $118.3 million
of loans, compared to $104.6 million and $84.4 million in 1995 and 1994,
respectively. The increase was attributed to expanded product lines, increased
marketing, price competitiveness, and the 1995 opening of a loan production
office in Springfield, Missouri, which was merged into the new Springfield
branch office in January of 1996.
1st Savings generally sold its fixed-rate one- to four-family
residential mortgage loans, without recourse, to Federal Home Loan Mortgage
Corporation ("FHLMC") from 1991 until April of 1994. The Company stopped
selling most of its fixed rate originations in order to help meet the targets
set out in the Company's growth plan which has resulted in increased balances
of fixed-rate loans in the loan portfolio. The impact of these fixed rate
loans on the Company's overall sensitivity to fluctuating interest rates is
closely monitored. The decision to portfolio or sell fixed rate originations
is based on several factors which include the Company's overall sensitivity to
interest-rate risk, liquidity needs, comparable returns available on
alternative investments, and the anticipated effect on the attainment of growth
and profitability targets.
Historically, when loans were sold to the secondary market, the
Company retained the responsibility for servicing the loans which generates a
loan servicing fee. The Company's portfolio of mortgage loans serviced for
others totaled $20.3 million, $12.6 million and $14.5 million at December 31,
1996, 1995 and 1994, respectively.
The increase in loans serviced for others is due to the sale of $9.4
million in loan participation interests to others in 1996. Included in these
sales were $8.2 million of seasoned one- to four-family ARM loans which repriced
based on the 11th District Cost-of-Funds ("COFI") Index and $1.2 million of a
$4.6 million loan secured by a multi-family project which exceeded the
-11-
<PAGE> 13
Company's loans-to-one borrower limit. The sale of the COFI loans was
initiated as part of a plan to modify the repricing characteristics of the loan
portfolio, manage loan growth rates and increase liquidity. The Company
retains a servicing fee of .375% on the one- to four-family loans and a fee of
.25% on the multi-family loan.
From time to time, 1st Savings has purchased whole loans or loan
participations consistent with its loan origination underwriting standards.
During 1996, the Bank purchased 1 loan for $360,000 which was secured by
multi-family residential real estate located in Missouri. At December 31,
1996, purchased loans totaled $18.5 million, or 7.2% of net loans receivable.
Of these purchased loans, $15.8 million were secured by properties located in
Missouri.
In addition, 1st Savings occasionally purchases mortgage-backed and
related securities ("MBS") to complement mortgage lending activities and
provide balance sheet flexibility for liquidity and asset/liability management.
The Board believes that the slightly lower yield carried by MBS is somewhat
offset by the lower level of credit risk and the lower level of overhead
required in connection with these assets, as compared to one- to four-family,
non-residential, multi-family and other types of loans. See "- Mortgage-Backed
and Related Securities."
-12-
<PAGE> 14
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------- ----------------------------
(In Thousands)
<S> <C> <C> <C>
Originations:
-------------
Adjustable-rate:
Real estate
- one- to four-family . . . . . . . . . . . . . . $57,894 $55,170 $52,105
- multi-family . . . . . . . . . . . . . . . . . 5,562 5,918 5,664
- commercial . . . . . . . . . . . . . . . . . . 6,642 2,684 1,460
- construction or development . . . . . . . . . . 544 431 273
Non-real estate
- consumer . . . . . . . . . . . . . . . . . . . 75 23 ---
- commercial business . . . . . . . . . . . . . . 1,117 133 55
------- ------- -------
Total adjustable-rate . . . . . . . . . . . 71,834 64,359 59,557
Fixed-rate:
----------
Real estate
- one- to four-family . . . . . . . . . . . . . . 18,990 18,241 2,147
- multi-family . . . . . . . . . . . . . . . . . --- 568 ---
- commercial . . . . . . . . . . . . . . . . . . --- --- 219
- construction or development . . . . . . . . . . 15,596 12,309 14,155
Non-real estate
- consumer . . . . . . . . . . . . . . . . . . . 9,892 7,733 6,906
- commercial business . . . . . . . . . . . . . . 1,943 1,369 1,383
------- ------- -------
Total fixed-rate . . . . . . . . . . . . . . 46,421 40,220 24,810
------- ------- -------
Total loan originations . . . . . . . . . . 118,255 104,579 84,367
------- ------- -------
Purchases:
---------
Real estate
- one- to four-family . . . . . . . . . . . . . . -- 598 9,638
- multi-family . . . . . . . . . . . . . . . . . 360 697 --
------- ------- -------
Total loans . . . . . . . . . . . . . . . . 360 1,295 9,638
Mortgage-backed and related securities purchases . -- 1,623 16,584
------- ------- -------
--
--
Total loan and mortgage-backed and related
securities purchases . . . . . . . . . . . 360 2,918 26,222
------- ------- -------
Total originations and purchases . . . . . . . . . 118,615 107,497 110,589
------- ------- -------
Sales:
-----
Real estate
- one- to four-family . . . . . . . . . . . . . . 8,804 1,840 1,840
- multi-family . . . . . . . . . . . . . . . . . 1,200
Mortgage-backed and related securities . . . . . . 4,348 3,852 4,885
------- ------- -------
Total loan, mortgage-backed and related
securities sales . . . . . . . . . . . 14,352 5,692
------- -------
6,725
-------
Repayments:
----------
Real estate
- one- to four-family . . . . . . . . . . . . . . 33,703 24,831 15,251
- multi-family . . . . . . . . . . . . . . . . . 4,259 2,198 2,088
- commercial . . . . . . . . . . . . . . . . . . 1,661 870 5,127
- construction or development . . . . . . . . . . 16,807 10,115 10,202
Non-real estate
- consumer . . . . . . . . . . . . . . . . . . . 8,106 6,500 5,905
- commercial business . . . . . . . . . . . . . . 1,441 868 1,707
------ ------- -------
Total loan repayments . . . . . . . . . . . 65,977 45,382 40,280
Mortgage-backed and related securities repayment . 1,030 1,563 7,345
------- ------- -------
Total repayments . . . . . . . . . . . . . 67,007 46,945 47,625
------- ------- -------
Total sales and repayments . . . . . . . . 81,359 52,637 54,350
Increase (decrease) in other items, net . . . . . . 1,413 (3,255) 4,277
------- ------ -------
Net increase . . . . . . . . . . . . . . . $35,843 $58,115 $51,962
======= ======= =======
</TABLE>
-13-
<PAGE> 15
ASSET QUALITY
DELINQUENT LOANS. Generally, when a borrower fails to make a required
payment on mortgage or installment loans the Company begins the collection
process by mailing a computer generated notice to the customer. If the
delinquency is not cured promptly, the customer is contacted again by notice or
telephone. After an account secured by real estate becomes over 60 days past
due, the Company will send a 30-day demand notice to the customer, which if not
cured, unless satisfactory arrangements have been made, will lead to
foreclosure. For consumer loans the Missouri Right-To-Cure Statute is followed
which requires issuance of specifically worded notices at specific time
intervals prior to repossession or further collection efforts.
The following table sets forth the Company's loan delinquencies by
type and by amount at December 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
--------------------------------------------------------------------------------
Total Loans
90 Days and Delinquent 60
60-89 Days Over Days or More
-------------------------- -----------------------------------------------------
Number Amount Number Amount Number Amount
------------ ------------- ------------ ----------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family . . . . 2 $ 98 4 $254 6 $352
Consumer . . . . . . . . . 5 27 3 4 8 31
--- ------ --- ------ --- -----
Total . . . . . . . . . . . 7 $ 125 7 $258 14 $383
=== ===== === ==== == ====
</TABLE>
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful, but no later than 90 days delinquent (120 days for consumer
loans), and as a result, previously accrued interest income on the loan is
taken out of current income. The loan will be transferred back to accrual
status once the borrower brings the loan to less than a 90-day delinquency.
Foreclosed assets held for sale include assets acquired in settlement of loans
and are shown net of reserves.
-14-
<PAGE> 16
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------------------- --------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to four-family . . . . . . . . . . . . . . . . . $ 254 $ --- $ 38 $ 334 $ 74
Consumer loans . . . . . . . . . . . . . . . . . . . --- --- --- --- 9
------ ------- ----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 254 --- 38 334 83
------ ------- ----- ----- -----
Accruing loans delinquent more than 90 days:
Consumer . . . . . . . . . . . . . . . . . . . . . 4 35 8 1 15
------ ------- ----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . 4 35 8 1 15
------ ------- ----- ----- -----
Foreclosed assets held for sale:
One- to four-family . . . . . . . . . . . . . . . . --- --- --- --- 70
Commercial real estate . . . . . . . . . . . . . . . --- --- 51 238 302
------ ------- ----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . --- --- 51 238 372
------ ------- ----- ----- -----
Total non-performing assets . . . . . . . . . . . . . $ 258 $ 35 $ 97 $ 573 $ 470
====== ======= ===== ===== =====
Total as a percentage of total assets . . . . . . . . .09% .01% .05% .39% .32%
==== ==== ==== === ===
</TABLE>
At December 31, 1996, 1st Savings had four loans totaling $254,000 on which
interest was not being accrued in accordance with SFAS No. 114. The total
amount that would have been included in interest income if these loans had not
been delinquent would have been $25,000. The amount that was included in
interest income on these impaired loans during 1996 was approximately
$15,000.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When a savings association classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a problem asset is classified as
"loss," a savings association is required to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to
charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
-15-
<PAGE> 17
In connection with the filing of its periodic reports with the OTS and in
accordance with its asset classification policy, the Company regularly reviews
the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of 1st Savings assets, at December 31, 1996, the Company
had classified a total of $263,000, or .09% of its assets as substandard (which
includes all of the non-performing assets set forth on the previous page) and
none as doubtful or loss.
OTHER LOANS OF CONCERN. In addition to the classified assets discussed
above, there was also an aggregate of $335,000 in net book value of loans (five
loans secured by single-family residences, one loan secured by land and 8
consumer loans) with respect to which management has some doubt as to the
ability of the borrowers to continue to comply with present loan repayment
terms which may ultimately result in the future inclusion of such items in
classified assets.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risk inherent in the loan portfolio and changes in the nature
and volume of loan activity, including those loans which are being specifically
monitored. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters,
the estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate provision for loan losses.
Real estate properties acquired through foreclosure are recorded at lower of
cost or fair value, less estimated disposition costs. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At December 31, 1996, the Company had an allowance for loan losses of
$1.8 million or 705.3% of non- performing loans. See Note 3 of the Notes to
Consolidated Financial Statements.
The following table sets forth an analysis of the Company's allowance for
loan losses.
-16-
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ---------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . . . $1,689 $1,614 $1,542 $1,148 $1,127
Charge-offs:
One- to four-family . . . . . . . . . . . --- --- --- --- 1
Multi-family . . . . . . . . . . . . . . --- --- --- 1 ---
Commercial real estate . . . . . . . . . --- --- --- --- 53
Consumer . . . . . . . . . . . . . . . . 33 58 18 16 ---
----- ------- ------ ------ ------
33 58 18 17 54
----- ------- ------ ------ ------
Recoveries:
One- to four-family . . . . . . . . . . . --- --- --- --- ---
Consumer . . . . . . . . . . . . . . . . 13 3 --- 1 5
----- ------- ------- ------ ------
13 3 0 1 5
----- ------- ------- ------ ------
Net charge-offs . . . . . . . . . . . . . . (20) (55) (18) (16) (49)
Provision charged to operations . . . . . . 155 130 90 410 70
------ ------- ------- ------- -------
Balance at end of period . . . . . . . . . $1,824 $1,689 $1,614 $1,542 $1,148
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding during
the period . . . . . . . . . . . . . . . . .01% .03% .01% .02% .05%
=== ====== ====== ===== =====
Ratio of net charge-offs during the period
to 11.03% 94.83% 5.73% 3.07% 3.95%
===== ====== ===== ===== =====
average non-performing assets . . . . . .
</TABLE>
-17-
<PAGE> 19
The distribution of the Company's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------------------------------------------------------------------- ------------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
----------- ------------------------------------------------ ------------ ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of loans:
One- to four-family . . . $ 878 76.94% $ 813 76.23% $ 813 74.64% $ 317 67.47%
Multi-family . . . . . . 317 8.08 345 9.41 321 9.74 377 11.05
Commercial real estate . 156 4.17 90 2.74 86 2.61 453 6.88
Construction and
development . . . . . . 256 5.63 297 7.01 260 7.91 302 7.80
Consumer . . . . . . . . 159 3.86 117 3.77 107 4.35 78 5.46
Commercial business . . . 58 3.86 27 .84 27 .75 15 1.34
------ ------ ------ ------ ------ ------- ------ ------
Total . . . . . . . . $1,824 100.00% $1,689 100.00% $1,614 100.00% $1,542 100.00%
====== ====== ====== ====== ====== ======= ====== ======
<CAPTION>
1992
------------------------
Percent
of Loans
in Each
Category
to Total
Amount Loans
----------- ------------
<S> <C> <C>
Type of loans:
One- to four-family . . . $ 238 67.67%
Multi-family . . . . . . 259 9.92
Commercial real estate . 381 10.04
Construction and
development . . . . . . 208 6.32
Consumer . . . . . . . . 52 4.85
Commercial business . . . 10 1.20
------- -------
Total . . . . . . . . $1,148 100.00%
====== ======
</TABLE>
-18-
<PAGE> 20
INVESTMENT ACTIVITIES
GENERAL. Generally, the investment policy of the Company is to invest funds
among various categories of investments and repricing characteristics based
upon the Company's need for liquidity, to provide collateral for borrowings and
public funds, to help reach financial performance targets and to help meet
asset/liability management objectives.
INVESTMENT SECURITIES. At December 31, 1996, the Company's interest-bearing
deposits in other financial institutions totaled $9.8 million, or 3.3% of its
total assets, and investment securities totaled $12.4 million, or 4.2% of its
total assets. It is the Company's general policy to purchase U.S. Government
securities and federal agency obligations, state and local government
obligations and overnight federal funds. The Company also has invested in
equity securities consisting primarily of common stock of publicly traded
financial institutions. At December 31, 1996, the weighted average term to
maturity or repricing of the investment securities portfolio, excluding equity
investments, was 14.5 months. For information regarding the amortized cost and
market values of the Company's investment securities portfolio, see Note 2 of
the Notes to Consolidated Financial Statements.
OTS regulations restrict investments in corporate debt and equity securities
by the Bank. These restrictions include prohibitions against investments in
the debt securities of any one issuer in excess of 15% of 1st Savings
unimpaired capital and surplus as defined by OTS regulations, which totalled
$4.0 million as of December 31, 1996, plus an additional 10% if investments are
fully secured by readily marketable collateral. See "Regulation - Federal
Regulation of Savings Associations" for a discussion of additional restrictions
on the Company's investment activities.
MORTGAGE-BACKED AND RELATED SECURITIES. At December 31, 1996, MBS totaled
$6.5 million, or 2.2% of the Company's total assets. During 1996, the Company
did not purchase any MBS, while it sold $4.3 million of fixed and adjustable
rate MBS. At December 31, 1996, the MBS portfolio included $4.5 million in
PAC-1 collateralized mortgage obligations which passed the FFIEC's sensitivity
test and $1.9 million in adjustable- rate MBS issued by government-sponsored
entities. For information regarding the amortized cost and market values of
1st Savings' MBS portfolio, see Note 2 of the Notes to Consolidated Financial
Statements.
-19-
<PAGE> 21
The following table sets forth the composition of the Company's portfolio of
available-for-sale ("AFS") and held-to-maturity debt and equity securities
including mortgage-backed and related securities at the dates indicated. At
December 31, 1996 all securities were classified as AFS.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- -----------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
U.S. Treasury . . . . . . . . . . . . . $ --- ---% $ --- ---% $ 7,018 23.57%
U.S. Government agencies . . . . . . . 8,951 47.41 5,859 28.14 5,536 13.01
State and political subdivisions . . . 1,040 5.51 407 1.96 184 0.62
SBA loan pools . . . . . . . . . . . . 1,680 8.90 1,889 9.08 2,291 7.70
Equity investments . . . . . . . . . . 736 3.90 1,000 4.81 --- ---
Guaranteed Student Loan Certificates . --- --- --- --- 595 .20
------- ------ ------ ----- ------- ------
12,407 65.72 9,155 43.99 15,624 52.48
Mortgage-backed securities . . . . . . 1,945 10.30 7,079 34.02 9,670 32.48
Collateralized mortgage obligations . . 4,528 23.98 4,576 21.99 4,476 15.04
------- ------ ------ ------ ------- ------
Total Securities . . . . . . . . . . $18,880 100.00% $20,810 100.00% $29,770 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The composition and maturities of the Company's investment securities
portfolio, excluding FHLB stock, are indicated in the following table before
consideration of market value adjustments at December 31, 1996.
<TABLE>
<CAPTION>
Due in
-------------------------------------------------
December 31,
Not Due on a 1996
1 to 3 to 5 5 to 10 Single Balance
3 Years Years Years Maturity Date Outstanding
---------- ---------- ---------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government agencies . . . $ 996 $6,960 $ 995 $ --- $ 8,951
State and political subdivisions
65 572 76 327 1,040
SBA loan pools . . . . . . . . --- --- --- 1,680 1,680
Equity investments . . . . . . --- --- --- 736 736
Mortgage-backed . . . . . . . . --- --- --- 1,945 1,945
CMOs . . . . . . . . . . . . . --- --- --- 4,528 4,528
------ ------ ------ ------ -------
Total securities . . . . . . $1,061 $ 7,532 $1,071 $9,216 $18,880
====== ======= ====== ====== =======
</TABLE>
1st Savings' investment and mortgage-backed securities portfolios are managed
in accordance with the Bank's investment policy which was adopted by the Board
of Directors of
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<PAGE> 22
the Bank and is implemented by members of the asset/liability management
committee which includes the President, Executive Vice President and Chief
Financial Officer.
The OTS has issued guidelines regarding management oversight and accounting
treatment for securities, including investment securities, loans, MBS and
derivative securities. The guidelines require savings associations to reduce
the carrying value of securities to the lesser of cost or market value unless
it can be demonstrated that a class of securities is intended to be held to
maturity. As of December 31, 1996, the Company held $18.9 million in
investment and mortgage-backed securities, all of which were accounted for as
available-for-sale.
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are deposits, borrowings,
payment of principal and interest on loans and MBS, interest and principal
received on investment securities and other short-term investments, and funds
provided from operating results.
Borrowings have been used at times to provide additional liquidity.
Borrowings are used on an overnight or short term basis to compensate for
periodic fluctuations in cash flows, and are used on a longer term basis to
fund loan growth and to help manage the Company's sensitivity to fluctuating
interest rates.
DEPOSITS. 1st Savings offers a variety of deposit accounts which have a wide
range of interest rates and terms. Product lines include several types of
savings and checking accounts, IRAs, and certificates of deposit which
generally range in term from 91 days to five years. Deposits are solicited
only from the Company's primary market area and are attracted and retained
through competitive pricing, cross-selling, advertisement and providing quality
customer service.
1st Savings will periodically promote a particular deposit product as part of
the Company's overall marketing plan. Deposit products have been promoted
through various mediums which include TV, radio, and newspaper advertisements.
The emphasis of these campaigns is to increase consumer awareness and market
share of the Company.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The level of competition for deposits varies significantly within
the Company's market area. Within the greater Springfield area, competition is
very strong. As a result, the Company's CD products have been much more
successful in the smaller communities within the market area.
1st Savings has become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. Based on its
experience, the Company believes that its deposits are relatively stable
sources of funds. However, the ability of the Company to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and
will continue to be significantly affected by market conditions.
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<PAGE> 23
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- -------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ---------- ---------- ---------- ------------ ------------
(Dollars in Thousands)
Transaction and Savings Deposits:
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Demand . . . . . . . . . . . . . $4,468 2.46% $ 3,789 2.59% $ 2,584 1.90%
Passbook Accounts (2.50%) . . . . . . . . . 9,633 5.29 10,096 6.89 11,195 8.21
NOW Accounts (2.50-4.75%) . . . . . . . . . 23,785 13.07 19,621 13.38 18,832 13.82
Money Market Accounts (2.75 - 5.00%) . . . 12,722 6.99 7,758 5.30 5,869 5.04
------ ------- --------- ------ -------- ------
Total Non-Certificates . . . . . . . . . . 50,608 27.81 41,264 28.16 39,480 28.97
------ ------ --------- ------ -------- ------
Certificates:
- ------------
0.00 - 3.99% . . . . . . . . . . . . . . --- --- 1,546 1.05 10,700 7.85
4.00 - 4.99% . . . . . . . . . . . . . . 3,528 1.94 15,816 10.79 48,717 35.74
5.00 - 5.99% . . . . . . . . . . . . . . 111,540 61.27 63,756 43.50 36,665 26.90
6.00 - 7.99% . . . . . . . . . . . . . . 15,958 8.77 23,910 16.32 417 .31
8.00 - 9.99% . . . . . . . . . . . . . . 11 .01 11 .01 154 .11
-------- ------- -------- ------ -------- ------
Total Certificates . . . . . . . . . . . . 131,037 71.99 105,039 71.67 96,653 70.91
Accrued Interest . . . . . . . . . . . . . 369 .20 247 .17 164 .12
-------- ------- -------- ------ -------- ------
Total Deposits . . . . . . . . . . . . . . $182,014 100.00% $146,550 100.00% $136,297 100.00%
======== ======= ========= ======= ======== =======
</TABLE>
-22-
<PAGE> 24
The following table sets forth the savings flows at the Company during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance . . . . . . . . . $146,550 $ 136,297 $ 132,801
Deposits . . . . . . . . . . . . 529,666 368,848 383,237
Withdrawals . . . . . . . . . . . (500,711) (363,315) (383,442)
Interest credited . . . . . . . . 6,140 4,720 3,701
-------- --------- ---------
Ending balance . . . . . . . . . $181,645 $ 146,550 $ 136,297
======== ========= =========
Net increase . . . . . . . . . . $ 35,095 10,253 $ 3,496
======== ========= =========
Percent increase . . . . . . . . 23.95% 7.52% 2.63%
===== ==== ====
</TABLE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
2.00- 6.00- 8.00- Percent
5.99% 7.99% 9.99% Total of Total
------ ------ ------ ------- --------
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending :
----------------------
<S> <C> <C> <C> <C> <C>
March 31, 1997 . . . . . . $22,776 $ 1,107 $ --- $23,883 18.23%
June 30, 1997 . . . . . . . 26,987 2,126 --- 29,113 22.22
September 30, 1997 . . . . 16,524 6,547 --- 23,071 17.61
December 31, 1997 . . . . . 9,497 86 --- 9,583 7.31
March 31, 1998 . . . . . . 9,198 634 --- 9,832 7.50
June 30, 1998 . . . . . . . 9,367 1,007 --- 10,374 7.92
September 30, 1998 . . . . 9,743 2,978 --- 12,721 9.71
December 31, 1998 . . . . . 5,211 37 --- 5,248 4.01
March 31, 1999 . . . . . . 814 49 --- 863 .66
June 30, 1999 . . . . . . . 3,306 12 --- 3,318 2.53
September 30, 1999 . . . . 578 106 --- 684 .52
December 31, 1999 . . . . . 492 67 --- 559 .43
Thereafter . . . . . . . . 573 1,204 11 1,788 1.35
--------- ----- ------- -------- -------
Total . . . . . . . . . $115,066 $15,960 $ 11 $131,037 100.00%
======== ======= ======= ======== ======
Percent of total . . . . 87.81% 12.18% .01% 100.00%
===== ==== ====== ======
</TABLE>
-23-
<PAGE> 25
The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------ ------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $20,536 $26,432 $29,974 $41,871 $118,633
Certificates of deposit of $100,000 or more 1,705 1,678 2,558 2,598 8,539
Public funds(1) . . . . . . . . . . . . . . 1,824 1,000 123 918 3,865
-------- ------- ------- -------- ---------
Total certificates of deposit . . . . . . . $23,885 $29,110 $32,655 $45,387 $131,037
======= ======= ======= ======= ========
</TABLE>
_________
(1) Deposits from governmental and other public entities.
BORROWINGS. As a member of the FHLB of Des Moines, the Company has the
ability to apply for FHLB advances. These advances are available under various
credit programs, each of which has its own maturity, interest rate and
repricing characteristics. Additionally, FHLB advances have prepayment
penalties as well as limitations on size or term. In order to utilize FHLB
advances, a Company must be a member of the FHLB system, have sufficient
collateral to secure the requested advance and own stock in the FHLB equal to
5% of the amount borrowed. See "- Federal Home Loan Bank System."
Although deposits are the Company's primary and preferred source of funds,
the Company actively uses FHLB advances. The Company's general policy has been
to utilize borrowings to meet short-term liquidity needs, or to provide a
longer-term source of funding for asset growth when other cheaper funding
sources are unavailable or to aide in asset/liability management. As of
December 31, 1996, $28.0 million of the Company's $84.0 million in FHLB
advances repriced on a regular basis while the remainder repriced at maturity.
In order for the Company to borrow these funds, it has pledged $124.2 million
of its real estate loans to the FHLB and has purchased $4.3 million in FHLB
stock
The following table summarizes the Company's FHLB advances as of the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances . . . . . . . . . . $84,051 $73,024 $23,600
Weighted average rate . . . . . . 5.84% 5.94% 6.22%
</TABLE>
-24-
<PAGE> 26
The following table sets forth the maximum month-end balance and average
daily balance of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1995 1994
----------------- ----------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum FHLB advances outstanding . . . . . . $86,511 $73,024 $23,600
Average FHLB advances outstanding . . . . . . $77,816 $48,636 $ 5,250
Weighted average rate . . . . . . . . . . . . 5.88% 6.27% 5.62%
</TABLE>
COMPETITION
1st Savings faces strong competition, both in originating loans and in
attracting deposits, from a variety of entities which include some companies
which are subject to less regulatory oversight or regulation. Major
competitors of the Company include other banks and thrifts, credit unions,
pension funds, mortgage bankers, and insurance companies. The competitive
nature of the industry is unlikely to change as larger percentages of both
available deposits and loans are shifted into debt and equity markets.
The Company attracts all of its deposits through its branch network,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from other financial entities
located within those same communities. The Company competes for these deposits
by offering a variety of competitively priced products, providing friendly
service, offering convenient business hours, and by being an active participant
in the success of each of these communities.
EMPLOYEES
1st Savings has 68 full-time salaried employees and 20 part-time hourly
employees as of December 31, 1996, none of whom is represented by a collective
bargaining agreement. Management considers its employee relations to be good.
SUBSIDIARY ACTIVITIES
Federal associations generally may invest up to 2% of their assets in service
corporations, plus an additional 1% for community purposes. As of December 31,
1996, 1st Savings owned one corporation, First Savings Financial Corporation
("FSFC").
FSFC was established on July 6, 1993 for the purpose of offering credit life,
mortgage and disability insurance to the Bank's customers. As of December 31,
1996, the Bank's equity investment in FSFC was $39,000 which included FSFC's net
income for 1996.
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<PAGE> 27
REGULATION
GENERAL. 1st Savings is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. 1st Savings is a
member of the FHLB of Des Moines and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of 1st Savings, the Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations. The Bank is a member of the SAIF and the deposits of 1st
Savings are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed below
or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive authority
over the operations of savings associations. As part of this authority, 1st
Savings is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS. When these examinations are conducted, the
agency may require a variety of actions which could impact the Company's
overall performance, including the establishment of a higher allowance for loan
losses. The last regular OTS examination of the Company and the Bank commenced
on May 29, 1996. All OTS regulated savings associations are subject to
semi-annual assessments, based on total assets, to fund the operations of the
OTS. 1st Savings paid $69,000 in assessments to the OTS during the year ended
December 31, 1996.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Sho-Me Financial Corp.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of 1st Savings
is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws and regulations. For instance, no
savings institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. At December
31, 1996, the Bank is in compliance with each of these restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower as of
that date is equal to the greater of $500,000 or 15% of unimpaired capital and
surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At December 31, 1996, 1st Savings' lending limit under
-26-
<PAGE> 28
this restriction is approximately $4.0 million. 1st Savings was in compliance
with the loans-to-one-borrower limitation as of that date.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, systemic
risks, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to
comply with these standards must submit a compliance plan. A failure to submit
a plan or to comply with an approved plan will subject the institution to
further enforcement action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. 1st Savings is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern would pay the highest premium. Risk classification of all
insured institutions is made by the FDIC semi-annually.
For the first six months of 1995, the assessment schedule for BIF members and
SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching
its statutory reserve ratio the FDIC revised the premium schedule for BIF
insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC
revised the BIF premium schedule, it noted that, absent legislative action (as
discussed below), the SAIF would not attain its designated reserve ratio until
the year 2002. As a result, SAIF insured members would continue to be
generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.
-27-
<PAGE> 29
In order to eliminate this disparity and any competitive disadvantage between
BIF and SAIF member institutions with respect to deposit insurance premiums,
legislation to recapitalize the SAIF was enacted in September 1996. The
legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1,
1999 if no savings associations then exist. The special assessment rate has
been established at .657% of deposits by the FDIC and the resulting assessment
of $901,000 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Company's results of
operations for the year ended September 30, 1996.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO
assessment as a result of this continuing obligation. Although the legislation
also now requires assessments to be made on BIF-assessable deposits for this
purpose, effective January 1, 1997, that assessment will be limited to 20% of
the rate imposed on SAIF assessable deposits until the earlier of December 31,
1999 or when no savings association continues to exist, thereby imposing a
greater burden on SAIF member institutions such as the Bank. Thereafter,
however, assessments on BIF-member institutions will be made on the same basis
as SAIF-member institutions. The rates to be established by the FDIC to
implement this requirement for all FDIC-insured institutions is uncertain at
this time, but are anticipated to be about a 6.5 basis points assessment on
SAIF deposits and 1.5 basis points on BIF deposits until BIF insured
institutions participate fully in the assessment.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as 1st Savings, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage servicing rights,
must be deducted from tangible capital for calculating compliance with the
requirement.
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's one subsidiary is considered an includable
subsidiary.
-28-
<PAGE> 30
At December 31, 1996, 1st Savings had tangible capital of $25.2 million, or
8.6% of adjusted total assets, which was approximately $20.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets. As a result of the prompt corrective action
provisions of FDICIA discussed below, however, a savings association must
maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At December 31, 1996, 1st Savings had no intangibles which were
subject to these tests.
At December 31, 1996, 1st Savings had core capital equal to $25.2 million, or
8.6% of adjusted total assets, which was $16.4 million above the minimum
leverage ratio requirement of 3% in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk- weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
no capital instruments that qualify as supplementary capital and $1.8 million
of general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to- value ratio and
reciprocal holdings of qualifying capital instruments. The Bank did not have
any exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings association with
more than normal interest rate risk exposure to deduct from its total capital,
for purposes of determining compliance with such requirement, an amount equal
to 50% of its interest-rate risk exposure multiplied by the present value of
its assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is the present value of the expected
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<PAGE> 31
cash flows from assets, liabilities and off-balance sheet contracts. The rule
provides for a two quarter lag between calculating interest rate risk and
recognizing any deduction from capital. The rule will not become effective
until the OTS evaluates the process by which savings associations may appeal an
interest rate risk deduction determination. It is uncertain when this
evaluation may be completed. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from
this requirement unless the OTS determines otherwise.
On December 31, 1996, the Bank had capital of $27.0 million (including $25.2
million in core capital and $1.8 million in qualifying supplementary capital)
and risk-weighted assets of $163.7 million (including no converted off-balance
sheet assets); or total capital of 16.5% of risk-weighted assets. This amount
was $13.9 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be
one with less than either a 4% core ratio, a "4%" Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
OTS is authorized to impose the additional restrictions, discussed below, that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into
a limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90
days after it becomes critically undercapitalized. Any undercapitalized
association is also subject to the general enforcement authority of the OTS and
the FDIC, including the appointment of a conservator or receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on 1st Savings
may have a substantial adverse effect on the Bank's operations and
profitability. Company
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<PAGE> 32
stockholders do not have preemptive rights, and therefore, if the Company is
directed by the OTS or the FDIC to issue additional shares of Common Stock,
such issuance may result in the dilution in the percentage of ownership of the
Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit an
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion. See Note 15 to
the Consolidated Financial Statements.
Generally, savings associations, such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or 75% of its net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
During 1996, the Bank declared and paid three dividends to the Company
totaling $1.3 million. The dividends paid to the Company were equal to the
income earned by the Bank during the first three quarters of 1996.
LIQUIDITY. All savings associations, including 1st Savings, are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. This liquid asset ratio
requirement has varied from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon associations for violations of either liquid asset ratio
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<PAGE> 33
requirement. At December 31, 1996, 1st Savings was in compliance with both
requirements, with an overall liquid asset ratio of 9.8% and a short-term
liquid asset ratio of 5.6%.
ACCOUNTING. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. 1st Savings is in compliance with
these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by the
OTS, require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST. All savings associations, including 1st
Savings, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. Such assets primarily consist of
residential housing and related loans and instruments. At December 31, 1996,
the Bank easily exceeded its QTL test.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after
the failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection
with the examination of the Bank, 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 certain applications, such as a merger or the
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<PAGE> 34
establishment of a branch, by the Bank. An unsatisfactory rating may be used
as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have revised the CRA
regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1995 and received a rating of "satisfactory".
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of 1st Savings include the Company and any
company which is under common control with the Company or the Bank. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiary is not deemed to be an affiliate;
however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the
Company is required to file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority
over the Company and its non-savings association subsidiary which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the Company and any of
its subsidiaries (other than 1st Savings or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If 1st Savings fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
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<PAGE> 35
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
FEDERAL SECURITIES LAW. The stock of the Company is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As
such, the Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
The Company's stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board ("FRB") requires
all depository institutions to maintain non-interest bearing reserves at
specified levels against their transaction accounts (checking, NOW and Super
NOW checking accounts). At December 31, 1996, 1st Savings was in compliance
with these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy OTS liquidity
requirements. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the FRB.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, 1st Savings is required to purchase and maintain stock in the
FHLB of Des Moines. At December 31, 1996, the Bank had $4.3 million in FHLB
stock, which was in compliance with this requirement. In past years, 1st
Savings has received dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 7.88% and was 7.0% for the year ended
December 31, 1996.
Under federal law the FHLBs are required to provide funds for the resolution
of troubled savings associations and to contribute to low- and moderately
priced housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and
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<PAGE> 36
moderate-income housing projects. These contributions have affected adversely
the level of FHLB dividends paid and could continue to do so in the future.
These contributions could also have an adverse effect on the value of FHLB
stock in the future. A reduction in value of the Bank's FHLB stock may result
in a corresponding reduction in the Bank's capital.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been permitted to establish reserves for bad debts and to make annual additions
thereto which could, within specified formula limits, be taken as a deduction
in computing taxable income for federal income tax purposes for taxable years
beginning prior to January 1, 1996. The amount of the bad debt reserve
deduction for "non-qualifying loans" was computed under the experience method.
The amount of the bad debt reserve deduction for "qualifying real property
loans" (generally loans secured by improved real estate) could be computed
under either the experience method or the percentage of taxable income method
(based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming
the maximum percentage bad debt deduction).
In August 1996, legislation was enacted that repealed the above-described
reserve method of accounting (including the percentage of taxable income
method) used by many thrift institutions to calculate their bad debt reserve
for federal income tax purposes. Thrift institutions with $500 million or less
in assets may, however, continue to use the experience method. As a result,
the Bank must recapture that portion of the reserve that exceeds the amount
that could have been taken under the experience method for post-1987 tax years.
At December 31, 1996, the Bank's post-1987 excess reserves amounted to
approximately $337,000. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The legislation also requires thrift institutions to
account for bad debts for federal income tax purposes on the same basis as
commercial banks for tax years beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a
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<PAGE> 37
corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income. For taxable years beginning after 1986 and before 1996, corporations,
including savings associations such as the Bank, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996 and 1995 the Bank's Excess for tax purposes
totaled approximately $1.2 million.
The Company and its subsidiary file consolidated federal income tax returns
on a fiscal year basis using the accrual method of accounting.
The Company, the Bank and its consolidated subsidiary has not been audited by
the Internal Revenue Service for the last 10 years and have federal income tax
returns which are open and subject to audit for the fiscal years 1994 through
1996.
MISSOURI TAXATION. Missouri-based thrift institutions, such as the Bank, are
subject to a special financial institutions tax, based on net income without
regard to net operating loss carryforwards, at the rate of 7% of net income.
This tax is in lieu of all other state taxes on thrift institutions, on their
property, capital or income, except taxes on tangible personal property owned
by the Bank and on real estate, contributions paid pursuant to the Unemployment
Compensation Law of Missouri, social security taxes, sales taxes and use taxes.
In addition, 1st Savings is entitled to credit against this tax all taxes paid
to the State of Missouri or any political subdivision except taxes on tangible
personal property owned by the Bank and held for lease or rental to others and
on real estate, contributions paid pursuant to 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
are not subject to the regular state corporate income tax.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report
with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
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<PAGE> 38
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, each of whom is currently an executive
officer of the Bank, are identified below. The executive officers of the
Company are elected annually by the Company's Board of Directors.
NAME AGE(1) POSITION WITH COMPANY
- ---------------------- ----- -----------------------------
Raymond Merryman 47 President and Chief Executive Officer
David J. Tooley 47 Executive Vice President
Greg Steffens 29 Chief Financial Officer
______________
(1) As of December 31, 1996
The business experience of each executive officer of the Company over
the last five years is provided below.
Raymond Merryman, age 47, is President and Chief Executive Officer of
the Company and the Bank, positions he has held since 1993. Mr. Merryman is
also a director of the Bank and the Company. Mr. Merryman joined the Bank in
1978 and has held various positions since that time, including Vice President
from January 1982 until May 1992 and Executive Vice President from May 1992
until October 1993. In February 1996, Mr. Merryman was nominated to serve a
three year term on the Board of Directors of the Bank and the Company.
David J. Tooley, age 47, is Executive Vice President of the Bank and
the Company, positions he has held since October 1993. Mr. Tooley is also a
Director of the Bank and the Company. Prior to his promotion in 1992, Mr.
Tooley served as Branch Manager and Senior Lender. Mr. Tooley joined the Bank
in 1975.
Greg Steffens, age 29, is Chief Financial Officer of the Bank and the
Company, a position he has held since December 1993. Prior to joining the
Bank, Mr. Steffens was employed by the OTS as an examiner for 4 years.
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<PAGE> 39
ITEM 2. DESCRIPTION OF PROPERTY
1st Savings operates from seven full service facilities and one
deposit-taking office. Six of these full service facilities, the
deposit-taking office and the underlying land for each are owned by the
Company. The 2927 South Campbell, Springfield branch is owned by the Company
while the underlying land is owned by a private party which leases the use of
the land to 1st Savings for $1,670 per month. The 3271 East Battlefield,
Springfield branch contains 34,983 square feet, of which 19,134 square feet
have been leased (including 5,939 square feet leased by the Bank). At
December 31, 1996, this facility had 7,184 square feet available for lease.
<TABLE>
<CAPTION>
Date Approximate Square Net Book Value as of
Location Acquired Title Footage December 31, 1996
- --------------------------------------------------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Main Office
-----------
109 N. Hickory 1988 Owned 9,630 $651,845
Mount Vernon, MO 1,200 basement
Branch Offices
--------------
Business Loop I-44 1982 Owned 2,457 93,441
Mount Vernon, MO(1)
1625 S. Elliot 1979 Owned 2,660 199,656
Aurora, MO
340 S. Springfield 1975 Owned 2,000 110,767
Bolivar, MO
415 N. Highway 60 1977 Owned 2,800 213,147
Republic, MO
E. Highway 54 1987 Owned 3,364 130,143
El Dorado Springs, MO
2927 S. Campbell 1984 Own Building 3,864 166,567
Springfield, MO Lease Land
3271 E. Battlefield 1989 Owned 34,983 3,886,576
Springfield, MO(3)
</TABLE>
___________________
(1) Deposit-taking branch only.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are involved as plaintiff or defendant in
various legal actions arising in the normal course of its business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the
Company and the Bank in the proceedings, that the resolution of these
proceedings should not have a material effect on Company's consolidated
financial position, results of operations or liquidity.
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<PAGE> 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 43 of the Company's 1996 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Pages 4 through 16 of the Company's 1996 Annual Report to Stockholders
is herein incorporated by reference.
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<PAGE> 41
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
- --------------------- -------------
Selected Consolidated Financial Information . . . . . . . . . . . 2-3
Management's Discussion and Analysis of Financial Condition
and Results of Operation . . . . . . . . . . . . . . . . . . . 4-16
Report of Independent Auditors . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . 19
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 . . . . . 20
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . 21-22
Notes to Consolidated Financial Statements . . . . . . . . . . . 23
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1996, is not
deemed filed as part of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no current report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure nor has there been a change of
accountants within the past 24 months.
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<PAGE> 42
PART III
ITEM 9. DIRECTORS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
Directors
Information concerning directors, of the Company is incorporated
herein by reference from the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders for the fiscal year ended December 31, 1996, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Executive Officers
Information regarding the business experience of the executive
officers of the Company and the Bank contained in Part I of this 10-KSB is
incorporated herein by reference.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with the exception of two
directors covering one transaction of the Company.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the fiscal year
ended December 31, 1996, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement for the fiscal year ended December 31, 1996, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
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<PAGE> 43
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders for the fiscal year ended December 31, 1996, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<CAPTION>
REFERENCE TO
PRIOR FILING
OR EXHIBIT
REGULATION NUMBER
S-B EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
----------- --------------------------------------- ------------
<S> <C> <C>
2 Plan of acquisition, reorganization
arrangement, liquidation or succession . . . . . . . . . None
3 Articles of Incorporation and Bylaws . . . . . . . . . . *
4 Instruments defining the rights of
security holders, including indentures:
Common Stock Certificate . . . . . . . . . . . . . . . *
9 Voting trust agreement . . . . . . . . . . . . . . . . . None
10 Material Contracts
10.1 1994 Stock Option and Incentive Plan . . . . . . . . . 10.1
10.2 1994 Management Recognition Plan . . . . . . . . . . . 10.2
10.3 Change-in-Control Severance Agreement with each of
Raymond G. Merryman, David Tooley and Greg Steffens. . . 10.3
11 Statement re: computation of per
share earnings . . . . . . . . . . . . . . . . . . . . . None
12 Statement re: computation of ratios . . . . . . . . . . . None
13 Annual Report to Security Holders . . . . . . . . . . . . 13
16 Letter on change in certifying
accountant . . . . . . . . . . . . . . . . . . . . . . . None
18 Letter on change in accounting
principles . . . . . . . . . . . . . . . . . . . . . . . None
21 Subsidiaries of Registrant . . . . . . . . . . . . . . . 21
22 Published report regarding matters
submitted to vote of security holders . . . . . . . . . None
23 Consent of Experts and Counsel . . . . . . . . . . . . . 23
24 Power of Attorney . . . . . . . . . . . . . . . . . . . . None
27 Financial Data Schedule . . . . . . . . . . . . . . . . . 27
28 Information from reports furnished to
state insurance regulatory authorities . . . . . . . . . None
99 Additional exhibits . . . . . . . . . . . . . . . . . . . None
</TABLE>
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<PAGE> 44
______________________________________________
* Filed as exhibits to the Company's S-1 registration statement filed
on March 25, 1994, (File No.33-76926) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
(B) REPORTS ON FORM 8-K:
None.
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<PAGE> 45
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 Stock Option and Incentive Plan
10.2 Recognition and Retention Plan
10.3 Change-in-Control Severance Agreement with each of Raymond G.
Merryman, David Tooley and Greg Steffens
13 Annual Report to Security holders
21 Subsidiaries of Registrant
23 Consent of Experts and Counsel
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 13
________________________________________________________________________________
1996 ANNUAL REPORT
________________________________________________________________________________
[LOGO]
SHO-ME FINANCIAL CORP.
<PAGE> 2
________________________________________________________________________________
TABLE OF CONTENTS
________________________________________________________________________________
President's Message . . . . . . . . . . . . . . . . . . . . . . . . . i
Selected Consolidated Financial Information . . . . . . . . . . . . . 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 4
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 17
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . 43
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . 44
<PAGE> 3
________________________________________________________________________________
FROM YOUR PRESIDENT
________________________________________________________________________________
March 25, 1997
To Our Fellow Shareholders:
On behalf of the Board of Directors, Management and Associates of
Sho-Me Financial Corp. and its subsidiary, 1st Savings Bank, we are pleased to
present the results of the Company's performance for the year ended December
31, 1996.
This was the second full year of operation for Sho-Me Financial Corp.,
following the initial public offering in June of 1994. The positive trends in
earnings and asset growth established during the Company's first year continued
through 1996, as net earnings, exclusive of the effect of the one-time
assessment to recapitalize the Savings Association Insurance Fund, were $1.70
per share which reflects a 77% increase over the $.96 per share earned in 1995.
The increase in earnings per share was attributable to several factors
including the increased asset base and the repurchase of 227,000 shares, or
12.9% of the Company's outstanding stock. Assets of the Company increased to
$298.0 million, representing a 18.2% rate of growth for 1996. The growth in
assets was primarily the result of a 19.1% or $41.0 million increase in the
Bank's loan portfolio. The majority of the asset growth was funded by a $35.5
million, or 24.2% increase in deposits. We were particularly proud of this
significant increase in deposit base and of the effort made by our associates
to attain that level of growth in a highly competitive market.
In January 1996, we opened our eighth Branch office which is the
Company's second full service facility in Springfield, Missouri. The opening
of this new office has greatly increased our presence in the attractive
Springfield market and the new facility led all of the Company's offices in net
growth of both mortgage loans and deposits in its first year of operation.
As we turn our attention to 1997, we intend to remain focused on
growing our deposit base and continuing to increase the Company's assets
through loan originations in our market area. It is our pledge to remain
committed to the growth and performance goals of the Company and to bring value
and opportunity to the four groups that hold the keys to our success: our
customers, our associates, our shareholders, and our communities.
Thank you for your investment in Sho-Me Financial Corp. and for the
confidence you have placed in our team. We look forward to a prosperous future
together.
Sincerely,
RAYMOND G. MERRYMAN
Raymond G. Merryman,
President
i
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At December31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . $297,996 $252,060 $193,469 $147,095 $144,852
Loans receivable, net . . . . . . . . . . . . . . . . 255,470 214,445 153,840 106,528 95,267
Available-for-sale mortgage-backed securities . . . . 6,473 11,656 9,670 --- ---
Held-to-maturity mortgage-backed securities. . . . . --- --- 4,475 10,274 9,847
Available-for-sale investment securities . . . . . . 12,407 9,155 8,421 --- ---
Held-to-maturity investment securities . . . . . . . --- --- 7,203 16,450 22,235
Deposits . . . . . . . . . . . . . . . . . . . . . . 182,014 146,550 136,297 132,801 131,903
FHLB advances . . . . . . . . . . . . . . . . . . . . 84,051 73,024 23,600 --- ---
Stockholders' equity . . . . . . . . . . . . . . . . 30,032 30,966 32,518 13,511 11,914
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income . . . . . . . . . . . . . . . . $ 21,274 $ 15,971 $ 10,661 $ 9,966 $ 11,341
Total interest expense . . . . . . . . . . . . . . . 12,374 9,331 5,141 4,807 6,442
-------- -------- ----- -------- --------
Net interest income . . . . . . . . . . . . . . . 8,900 6,640 5,520 5,159 4,899
Provision for loan losses . . . . . . . . . . . . . . 155 130 90 410 70
-------- -------- ----- -------- --------
Net interest income after provision for loan
losses . . . . . . . . . . . . . . . . . . . . . 8,745 6,510 5,430 4,749 4,829
Service charges and fees . . . . . . . . . . . . . . 502 406 391 322 244
Net realized gains (losses) on sales of loans and
available-for-sale securities . . . . . . . . . 128 32 (63) 142 59
Other non-interest income . . . . . . . . . . . . . . 690 540 331 312 349
-------- -------- ----- -------- --------
Total non-interest income . . . . . . . . . . . . . . 1,320 978 659 776 652
Total non-interest expense . . . . . . . . . . . . . 6,594 4,688 3,817 3,376 2,730
-------- -------- ----- -------- --------
Income before income taxes and change in
accounting principle . . . . . . . . . . . . . . . . 3,471 2,800 2,272 2,149 2,751
Provision for income taxes . . . . . . . . . . . . . 1,273 1,054 841 885 995
Change in accounting principle . . . . . . . . . . . --- --- --- 333 ---
-------- -------- --------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . $ 2,198 $ 1,746 $ 1,431 $ 1,597 $ 1,756
======== ======== ========= ======== ========
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- ----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to average
total assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79% .79% .87% 1.09% 1.21%
Interest rate spread information:
Average during period . . . . . . . . . . . . . . . . . . . . . . . . 2.96 2.52 3.07 3.43 3.20
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.85 2.68 2.30 3.03 3.18
Net interest margin(1) . . . . . . . . . . . . . . . . . . . . . . . . 3.37 3.12 3.49 3.67 3.47
Ratio of operating expense to average total assets . . . . . . . . . . 2.38 2.11 2.32 2.45 1.99
Return on stockholders' equity (ratio of net income
to average equity) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.14 5.48 6.41 10.11 15.91
Quality Ratios:
Non-performing assets to total assets at end of period . . . . . . . . . .09 .01 .05 .39 .32
Allowance for loan losses to non-performing loans . . . . . . . . . . . 717.16 4,825.71 3,470.78 269.11 244.26
Capital Ratios:
Stockholders' equity to total assets, at end of period . . . . . . . . . 10.08 12.28 16.81 9.18 8.22
Average stockholders' equity to average assets . . . . . . . . . . . . . 11.09 14.33 13.57 8.71 7.58
Ratio of average interest-earning assets to average interest-
bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1.09 1.13 1.13 1.07 1.06
Number of full service offices(2) . . . . . . . . . . . . . . . . . . . 7 6 6 6 6
- -----------------
</TABLE>
(1) Net interest income divided by average interest earning assets.
(2) The Bank also has a deposit-taking branch in Mount Vernon, Missouri.
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal business of the Company consists of the business of 1st
Savings Bank, f.s.b. ("1st Savings" or the "Bank"). The principal business of
1st Savings consists primarily of attracting deposits from the general public
and using such deposits along with wholesale funding from the Federal Home Loan
Bank of Des Moines ("FHLB") to originate mortgage loans secured by one- to
four-family residences and, to a lesser extent, multi-family, construction and
commercial real estate loans and consumer and business loans. These funds have
also been used to purchase loans secured by residential property,
mortgage-backed securities ("MBS"), U.S. government and agency obligations and
other permissible securities.
The revenues of 1st Savings are derived principally from interest
earned on loans and, to a lesser extent, from interest earned on investments.
The operations of 1st Savings are influenced significantly by general economic
conditions and by policies of financial institution regulatory agencies,
including the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). The Bank's cost of funds is influenced by
interest rates on competing investments and general market interest rates.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financing may be offered. 1st Savings intends to continue to focus on its
lending programs for one- to four-family residential real estate, commercial
mortgage and consumer financing with a primary emphasis placed on loans secured
by properties located in Southwestern Missouri.
FINANCIAL CONDITION
The Company's total assets increased $45.9 million, or 18.2%, from
$252.1 million at December 31, 1995 to $298.0 million at December 31, 1996.
The increase was primarily attributed to a $41.0 million increase in loans
receivable and a $6.0 million increase in cash and cash equivalents. The asset
growth was primarily funded through increased deposits of $35.5 million, an
$11.0 million increase in FHLB advances and a $1.9 million reduction in
available-for-sale securities.
The balance of net loans receivable increased $41.0 million, or 19.1%
to $255.5 million at December 31, 1996 from $214.4 million at December 31,
1995. The increase in gross loans receivable (excluding loans-in-process)
consisted primarily of growth in loans secured by one- to four-family
residences, nonresidential real estate and installment loans of $34.4 million,
$5.0 million, and $3.5 million, respectively. During 1996, the amount and rate
of loan growth declined from the prior year due primarily to increased net loan
sales of $9.4 million as well as increased prepayments. The Company originated
$118.6 million of mortgage and installment loans during 1996 as compared to
$104.6 million in 1995.
Available-for-sale ("AFS") securities declined $2.0 million to $18.8
million at December 31, 1996 from $20.8 million at December 31, 1995. The
decline was attributed to a $5.2
4
<PAGE> 7
million reduction in MBS which was partially offset by a $3.3 million increase
in investment securities. During 1996, $4.0 million in MBS were sold and
reinvested in cash or other investment securities.
Deposits increased $35.4 million, or 24.2%, from $146.6 million at
December 31, 1995 to $182.0 million at December 31, 1996. The increase in
deposits was comprised of a $26.0 million increase in certificates of deposit
and an increase in transaction accounts of $9.8 million which was partially
offset by a $464,000 decline in statement savings accounts.
Advances from the FHLB increased $11.1 million, or 15.1%, from $73.0
million at December 31, 1995 to $84.1 million at December 31, 1996. The
outstanding advances have original terms of up to five years at either variable
or fixed rates of interest and have been used primarily to finance growth in
loans receivable. At December 31, 1996, the average cost of FHLB advances was
.19% higher than the average cost of the Company's certificates of deposit.
At December 31, 1996 stockholders' equity was $30.0 million, or 10.1%
of average assets as compared to $31.0 million, or 12.3% of average assets at
December 31, 1995. The decline in stockholders' equity was primarily
attributable to the repurchase of $4.1 million of the Company's stock which
exceeded the Company's net income of $2.2 million and benefit plan vesting of
$805,000.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the level of
its net interest income, non-interest income and the control of operating
expenses. Net interest income is dependent primarily upon the difference or
spread between the average yield earned on interest- earning assets and the
average rate paid on interest-bearing liabilities, as well as the relative
amounts of such assets and liabilities. 1st Savings, as with other financial
institutions, is also subject to interest-rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
The Company's noninterest income consists primarily of fees charged on
transaction and loan accounts, lease income received from leased office space,
dividends received on other assets, and other charges for services provided to
the Company's customers. Also, noninterest income is derived from 1st Savings'
wholly-owned subsidiary which offers credit life, mortgage and disability
insurance.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
General. The Company's net income increased $452,000, or 25.9%, from
$1.7 million for the year ended December 31, 1995 to $2.2 million for the year
ended December 31, 1996. Exclusive of the one-time Savings Association
Insurance Fund ("SAIF") assessment of $901,000 and the related income tax
effect, net income for 1996 would have approximated $2.8 million, or an
increase of $1.0 million from the year ended December 31, 1995. Increased net
income was attributed to both higher net interest and noninterest income which
was partially offset by increased noninterest expense and provisions for income
taxes.
5
<PAGE> 8
NET INTEREST INCOME. Net interest income, before the provision for
loan losses, increased by $2.3 million, or 34.0%, to $8.9 million for the year
ended December 31, 1996 as compared to $6.6 million for the year ended December
31, 1995. The increase was due to interest earned on the $51.0 million
increase in the average balance of interest-earning assets and a higher net
interest rate spread. During 1996, the average net interest rate spread was
2.96% as compared to 2.52% for the prior year. The improvement was primarily
due to the .56% increase in average interest-earning asset yields, which
exceeded the .12% increase in the average cost of interest-bearing liabilities.
INTEREST INCOME. Interest income increased $5.3 million, or 33.2%, to
$21.3 million for the year ended December 31, 1996 as compared to $16.0 million
for the year ended December 31, 1995. The increase was primarily attributed to
the $51.0 million, or 23.9% increase in the average balance of interest-earning
assets and the .56% increase in the average yield earned on interest-earning
assets, from 7.49% during 1995 to 8.05% during 1996.
Interest income on loans receivable increased $5.6 million, or 39.6%,
to $19.8 million for the year ended December 31, 1996 as compared to $14.2
million for the year ended December 31, 1995. The increase was primarily due
to the $55.4 million, or 30.1% increase in average loans receivable and the
.57% increase in the average yield earned on loans receivable, from 7.71%
during 1995 to 8.28% in 1996. Increased average balances were primarily due to
mortgage and installment loan originations of $118.6 million, while increased
average yields were due to upward repricing of adjustable rate mortgage loans,
increased balances of higher yielding loans and an increase in the percentage
of loans with initial repricing periods of more than one year, which typically
yield a higher initial return than owner occupied, one-year adjustable rate
loans. See " - Asset/Liability Management."
INTEREST EXPENSE. Interest expense increased $3.0 million, or 32.6%,
to $12.4 million for the year ended December 31, 1996 as compared to $9.3
million for the year ended December 31, 1995. The increase was attributed to
the $55.5 million increase in the average balance of interest-bearing
liabilities and the .12% increase in the average rate paid on these same
interest-bearing liabilities, to 5.09% during 1996 from 4.97% during 1995.
Increased balances were due to the use of interest-bearing liabilities to fund
the Company's asset growth, while the increase in the average cost of
interest-bearing liabilities was primarily attributed to higher rates paid to
retain and attract deposits. During 1996, the average cost of deposits was
4.71% as compared to 4.51% for 1995, while the average cost of FHLB advances
declined from 6.27% to 5.88% from 1995 to 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $155,000
for the year ended December 31, 1996 as compared to $130,000 for the prior
year. The provision increased the allowance for loan losses to $1.8 million,
or .71% of loans receivable on December 31, 1996, as compared to .76% on
December 31, 1995. At December 31, 1996, the Company's allowance for loan
losses to non-performing loans was 717.2% as compared to 4,825.7% at December
31, 1995.
The Company maintains an allowance for loan losses based on
management's analysis of the loan portfolio, the amount of non-performing and
classified assets, and general economic conditions. Management evaluates the
allowance for loan losses on a regular basis and makes adjustments as deemed
necessary. Future additions or
6
<PAGE> 9
adjustments to the allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing or classified loans
are dependent upon interest rates, local real estate values, and overall
delinquency trends. Although the ratios for the allowance to loans receivable
and non-performing loans both declined when compared to ratios from December
31, 1995 to December 1996, the ratios continue to exceed peer averages. The
current allowance for loan losses reflects what the Company believes is an
adequate allowance for potential loan losses. There can be no assurance,
however, that future operating results will not be adversely affected by loan
losses which exceed current estimates.
NON-INTEREST INCOME. Noninterest income increased $342,000, or 35.0%,
to $1.3 million for the year ended December 31, 1996 as compared to $978,000
for the year ended December 31, 1995. The increase was due to increased income
from leasing operations, account service charges and realized gains on the sale
of AFS securities of $183,000, $98,000 and $95,000, respectively. Increased
income from leasing operations resulted from leased space contained in the new
Springfield branch which opened in January 1996. These increases were
partially offset by a non-recurring item, realized in 1995, which totaled
$61,000.
NON-INTEREST EXPENSE. Noninterest expense increased $1.9 million, to
$6.6 million for the year ended December 31, 1996 as compared to $4.7 million
for the year ended December 31, 1995. Excluding the SAIF assessment of
$901,000, noninterest expense increased $1.0 million, or 21.4% to $5.7 million
when compared to the prior year. The majority of the increase was attributable
to increased compensation expense of $432,000 and occupancy expense of
$235,000. Increased compensation expense was primarily due to increased
staffing and benefit costs, while higher occupancy expense was mostly
attributed to operating the new Springfield office. Much of the remaining
increase in noninterest expense was the result of the Company's growth.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, such as 1st Savings, equal to 65.7 basis points on
each $100 of SAIF-insured deposits maintained as of March 31, 1995. The amount
of 1st Savings' special assessment was $901,000, which was paid to the FDIC on
November 27, 1996.
As a result of the SAIF recapitalization, the FDIC amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective January 1, 1997, SAIF insurance premiums range from 0
to 27 basis points per $100 of domestic deposits. Additionally, the FDIC has
imposed a Financing Corporation ("FICO") assessment on SAIF-assessable deposits
for the first semi-annual period of 1997 equal to 6.48 basis points per $100 of
domestic deposits, as compared to a FICO assessment on Bank Insurance Fund
assessable deposits equal to 1.30 basis points per $100 of domestic deposits
for the same period.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$220,000, to $1.3 million for the year ended December 31, 1996 as compared to
$1.1 million for the year ended December 31, 1995. The increase was primarily
due to increased taxable income as the Company's effective tax rate for 1996
and 1995 was 36.7% and 37.6%, respectively.
7
<PAGE> 10
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
General. The Company's net income increased $315,000, or 22.0%, from
$1.4 million for the year ended December 31, 1994 to $1.7 million for the year
ended December 31, 1995. The increase was attributed to increases in net
interest income and noninterest income which were partially offset by increases
in noninterest expense and the provision for income taxes.
NET INTEREST INCOME. Net interest income before provision for loan
losses increased by $1.1 million, or 20.3%, to $6.6 million for the year ended
December 31, 1995 as compared to $5.5 million for the year ended December 31,
1994. The increase was due primarily to the interest rate spread earned on the
$55.0 million increase in the average balance of interest-earning assets which
exceeded the $48.3 million increase in the average balance of interest-bearing
liabilities. The average net interest rate spread declined, however, from
3.07% for the year ended December 31, 1994 to 2.52% for the year ended December
31, 1995. The decline was attributable to the increased use of FHLB advances
(at higher rates than the Company's average cost of funds) to fund growth in
interest-earning assets.
INTEREST INCOME. Interest income increased $5.3 million, or 49.8%, to
$16.0 million for the year ended December 31, 1995 as compared to $10.7 million
for the year ended December 31, 1994. The increase was primarily attributed to
the $55.0 million, or 34.9% increase in the average balance of interest-earning
assets and the .74% increase in the average yield earned on interest-earning
assets, from 6.75% during 1994 to 7.49% during 1995.
Interest income on loans receivable increased $5.3 million, or 59.6%,
to $14.2 million for the year ended December 31, 1995 as compared to $8.9
million for the year ended December 31, 1994. The increase was primarily due
to the $58.6 million, or 46.8% increase in the average outstanding balance of
loans receivable and the .62% increase in the average yield earned on loans
receivable, from 7.09% during 1994 to 7.71% during 1995. Increased average
balances were attributed to increased loan originations, a reduction in
secondary market loan sales and a decline in prepayment rates, while increased
average yields were due to generally higher market interest rates and upward
repricing of the adjustable rate mortgage loan portfolio.
INTEREST EXPENSE. Interest expense increased $4.2 million, or 81.5%,
to $9.3 million for the year ended December 31, 1995 as compared to $5.1
million for the year ended December 31, 1994. The increase was attributed to
the $48.3 million increase in the average balance of interest-bearing
liabilities and the 1.29% increase in the average rate paid on interest-bearing
liabilities, from 3.68% during 1994 to 4.97% during 1995. Both of these
increases were principally due to the Company's increased use of FHLB advances
to fund asset growth along with generally higher market interest rates for both
deposits and FHLB advances.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $130,000
for the year ended December 31, 1995 as compared to $90,000 for the prior year.
The provision increased the allowance for loan losses to $1.7 million, or .76%
of loans receivable on December 31, 1995, as compared to .98% of loans
receivable on December 31, 1994. At December 31, 1995, the Bank's allowance
for loan losses to non-performing loans was 4,825.7% as compared to 3,470.8% at
December 31, 1994.
8
<PAGE> 11
NON-INTEREST INCOME. Noninterest income increased $319,000, or 48.3%,
to $978,000 for the year ended December 31, 1995 as compared to $660,000 for
the prior year. The increase was partially due to $32,000 in realized gains on
the sale of loans and AFS securities in 1995 as compared to net realized losses
of $63,000 in 1994. In addition, dividends on other assets totaled $286,000 in
1985 as compared to $94,000 in 1994. Increased dividends were due to increased
FHLB stock ownership and a one-time special distribution on another equity
investment. Also, a non-recurring item of $61,000 was offset by an $89,000
reduction in income on the sale of foreclosed assets.
NON-INTEREST EXPENSE. Non-interest expense increased $871,000, or
22.8%, to $4.7 million for the year ended December 31, 1995 as compared to $3.8
million for the year ended December 31, 1994. The increase was primarily
related to a $584,000 increase in compensation expense due to the increased
cost of benefit plans and salaries of $290,000 and $294,000, respectively. In
addition, professional fees increased $86,000 reflecting increased costs
associated with being a public company while other increased expenditures
related mostly to growth of the Company.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$212,000, to $1.1 million for the year ended December 31, 1995 as compared to
$841,000 for the year ended December 31, 1994. The increase was primarily due
to increased taxable income as the Company's effective tax rate for 1995 and
1994 was 37.6% and 37.0%, respectively.
9
<PAGE> 12
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made. All average balances are daily average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield. The yields include fees which are considered adjustments to yield.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1996 1995
------------------------------------ ----------------------
Interest Average Interest
Average Income/ Yield/ Average Income/
Balance Expense Cost Balance Expense
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1) . . . . . . . . . . . . . . . $239,392 $ 19,817 8.28% $183,974 $14,193
Mortgage-backed and related securities . . . . . . . . 9,694 618 6.37 12,586 802
Investment securities . . . . . . . . . . . . . . . . . 12,299 729 5.93 14,623 868
Other . . . . . . . . . . . . . . . . . . . . . . . . . 2,747 110 3.98 1,968 108
-------- -------- ---- -------- -------
Total interest-earning assets(1) . . . . . . . . . . . 264,132 21,274 8.05 213,151 15,971
-------- -------- -------- -------
Non-interest earning assets(4) . . . . . . . . . . . . 13,354 9,232
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . $277,486 $222,383
======== ========
Interest-bearing liabilities:
Demand and NOW deposits . . . . . . . . . . . . . . . . $ 34,155 881 2.58 $ 28,325 736
Savings deposits . . . . . . . . . . . . . . . . . . . 10,232 254 2.48 10,442 259
Certificate accounts . . . . . . . . . . . . . . . . . 121,096 6,660 5.50 100,424 5,286
FHLB advances . . . . . . . . . . . . . . . . . . . . . 77,816 4,579 5.88 48,636 3,050
-------- -------- ---- -------- -------
Total interest-bearing liabilities . . . . . . . . . 243,299 12,374 5.09 187,827 9,331
-------- -------- -------- -------
Non-interest bearing liabilities . . . . . . . . . . . 3,403 2,695
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . 246,702 190,522
-------- --------
Stockholders' equity . . . . . . . . . . . . . . . . . 30,784 31,861
-------- --------
Total liabilities and stockholders' equity . . . . . $277,486 $222,383
======== ========
Net interest income . . . . . . . . . . . . . . . . . . $ 8,900 $ 6,640
======== =======
Net interest rate spread(2) . . . . . . . . . . . . . . 2.96%
====
Net interest-earning assets . . . . . . . . . . . . . . $ 20,833 $ 25,324
======== ========
Net yield on average interest-earning assets(3) . . . . 3.37%
====
Average interest-earning assets to average
interest-bearing liabilities . . . . . . . . . . . . . 109% 113%
=== ===
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994
-------- ----------------------------------
Average Interest Average
Yield/ Average Income/ Yield/
Cost Balance Expense Cost
------- ------- -------- ------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1) . . . . . . . . . . . . . . . 7.71% $125,349 $ 8,893 7.09%
Mortgage-backed and related securities . . . . . . . . 6.37 12,672 774 6.11
Investment securities . . . . . . . . . . . . . . . . . 5.94 15,097 758 5.02
Other . . . . . . . . . . . . . . . . . . . . . . . . . 5.49 4,823 236 4.87
----- -------- ------- -----
Total interest-earning assets(1) . . . . . . . . . . . 7.49 157,941 10,661 6.75
-------- ------- -----
Non-interest earning assets(4) . . . . . . . . . . . . 6,511
--------
Total assets . . . . . . . . . . . . . . . . . . . . $164,452
========
Interest-bearing liabilities:
Demand and NOW deposits . . . . . . . . . . . . . . . . 2.60 $ 27,729 626 2.26
Savings deposits . . . . . . . . . . . . . . . . . . . 2.48 12,666 314 2.48
Certificate accounts . . . . . . . . . . . . . . . . . 5.26 93,886 3,906 4.16
FHLB advances . . . . . . . . . . . . . . . . . . . . . 6.27 5,250 295 5.62
----- -------- ------- -----
Total interest-bearing liabilities . . . . . . . . . 4.97 139,531 5,141 3.68
-------- -------
Non-interest bearing liabilities . . . . . . . . . . . 2,606
--------
Total liabilities . . . . . . . . . . . . . . . . . . 142,137
--------
Stockholders' equity . . . . . . . . . . . . . . . . . 22,315
--------
Total liabilities and stockholders' equity . . . . . $164,452
========
Net interest income . . . . . . . . . . . . . . . . . . $ 5,520
=======
Net interest rate spread(2) . . . . . . . . . . . . . . 2.52% 3.07%
==== ====
Net interest-earning assets . . . . . . . . . . . . . . $ 18,410
========
Net yield on average interest-earning assets(3) . . . . 3.12% 3.49%
==== ====
Average interest-earning assets to average
interest-bearing liabilities . . . . . . . . . . . . . 113%
===
</TABLE>
________________________
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
(2) Net interest rate spread represents the difference between the average
rate on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on average interest-earning assets represents net interest
income before provision for loan losses divided by average interest-earning
assets.
(4) Includes FHLB stock.
10
<PAGE> 13
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest- earning
assets and interest-bearing liabilities. It distinguishes between the increase
related to higher outstanding balances and that due to the volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (i.e., changes in volume multiplied by old rate) and
(ii) changes in rate (i.e., changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate.
Year Ended December 31,
<TABLE>
<CAPTION>
1996 v. 1995 1995 v. 1994
-------------------------------------- -------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
---------------------- ----------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable . . . . . . . . . . . . $4,405 $1,220 $5,625 $4,280 $1,020 $5,300
Mortgage-backed and related
securities . . . . . . . . . . . . . . . (184) --- (184) (7) 35 28
Investment securities . . . . . . . . . . (138) (1) (139) (28) 138 110
Other . . . . . . . . . . . . . . . . . . 45 (44) 1 (147) 19 (128)
------ ------ ------ ------ ------ ------
Total interest-earning assets . . . . . $4,128 $1,175 $5,303 $4,098 $1,212 $5,310
====== ====== ====== ====== ====== ======
Interest-bearing liabilities:
Demand and NOW deposits . . . . . . . . $ 152 $ (7) $ 145 $ 15 $ 95 $ 110
Savings deposits . . . . . . . . . . . (5) --- (5) (55) --- (55)
Certificate Accounts . . . . . . . . . 1,127 247 1,374 312 1,068 1,380
FHLB Advances . . . . . . . . . . . . . 1,798 (269) 1,529 2,607 148 2,755
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities . . . $3,072 $ (29) $3,043 $2,879 $1,311 $4,190
====== ====== ------ ====== ====== ======
Net interest income . . . . . . . . . . . $2,260 $1,120
====== ======
</TABLE>
11
<PAGE> 14
INTEREST RATE SPREAD. The following table sets forth, at the dates
indicated, the weighted average yields earned on the Company's assets and the
weighted average rates paid on the Company's liabilities, together with the
interest rate spread.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1996 1995 1994
------- ------- ---------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable . . . . . . . . . . . . . . . . . 8.16% 7.97% 6.83%
Mortgage-backed securities
Available-for-sale . . . . . . . . . . . . . . . . 7.40 6.50 6.50
Held-to-maturity . . . . . . . . . . . . . . . . . --- --- 7.35
Investment securities
Available-for-sale . . . . . . . . . . . . . . . . 6.62 6.38 6.89
Held-to-maturity . . . . . . . . . . . . . . . . . --- --- 4.26
Other interest-earning assets . . . . . . . . . . . 5.80 5.52 5.60
Combined weighted average yield on
interest-earning assets . . . . . . . . . . . . . 7.99 7.80 6.71
Weighted average rate paid on:
Savings deposits . . . . . . . . . . . . . . . . . 2.50 2.50 2.50
Demand and NOW deposits . . . . . . . . . . . . . . 2.91 2.74 2.51
Certificates . . . . . . . . . . . . . . . . . . . 5.57 5.50 4.74
FHLB advances . . . . . . . . . . . . . . . . . . . 5.84 5.94 6.22
Combined weighted average rate paid on
interest-bearing liabilities . . . . . . . . . . . 5.14 5.12 4.41
Spread . . . . . . . . . . . . . . . . . . . . . . 2.85 2.68 2.30
</TABLE>
ASSET/LIABILITY MANAGEMENT
The goal of the Company's asset/liability management strategy is to manage
the interest rate sensitivity of both interest-earning assets and
interest-bearing liabilities so as to maximize net interest income without
exposing it or the Bank's Net Portfolio Value to an excessive level of
interest-rate risk. 1st Savings has employed various strategies intended to
manage the potential effect that changing interest rates have on future
operating results. Historically, the primary asset/liability management
strategy had been to focus on extending the repricing intervals of
interest-bearing liabilities while reducing repricing intervals for
interest-earning assets. The strategy resulted in limited exposure to
interest-rate risk with modest asset and loan growth rates. Subsequent to the
Company's stock conversion, the asset/liability strategy was modified with the
intent of enhancing shareholder returns. The revised strategy increased the
focus on asset growth and allowed for increasing the Company's overall
sensitivity to fluctuating interest rates.
The primary elements of the Company's current asset/liability strategy
includes (i) increasing loans receivable through the origination or purchase of
both fixed and adjustable-rate loans, (ii) emphasizing growth in loans secured
by commercial real estate, home equity and commercial businesses which
typically provide higher yields and shorter repricing periods, (iii) expanding
the consumer loan portfolio, (iv) active solicitation of less-rate sensitive
deposits, (v) offering competitively priced short-term certificates of deposit,
and (vi) the use of FHLB
12
<PAGE> 15
advances or loan sales to help maintain desired equity ratios as well as manage
the Bank's exposure to interest-rate risk. The degree to which each segment of
the strategy is achieved will affect the Company's overall profitability and
exposure to interest-rate risk.
NET PORTFOLIO VALUE
Management utilizes a quarterly report provided by the OTS as one of its
analytical tools to ascertain the sensitivity of the Bank's Net Portfolio Value
("NPV") and therefore the effects of fluctuating interest rates on net interest
income. The OTS provides a NPV approach to the quantification of interest rate
risk. This approach calculates the difference between the present value of
expected cash flows from assets and liabilities, as well as cash flows from
off-balance sheet contracts under a variety of interest rate scenarios.
Under OTS regulations, a thrift's "normal" level of interest rate risk in
the event of this assumed change in interest rates is a decrease in the
thrift's NPV in an amount not exceeding 2% of the present value of its assets.
Thrift institutions with greater than "normal" interest- rate risk exposure
must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of
the difference between (a) the thrift's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure which
is 2% of the present value of its assets. The regulation, however, will not
become effective until the OTS evaluates the process by which thrifts may
appeal an interest rate risk deduction determination. It is uncertain as to
when this evaluation may be completed. The Bank, due to its asset size and
level of risk-based capital, is exempt from this requirement. Notwithstanding
the foregoing, utilizing this measuring concept, as of December 31, 1996, a 200
basis point interest rate increase would have reduced the Bank's NPV by 16% (as
a percentage of the present value of assets) while a 200 basis point decline in
interest rates would have increased the Bank's NPV by 2% (as a percentage of
the present value of assets). Accordingly, a deduction to risk-based capital
would not have been required as of December 31, 1996 even if the regulation
applied to the Bank. As of December 31, 1995, the same 200 basis point
interest rate increase would have reduced NPV by 4%. The change in exposure was
attributed to changes in interest rates and the type, amount and method by
which asset growth was funded.
Presented below, as of December 31, 1996, is an analysis of the Bank's
interest-rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 400 basis points in accordance with OTS regulations. As illustrated
below, the Bank's NPV is more sensitive to rising rates than declining rates.
This occurs principally because, as rates rise, the market value of
interest-earning assets tends to decline due to the change in rates and/or
prepayment expectations. When rates decline, NPV generally does not increase
with the same velocity as it declines in upward rising rate scenarios due to
the tendency of loan and securities anticipated effective durations to decline
due to prepayments.
13
<PAGE> 16
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
Change in
Interest Rates Estimated Estimated NPV as Amount of
(Basis Points) NPV Percentage of Assets Change Percent
------------- --------- -------------------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $20,114 7.14% $(14,242) (41)%
+300 24,730 8.58 (9,626) (28)
+200 28,878 9.82 (5,479) (16)
+100 32,189 10.76 (2,167) (6)
--- 34,356 11.34 --- ---
-100 35,142 11.50 786 2
-200 34,946 11.37 590 2
-300 34,864 11.27 508 1
-400 35,457 11.37 1,101 3
</TABLE>
Certain shortcomings are inherent in any method of interest rate analysis.
For example, although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag
behind changes in market interest rates. Additionally, certain assets, such as
adjustable-rate mortgages, have features which restrict changes in interest
rates on a short term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the
foregoing table. Finally, the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposit growth, FHLB advances,
amortization and prepayment of loan principal, investment maturities and sales,
and on-going operating results. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan prepayment rates
are influenced significantly by interest rates, general economic conditions and
competition. The Company has focused on increasing deposits as its primary
source for funding asset growth, and, when necessary, has utilized FHLB
advances to meet additional funding needs.
Historically, 1st Savings has been required by federal regulations to
maintain minimum levels of specified liquid assets in order to fund the cash
needs of the Bank. The required percentage has varied over the years based
upon market and economic conditions, and is currently 5% of net withdrawable
savings deposits plus borrowings payable on demand or in one year or less.
Eligible liquid assets for this ratio include cash and cash equivalents, U.S.
Government, government agency, municipal and corporate securities having
remaining maturities of less than five years. The Bank's liquidity ratio at
December 31, 1996, was 9.82%.
14
<PAGE> 17
The Company uses its liquid assets as well as other funding sources to meet
on-going commitments, to fund loan commitments, to repay maturing certificates
of deposit and FHLB advances, to make investments, to fund other deposit
withdrawals, to maintain liquidity requirements and to meet operating expenses.
At December 31, 1996, the Bank had outstanding commitments to extend credit and
purchase AFS securities of $13.2 million (including $9.0 million in
loans-in-process and lines of credit). Management believes that current
funding sources will be adequate to meet the Company's foreseeable liquidity
needs.
The primary source of funding for the Company are deposits and FHLB
advances. For the year ended December 31, 1996 the Company increased deposits
and FHLB advances by $35.5 million and $11.0 million, respectively, as compared
to respective increases of $10.3 million and $49.4 million during the prior
year. The amount or degree to which the Company will continue to attract and
retain new deposits is unknown; however, at December 31, 1996, the Company had
additional borrowing capacity from the FHLB of approximately $86.0 million.
Liquidity management is an on-going responsibility of the Company's
management. The Company adjusts its investment in liquid assets based upon a
variety of factors including (i) expected loan demand and deposit flows, (ii)
anticipated investment and FHLB advance maturities, (iii) the impact on
profitability, and (iv) asset/liability management objectives.
At December 31, 1996, the Company had $85.7 million in certificates of
deposit due within one year and $50.6 million in other deposits without
specific maturity, as well as FHLB advances due within one year of $32.0
million. Management believes that most maturing interest- bearing liabilities
will be retained or replaced by new interest-bearing liabilities.
REGULATORY CAPITAL
Federally insured savings institutions are required to maintain a minimum
level of regulatory capital. OTS regulations established capital requirements,
including a tangible capital requirement, a leverage (or core capital)
requirement and a risk-based capital requirement applicable to savings
institutions. These capital requirements must be generally as stringent as the
comparable capital requirements for national banks. The OTS is also authorized
to impose capital requirements in excess of these standards on individual
institutions on a case- by-case basis.
At December 31, 1996, the Bank continued to exceed all regulatory capital
requirements with tangible and core capital of $25.2 million and $25.2 million,
or 8.6% and 8.6% of adjusted total assets, respectively, which were
approximately $20.8 million and $16.4 million above the minimum requirements of
1.5% and 3.0%, respectively, of the adjusted total assets in effect on that
date. On December 31, 1996 the Bank had risk-based capital of $27.0 million,
or 16.5% of risk-weighted assets of $163.7 million. This amount was $13.9
million above the 8.0% requirement in effect on that date. Under regulatory
guidelines, the Bank was considered well-capitalized at December 31, 1996.
15
<PAGE> 18
IMPACT OF INFLATION
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operations of the Company is reflected in increased operating costs. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, change in interest
rates generally have a more significant impact on a financial institution's
performance than does inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services. In
the current interest rate environment, liquidity and maturity structure of the
Company's assets and liabilities are critical to the maintenance of acceptable
performance levels.
IMPACT OF NEW ACCOUNTING STANDARDS
The FASB has issued Financial Accounting Standards Statement No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation." FAS 123 establishes a fair
value based method of accounting for stock-based compensation plans. It
encourages entities to adopt that method in place of the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. FAS 123 applies to financial
statements for fiscal 1996. Management is continuing to account for
stock-based compensation in accordance with the provisions of APB No. 25.
The FASB has issued Statement of Financial Accounting Standards No. 125,
("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The primary impact of SFAS 125 on mortgage
banking concerns is to extend the rules in SFAS 122 from servicing of mortgage
loans to all loan servicing. Adoption of SFAS 125 will be required by the
Company during the fiscal year ending December 31, 1997. The impact of this
statement is not expected to have a material effect on the Company's financial
statements.
16
<PAGE> 19
Independent Accountants' Report
Board of Directors
Sho-Me Financial Corp.
Mt. Vernon, Missouri
We have audited the accompanying consolidated statements of financial
condition of SHO-ME FINANCIAL CORP. AND SUBSIDIARY as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SHO-ME
FINANCIAL CORP. AND SUBSIDIARY as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1, in 1994 the Company changed its method of accounting
for investments in debt and equity securities.
/s/ Baird Kurtz & Dobson
February 7, 1997
Springfield, Missouri
-17-
<PAGE> 20
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
------
1996 1995
---- ----
<S> <C> <C>
Cash and due from banks $ 1,687,719 $ 1,323,867
Interest bearing deposits in other
financial institutions 9,838,295 4,250,841
------------ ------------
Cash and cash equivalents 11,526,014 5,574,708
Available-for-sale securities 18,880,277 20,810,487
Loans receivable, net 255,469,576 214,445,042
Premises and equipment, net 5,452,142 5,216,836
Interest receivable
Loans 1,604,575 1,238,760
Investments 213,910 213,487
Investment in FHLB stock 4,325,000 3,871,000
Prepaid expenses and other assets 94,048 283,032
Deferred income taxes 430,913 406,390
------------ ------------
Total Assets $297,996,455 $252,059,742
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
-18-
<PAGE> 21
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
LIABILITIES
Deposits $ 182,014,158 $ 146,550,426
Federal Home Loan Bank advances 84,051,000 73,024,000
Advances from borrowers for taxes and insurance 619,096 502,188
Accounts payable and accrued expenses 815,732 765,867
Income taxes payable 464,342 251,746
------------ ------------
Total Liabilities 267,964,328 221,094,227
------------ ------------
STOCKHOLDERS' EQUITY
Serial preferred stock, $.01 par value;
authorized 1,000,000 shares
Common stock, $.01 par value; authorized
6,000,000 shares, issued 2,049,875 shares 20,499 20,499
Additional paid-in capital 19,997,273 19,716,466
Retained earnings, substantially
restricted 18,886,732 16,688,663
Unrealized appreciation (depreciation) on
available-for-sale securities, net of
income taxes of $84,087 and $(2,390)
in 1996 and 1995, respectively 137,194 (3,899)
Unearned ESOP shares (995,179) (1,228,346)
Unearned MRP shares (313,498) (600,966)
Treasury stock, at cost; 1996 - 456,085 shares;
1995 - 228,925 shares (7,700,894) (3,626,902)
------------ ------------
Total Stockholders' Equity 30,032,127 30,965,515
------------ ------------
Total Liabilities and Stockholders' Equity $297,996,455 $252,059,742
============ ============
</TABLE>
<PAGE> 22
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 19,817,314 $ 14,192,598 $ 8,893,208
Available-for-sale securities 1,346,837 1,669,921 1,532,469
Other 109,208 108,244 235,366
--------------- ---------------- ----------------
21,273,359 15,970,763 10,661,043
--------------- ---------------- ----------------
INTEREST EXPENSE
Deposits 7,794,952 6,281,030 4,846,906
Federal Home Loan Bank advances 4,578,851 3,050,346 294,532
--------------- ---------------- ----------------
12,373,803 9,331,376 5,141,438
--------------- ---------------- ----------------
NET INTEREST INCOME 8,899,556 6,639,387 5,519,605
PROVISION FOR LOAN LOSSES 155,000 130,000 90,000
--------------- ---------------- ----------------
NET INTEREST INCOME
AFTER PROVISION
FOR LOAN LOSSES 8,744,556 6,509,387 5,429,605
--------------- ---------------- ----------------
NONINTEREST INCOME
Service charges and fees 503,182 405,586 391,281
Net realized gains (losses) on sales of
loans, available-for-sale securities
and other assets 127,593 32,313 (63,475)
Income on foreclosed assets 4,778 4,088 92,554
Other income 684,679 536,208 239,212
--------------- ---------------- ----------------
1,320,232 978,195 659,572
--------------- ---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements
-19-
<PAGE> 23
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,826,837 $ 2,394,769 $ 1,810,840
Net occupancy expense 815,084 579,718 522,520
Deposit insurance premium 1,255,559 313,048 305,399
FHLB service charges 232,511 197,424 180,128
Data processing 362,522 324,884 292,613
Legal and professional fees 213,456 185,957 99,862
Advertising 240,421 170,574 181,726
Other operating expenses 647,529 521,588 423,630
--------------- ---------------- ----------------
6,593,919 4,687,962 3,816,718
--------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 3,470,869 2,799,620 2,272,459
PROVISION FOR INCOME TAXES 1,272,800 1,053,200 841,000
--------------- ---------------- ----------------
NET INCOME $ 2,198,069 $ 1,746,420 $ 1,431,459
=============== ================ ================
EARNINGS PER COMMON
SHARE
Since conversion $1.35 $.96 $.40
==== === ===
</TABLE>
See Notes to Consolidated Financial Statements
-20-
<PAGE> 24
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
--------- ----------- --------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ $ $ 13,510,784
Net income 1,431,459
Initial adoption of SFAS No. 115,
net of income taxes of $97,183
Stock issued under plan of conversion
to stock ownership 20,499 19,678,251
Release of ESOP shares
Change in unrealized depreciation
on available-for-sale securities,
net of income taxes of $325,262
--------------- --------------- ----------------
BALANCE, DECEMBER 31, 1994 20,499 19,678,251 14,942,243
Net income 1,746,420
Stock issued under MRP (63,058)
Release of ESOP shares 101,273
Vesting of MRP shares
Change in unrealized depreciation
on available-for-sale securities,
net of income taxes of $420,055
Treasury stock purchased
--------------- ---------------- ---------------
BALANCE, DECEMBER 31, 1995 20,499 19,716,466 16,688,663
Net income 2,198,069
Stock issued under Stock Option Plan
Release of ESOP shares 273,970
Vesting of MRP shares 6,837
Change in unrealized appreciation
(depreciation) on available-for-sale
securities, net of income taxes of $86,477
Treasury stock purchased
--------------- ---------------- ---------------
BALANCE, DECEMBER 31, 1996 $ 20,499 $ 19,997,273 $ 18,886,732
=============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
-21-
<PAGE> 25
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
on Available- Unearned Unearned
for-Sale ESOP MRP Treasury
Securities, Net Shares Shares Stock Total
--------------- -------- --------- --------- -----
<S> <C> <C> <C> <C>
$ $ $ $ $ 13,510,784
1,431,459
(165,474) (165,474)
(1,639,900) 18,058,850
236,284 236,284
(553,823) (553,823)
--------------- ---------------- ---------------- --------------- --------------
(719,297) (1,403,616) 32,518,080
1,746,420
(914,051) 977,109
175,270 276,543
313,085 313,085
715,398 715,398
(4,604,011) (4,604,011)
--------------- ---------------- ---------------- --------------- --------------
(3,899) (1,228,346) (600,966) (3,626,902) 30,965,515
2,198,069
3,938 3,938
233,167 507,137
287,468 294,305
141,093 141,093
(4,077,930) (4,077,930)
--------------- ---------------- ---------------- --------------- --------------
$ 137,194 $ (995,179) $ (313,498) $ (7,700,894) $ 30,032,127
=============== ================ ================ =============== ==============
</TABLE>
<PAGE> 26
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 2,198,069 $ 1,746,420 $ 1,431,459
Items not requiring (providing) cash
Depreciation 353,150 267,113 266,838
Provision for loan losses 155,000 130,000 90,000
Net realized (gains) losses on available-for-sale
securities 20,250 (6,207) 87,106
FHLB stock dividends received (71,000)
Origination of loans held for delivery against
commitments (588,820) (1,840,250) (1,496,250)
Proceeds from sale of loans held for delivery
against commitments 601,674 1,866,356 1,839,631
Gain on sale of loans (12,854) (26,106) (23,631)
Gain on sale of foreclosed assets (5,179) (9,228) (87,977)
Gain on sale of other assets (134,989)
Amortization of deferred income,
premiums and discounts on loans and investments (48,426) 13,421 (215,765)
Deferred income taxes (111,000) (52,000) 23,193
Vesting of MRP shares 294,305 313,085
Release of ESOP shares 507,137 276,543 236,284
Changes in:
Accrued interest receivable (366,239) (506,115) (208,398)
Prepaid expenses and other assets 42,698 (44,974) 42,139
Accrued expenses and interest payable 199,150 292,749 159,945
Income taxes payable 212,596 77,444 56,019
-------------- ------------- -------------
Net cash provided by operating activities 3,316,522 2,427,251 2,200,593
-------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
-22-
<PAGE> 27
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES
Net originations of loans $ (50,155,148) $ (59,359,628) $ (37,373,882)
Purchase of loans (360,000) (1,294,570) (9,637,832)
Proceeds from sales of loans 9,415,629
Purchase of premises and equipment (588,456) (2,775,393) (726,245)
Proceeds from the sale of available-for-sale securities 7,606,235 9,302,058 4,884,840
Proceeds from maturities of available-for-sale securities 3,110,000 1,500,000
Proceeds from maturities of held-to-maturity securities 4,995,181 4,000,000
Purchases of available-for-sale securities (9,635,210) (6,133,210) (11,917,598)
Purchases of held-to-maturity securities (1,220,000) (4,666,091)
Principal reductions of securities 1,030,095 1,563,015 3,344,664
Purchases of Federal Home Loan Bank stock (454,000) (2,570,000) (202,700)
Proceeds from the sale of foreclosed assets 59,729 180,164
Proceeds from sale of other assets 281,275
--------------- ------------- -------------
Net cash used in investing activities (39,749,580) (55,932,818) (52,114,680)
--------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 19,698,750
Net increase in checking and savings 9,343,036 1,784,583 2,520,201
Net increase in certificates of deposit 25,998,412 8,468,641 976,164
Proceeds from FHLB advances 76,760,000 116,724,000 42,200,000
Repayments of FHLB advances (65,760,000) (67,300,000) (18,600,000)
Net increase in advances from borrowers
for taxes and insurance 116,908 96,062 54,218
Origination of ESOP debt (1,639,900)
Purchase of treasury stock (4,077,930) (4,604,011)
Stock issued under Stock Option Plan 3,938
--------------- ------------- -------------
Net cash provided by financing activities 42,384,364 55,169,275 45,209,433
--------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,951,306 1,663,708 (4,704,654)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 5,574,708 3,911,000 8,615,654
--------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 11,526,014 $ 5,574,708 $ 3,911,000
=============== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
-23-
<PAGE> 28
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
Sho-Me Financial Corp. (the "Company") operates as a one savings bank
holding company. 1st Savings Bank (the "Savings Bank") is primarily engaged in
providing a full range of banking and mortgage services to individual and
corporate customers in southwest Missouri. The Company also provides other
services, such as insurance brokerage activities. The Savings Bank is subject
to competition from other financial institutions. The Company and the Savings
Bank are also subject to the regulation of certain federal agencies and undergo
periodic examinations by those regulatory authorities.
On June 28, 1994, Sho-Me Financial Corp. completed the issuance of
2,049,875 shares of common stock in connection with the conversion of 1st
Savings Bank from a federally chartered mutual savings bank to a federally
chartered stock savings bank. In this conversion, the Company acquired all of
the common stock of the Savings Bank and became a savings bank holding company
(see Note 15).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses
and the valuation of foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
-24-
<PAGE> 29
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Management believes that the allowances for losses on loans and the
valuation of foreclosed assets held for sale are adequate. While management
uses available information to recognize losses on loans and foreclosed assets
held for sale, changes in economic conditions may necessitate revision of these
estimates in future years. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Savings
Bank's allowances for losses on loans and valuation of foreclosed assets held
for sale. Such agencies may require the Savings Bank to recognize additional
losses based on their judgments of information available to them at the time of
their examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sho-Me
Financial Corp. and its wholly-owned subsidiary, 1st Savings Bank, and its
wholly-owned subsidiary, 1st Savings Financial Corp. Significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND INVESTMENT SECURITIES
Regulations require the Savings Bank to maintain an amount in cash and U.S.
government and other approved securities equal to 5.0% of savings deposits (net
of loans on savings deposits) plus short-term borrowings.
The Savings Bank is a member of the Federal Home Loan Bank system. As a
member of this system, it is required to maintain an investment in capital
stock of the Federal Home Loan Bank in an amount equal to the greater of 1% of
its outstanding home loans, 0.3% of its total assets, or one-twentieth of its
outstanding advances from the Bank.
CASH EQUIVALENTS
The Savings Bank considers all liquid investments with original maturities
of three months or less to be cash equivalents.
-25-
<PAGE> 30
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN DEBT AND EQUITY SECURITIES
As of January 1, 1994, the Company adopted the provisions of the Financial
Accounting Standards Board Statement No. 115 (FAS 115) regarding investments in
debt and equity securities. The adoption of FAS 115 resulted in a net decrease
to stockholders' equity of approximately $165,000. Management determines the
appropriate classification of securities at the time of purchase.
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the future, are
carried at fair value. Realized gains and losses, based on specifically
identified amortized cost of the specific security, are included in other
income. Unrealized gains and losses are recorded, net of related income tax
effects, in stockholders' equity. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method over
the period to maturity.
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are carried
at historical cost adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted, respectively, to
interest income using the level-yield method over the period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
financial statements presentation. These reclassifications had no effect on
net income.
-26-
<PAGE> 31
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value occurs.
Forward commitments to sell mortgage loans are acquired to reduce market risk
on mortgage loans in the process of origination and mortgage loans held for
sale. Gains and losses resulting from sales of mortgage loans are recognized
when the respective loans are sold to investors. Gains and losses are
determined by the difference between the selling price and the carrying amount
of the loans sold, net of discounts collected or paid and considering a normal
servicing rate. Fees received from borrowers to guarantee the funding of
mortgage loans held for sale and fees paid to investors to ensure the ultimate
sale of such mortgage loans are recognized as income or expense when the loans
are sold or when it becomes evident that the commitment will not be used.
There were no mortgage loans held for sale at December 31, 1996 or 1995.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged to expense
and reduced by loans charged off, net of recoveries. The allowance is
maintained at a level considered adequate to provide for potential loan losses,
based on management's evaluation of the loan portfolio, as
-27-
<PAGE> 32
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
well as on prevailing and anticipated economic conditions and historical losses
by loan category. General allowances have been established, based upon the
aforementioned factors, and allocated to the individual loan categories.
Allowances are accrued on specific loans evaluated for impairment for which the
basis of each loan, including accrued interest, exceeds the discounted amount
of expected future collections of interest and principal or, alternatively, the
fair value of loan collateral.
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
A loan is considered impaired when it is probable that the Savings Bank
will not receive all amounts due according to the contractual terms of the
loan. This includes loans that are delinquent 90 days or more (nonaccrual
loans) and certain other loans identified by management. Accrual of interest
is discontinued, and interest accrued and unpaid is removed, at the time such
amounts are delinquent 90 days. Interest is recognized for nonaccrual loans
only upon receipt, and only after all principal amounts are current according
to the terms of the contract.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at estimated fair value as of the date of foreclosure, and a related
valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair
value. Changes in the valuation allowance are charged or credited to other
expense.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using straight-line and accelerated methods
over the estimated useful lives of the assets.
FEE INCOME
Loan origination fees, net of direct origination costs, are recognized as
income using the level-yield method over the term of the loans.
-28-
<PAGE> 33
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized.
-29-
<PAGE> 34
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
FUTURE CHANGES IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board recently adopted Statement No.
125, (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". FAS 125, which originally was to become
effective for transactions that occur after December 31, 1996, imposes new
rules for determining when transfers of financial assets are accounted for as
sales versus when transfers are accounted for as borrowings. Management
believes that FAS 125 should have no significant impact on the Company's
consolidated financial statements.
EARNINGS PER SHARE
Earnings per common share for 1996, 1995 and 1994 (since the conversion)
are based on the weighted average number of common shares outstanding for the
period less the weighted average number of shares of treasury stock divided
into net income. The weighted average number of common shares includes
restricted shares issued under the Company's MRP (Note 10) but does not include
unallocated shares of the Company's ESOP (Note 10).
Average shares include the weighted average number of common shares
considered outstanding, plus the shares issuable upon exercise of stock options
after the assumed repurchase of common shares with the related proceeds as
follows:
<TABLE>
<CAPTION>
Weighted Average Number Shares
of Common Shares Issuable
------------------------ --------
<S> <C> <C>
1996 1,606,573 22,467
1995 1,830,801 7,632
1994 (post conversion) 1,886,074 -0-
</TABLE>
-30-
<PAGE> 35
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair value of available-for-sale
securities are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. government agencies $ 8,960,657 $ 50,929 $ 60,845 $ 8,950,741
SBA loan pools 1,647,078 33,274 338 1,680,014
State and political subdivisions 1,034,221 7,281 925 1,040,577
Mortgage-backed securities 6,386,799 86,218 6,473,017
-------------- ---------- ------------ ------------
18,028,755 177,702 62,108 18,144,349
Equity investments 630,241 105,687 735,928
-------------- ---------- ------------ ------------
$ 18,658,996 $ 283,389 $ 62,108 $ 18,880,277
============== ========== ============ ============
<CAPTION>
December 31, 1995
-----------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. government agencies $ 5,946,107 $ $ 87,194 $ 5,858,913
SBA loan pools 1,851,548 36,811 1,888,359
State and political subdivisions 404,430 2,844 407,274
Mortgage-backed securities 11,614,691 101,466 60,216 11,655,941
-------------- ---------- ------------ ------------
19,816,776 141,121 147,410 19,810,487
Equity investments 1,000,000 1,000,000
-------------- ---------- ------------ ------------
$ 20,816,776 $ 141,121 $ 147,410 $ 20,810,487
============== ========== ============ ============
<CAPTION>
Maturities of available-for-sale debt instruments at December 31, 1996:
Approximate
Amortized Cost Fair Value
-------------- -----------
<S> <C> <C>
After one through five years $ 8,594,774 $ 8,593,585
After five years through ten years 1,400,104 1,397,734
Mortgage-backed and other debt
securities not due on a single
maturity date 8,033,877 8,153,030
-------------- --------------
$ 18,028,755 $ 18,144,349
============== ==============
</TABLE>
-31-
<PAGE> 36
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED)
The book value of securities pledged as collateral, to secure public
deposits and for other purposes, amounted to approximately $12,411,000 at
December 31, 1996, and $11,613,000 at December 31, 1995. The approximate fair
value of pledged securities amounted to $12,405,000 at December 31, 1996, and
$11,599,000 at December 31, 1995.
Gross gains of $285,978, $52,830 and $-0- and gross losses of $306,228,
$46,623 and $87,106 resulting from sales of available-for-sale securities were
realized for 1996, 1995 and 1994, respectively.
As of November 17, 1995, the Company redesignated held-to-maturity
securities with an aggregate amortized cost of $7,886,143 and net unrealized
gains of $49,265 to the available-for-sale portfolio. The redesignation was
prompted by the announcement by the Financial Accounting Standards Board to
allow a one-time redesignation and reflected management's expectations of
liquidity needs.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 1996 and 1995, include:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
One to four family mortgage loans $ 204,521,747 $ 170,145,877
Commercial real estate loans 32,567,283 27,122,220
Other commercial loans 3,493,222 1,874,537
Construction and development loans 14,970,189 15,636,769
Installment loans 9,036,653 7,167,002
Savings accounts 1,235,270 1,243,552
---------------- ----------------
265,824,364 223,189,957
Undisbursed portion of construction loans (8,092,729) (6,692,885)
Allowance for loan losses (1,824,195) (1,689,404)
Net deferred loan origination fees (428,403) (341,508)
Unearned discounts and interest (9,461) (21,118)
---------------- ----------------
$ 255,469,576 $ 214,445,042
================ ================
</TABLE>
-32-
<PAGE> 37
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 1,689,404 $ 1,613,914 $ 1,541,655
Provision charged to expense 155,000 130,000 90,000
Losses charged off (33,361) (57,991) (17,741)
Recoveries 13,152 3,481
-------------- --------------- ----------------
Balance, end of year $ 1,824,195 $ 1,689,404 $ 1,613,914
============== =============== ================
</TABLE>
The weighted average interest rate on loans receivable at December 31, 1996
and 1995, was 8.16% and 7.97%, respectively.
The Savings Bank serviced whole mortgage loans and participations in
mortgage loans for others amounting to $20,273,454, $12,564,436 and $14,492,626
at December 31, 1996, 1995 and 1994, respectively.
Impaired loans totaled $254,364 and $35,114 at December 31, 1996 and 1995,
respectively. An allowance for loan losses of $38,154 and $4,875 relates to
impaired loans of $254,364 and $16,187 at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, respectively, impaired loans of
$-0- and $19,627 had no related allowance for loan losses.
Interest of $18,100 and $1,900 was recognized on average impaired loans of
$158,300 and $19,350 for 1996 and 1995. Interest of $18,100 and $1,900 was
recognized on impaired loans on a cash basis during 1996 and 1995.
33
<PAGE> 38
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Loans on which the accrual of interest had been discontinued amounted to
$37,736 at December 31, 1994. If interest on these loans had been accrued,
such interest income would have approximated $1,500 at December 31, 1994.
NOTE 4: FORECLOSED ASSETS HELD FOR SALE
At December 31, 1996 and 1995, there were no foreclosed assets held for
sale.
NOTE 4: FORECLOSED ASSETS HELD FOR SALE (CONTINUED)
Transactions in the valuation allowance for foreclosed assets were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ -0- $ 5,050 $ 147,000
Charge-offs, net of recoveries (5,050) (141,950)
-------------- --------------- ---------------
Balance, end of year $ -0- $ -0- $ 5,050
============== =============== ================
</TABLE>
NOTE 5: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, at December
31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 609,944 $ 609,944
Buildings and improvements 5,938,471 5,518,424
Furniture, fixtures and equipment 1,408,938 1,480,362
---------------- ----------------
7,957,353 7,608,730
Less accumulated depreciation 2,505,211 2,391,894
---------------- ----------------
$ 5,452,142 $ 5,216,836
================ ================
</TABLE>
34
<PAGE> 39
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Depreciation expense was $353,150, $267,113 and $266,838 for 1996, 1995 and
1994, respectively.
NOTE 6: DEPOSITS
Deposits at December 31, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rate
---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Noninterest-bearing checking $ 4,468,178 $ 3,788,831
Interest-bearing checking 2.91% - 3.12% 36,506,457 27,379,059
Savings 2.50% - 2.50% 9,632,768 10,096,477
---------------- -----------------
50,607,403 41,264,367
---------------- -----------------
Certificates of deposit:
0% - 4.99% 3,527,569 17,361,864
5% - 5.99% 111,540,045 63,756,320
6% and up 15,969,711 23,920,729
---------------- -----------------
131,037,325 105,038,913
---------------- -----------------
Accrued interest on savings deposits 369,430 247,146
---------------- -----------------
$ 182,014,158 $ 146,550,426
================ =================
</TABLE>
The weighted average interest rate on certificates of deposit at December
31, 1996 and 1995, was 5.57% and 5.50%, respectively.
35
<PAGE> 40
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The aggregate amount of certificates of deposit in denominations of $100,000
or more was approximately $12,162,000 and $6,255,000 at December 31, 1996 and
1995, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1997 $ 85,650,779
1998 38,174,384
1999 5,424,467
2000 1,218,937
2001 552,240
Thereafter 16,518
----------------
$ 131,037,325
=================
</TABLE>
NOTE 6: DEPOSITS (CONTINUED)
Interest expense on deposits for the years ended December 31, 1996, 1995 and
1994, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Checking $ 880,575 $ 735,887 $ 626,325
Savings 254,197 258,992 314,327
Certificates of deposit 6,684,744 5,321,545 3,919,767
Early withdrawal penalties (24,564) (35,394) (13,513)
-------------- --------------- ---------------
$ 7,794,952 $ 6,281,030 $ 4,846,906
============== =============== ================
</TABLE>
36
<PAGE> 41
NOTE 7: ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following at
December 31, 1996 and 1995:
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- ---------------------------------------
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
----------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C>
1996 $ % $ 23,000,000 6.06%
1997 42,000,000 6.00 29,000,000 6.11
1998 25,000,000 5.75 9,000,000 6.15
1999 5,000,000 5.44 12,000,000 5.22
2000 2,000,000 5.22
2001 10,000,000 5.82
Accrued interest
on advances 51,000 24,000
-------------- --------------
$ 84,051,000 5.76% $ 73,024,000 5.94%
============== ===== ============== ======
</TABLE>
In addition to the above advances, the Savings Bank had available a line of
credit amounting to $6,000,000 with the FHLB at December 31, 1996. The Company
has also pledged 30,000 shares of its treasury stock held as collateral against
a margin account, which was not used at December 31, 1996.
NOTE 7: ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
The FHLB requires the Savings Bank to maintain specifically pledged mortgage
loans free of other pledges, liens and encumbrances as collateral for such
borrowings.
NOTE 8: REGULATORY MATTERS
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
37
<PAGE> 42
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Savings Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Savings Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Savings Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Savings Bank's actual capital amounts and ratios are also presented in
the table. There was no deduction from capital for interest-rate risk.
NOTE 8: REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Risk Based Capital
(to Risk Weighted Assets) $27,008 16.5% $13,100 8.0% $16,375 10.0%
Tier I Risk Based Capital
(to Risk Weighted Assets) 25,184 15.4 6,550 4.0 9,825 6.0
Core Capital
(to Adjusted Tangible Assets) 25,184 8.6 8,822 3.0 14,703 5.0
Tangible Capital
(to Adjusted Tangible Assets) 25,184 8.6 4,411 1.5 N/A N/A
</TABLE>
-38-
<PAGE> 43
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The Savings Bank is subject to certain restrictions on the amount of
dividends that it may declare without regulatory approval. At December 31,
1996, approximately $7.9 million of the Savings Bank's retained earnings were
available for dividend declaration without prior regulatory approval.
NOTE 9: INCOME TAXES
The Company files a consolidated federal tax return. Historically, thrifts
such as the Savings Bank were allowed a percentage of otherwise taxable income
as a statutory bad debt deduction, subject to limitations based on aggregate
loans and savings balances. This percentage was 8%. In August 1996 this
statutory bad debt deduction was repealed and is no longer available for
thrifts. In addition, bad debt reserves accumulated after 1987, which are
presently included as a component of the net deferred tax liability, must be
recaptured over a six to eight year period. The amount of the deferred tax
liability which must be recaptured is $336,805 at December 31, 1996.
NOTE 9: INCOME TAXES (CONTINUED)
Retained earnings at December 31, 1996 and 1995, includes approximately
$3,275,000 for which no deferred federal income tax liability has been
recognized. These amounts represent an allocation of income to bad debt
deductions for tax purposes only for tax years prior to 1988. If the Savings
Bank were to liquidate the entire amount would have to be recaptured and would
create income for income tax purposes only, which would be subject to the
then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $1,212,000 at December 31, 1996
and 1995.
-39-
<PAGE> 44
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Taxes currently payable $ 1,383,800 $ 1,105,200 $ 817,807
Deferred income taxes (111,000) (52,000) 23,193
-------------- --------------- ---------------
$ 1,272,800 $ 1,053,200 $ 841,000
============== =============== ================
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the December 31, 1996 and 1995, statements of financial condition were:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 674,952 $ 602,966
Accrued compensated absences 24,050 24,050
Deferred compensation liability 34,244 38,776
Deferred loan fees 158,509 126,358
Vesting of MRP 143,990 115,841
Unrealized depreciation on available-for-sale
securities 2,390
Other 1,604
--------------- ---------------
1,035,745 911,985
--------------- ---------------
</TABLE>
-40-
<PAGE> 45
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 9: INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Accumulated depreciation $ (34,241) $ (23,903)
FHLB stock dividends (147,588) (147,588)
Tax basis of allowance for loan losses (336,805) (334,104)
Unrealized appreciation on available-
for-sale securities (84,087)
Other (2,111)
--------------- ---------------
(604,832) (505,595)
--------------- ---------------
Net deferred tax asset $ 430,913 $ 406,390
=============== ================
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed at the statutory rate 34.0% 34.0% 34.0%
State income taxes 3.0 3.4 3.4
Other (.3) .2 (.4)
-------- --------- ---------
36.7% 37.6% 37.0%
======== ========= =========
</TABLE>
State legislation provides that savings banks will be taxed based on an
annual privilege tax of 7% of taxable income. This privilege tax is included
in the provision for income taxes for 1996, 1995 and 1994.
Deferred income taxes related to the change in unrealized appreciation
(depreciation) on available-for-sale securities, shown in stockholders' equity,
were $86,477, $420,055 and $(325,262) for 1996, 1995 and 1994, respectively.
-41-
<PAGE> 46
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: EMPLOYEE BENEFIT PLANS
The Savings Bank has entered into an agreement which provides for certain
amounts of salary continuation to the beneficiary of the Savings Bank's former
president and one of the Savings Bank's directors or his estate upon
retirement, disability or death. Annual amounts were accrued to provide for
estimated deferred compensation at the full eligibility date.
The Savings Bank participates in a multi-employer defined benefit pension
plan covering all employees who have met minimum service requirements. The
Savings Bank's policy is to fund pension cost accrued. Total pension plan
expense amounted to $49,000, $16,786 and $620 for the years ended December 31,
1996, 1995 and 1994, respectively. As a member of a multi-employer pension
plan, disclosures of plan assets and liabilities for individual employers are
not required or practicable.
Effective upon the conversion discussed in Note 15, the Company
established an internally-leveraged Employee Stock Ownership Plan (ESOP). All
employees are eligible to participate after they attain age 21 and complete 12
consecutive months of service during which they work at least 1,000 hours.
Shares are allocated to participants' accounts based on services rendered for
the plan year. The Corporation accounts for its ESOP in accordance with
Statement of Position 93-6.
The ESOP borrowed $1,639,900 from the Company and used the funds to
purchase 163,990 shares of the common stock of the Company. The loan will be
repaid from contributions to the ESOP as approved annually by the Savings
Bank's Board of Directors. At December 31, 1996 and 1995, respectively, the
loan had an outstanding balance of $978,187 and $1,210,630 and carried an
interest rate of 7.52%. Any dividends received by the ESOP will be used to pay
debt service. The ESOP shares are pledged as collateral on the issued debt.
As the debt is repaid, shares are released from collateral and allocated to
employees' accounts. The debt of the ESOP is eliminated in consolidation but
the shares pledged as collateral are reported as unearned ESOP shares in the
consolidated statement of financial condition. When shares are released from
collateral, the shares become outstanding for Earnings Per Share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings and may be paid directly to participants or credited to their account;
dividends on unallocated ESOP shares are recorded as a reduction of the
unearned ESOP shares and accrued interest. Compensation expense attributed to
the ESOP was $507,137, $276,543 and $300,000 for the years ended December 31,
1996, 1995 and 1994. The ESOP shares as of December 31, 1996 and 1995, were as
follows:
-42-
<PAGE> 47
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Allocated shares 41,158 20,391
Shares released for allocation 23,317 20,767
Unreleased shares 99,515 122,832
-------------- -------------
Total ESOP shares 163,990 163,990
============== =============
Fair value of unreleased shares $ 2,164,451 $ 1,842,525
============== =============
</TABLE>
The Company has established a Management Recognition and Retention Plan
(MRP) for the benefit of directors, officers and employees of the Company and
its subsidiary. The MRP was voted on and approved by the Company's
stockholders at the April 26, 1995, annual stockholders' meeting. The MRP
provides directors, officers and employees of the Company with a proprietary
interest in the Company in a manner designed to encourage these individuals to
remain with the Company.
The Plan is administered by a Compensation Committee consisting of the
Company's outside Board of Directors. Under the Plan, the Committee can award
up to 81,995 shares of the Company's common stock to selected directors,
officers and employees. As of December 31, 1996, 63,038 shares have been
awarded. These shares represent unearned compensation and have been accounted
for as a reduction of stockholders' equity. The awards vest at the rate of 20%
per year over a five year period. The Compensation Committee may accelerate a
participant's vesting at its discretion. Compensation expense is recognized
based on the Company's stock price on the date the Plan was ratified by
stockholders, which was $14.50 per share. The Savings Bank recognized $287,468
and $313,085 of expense under the MRP in 1996 and 1995, respectively.
In addition to the MRP, the Company has established the 1994 Stock Option
and Incentive Plan for the benefit of certain directors, officers and employees
of the Company and its subsidiary. The Plan was voted on and approved by
stockholders at the April 26, 1995, annual stockholders' meeting. The Plan is
administered by the Company's Compensation Committee. Under the Plan, the
Compensation Committee may grant stock options or awards of up to 204,987
shares of the Company's common stock.
-43-
<PAGE> 48
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: EMPLOYEE BENEFIT PLANS (CONTINUED)
The stock options may be either incentive stock options or nonqualified
stock options. Incentive stock options can be granted only to participants who
are employees of the Company or its subsidiary. The option price must not be
less than the market value of the Company's stock on the date of grant. All
options expire no later than 10 years from the date of grant. The options vest
at the rate of 20% per year over a five-year period.
A summary of the status of the plan at December 31, 1996 and 1995, and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- ---------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ------------------ ------ -------------------
<S> <C> <C> <C> <C>
Outstanding,
Beginning of Year 142,596 $ 14.50 -0- $
Granted 12,500 16.10 145,596 14.50
Exercised (250) (14.50)
Forfeited (1,500) (14.50) (3,000)
-------------- -------- -------------- --------
Outstanding,
End of Year 153,346 $ 14.63 142,596 $ 14.50
============== ======== ============== ========
Options Exercisable,
End of Year 28,169 -0-
============== ==============
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black Scholes pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Dividend per Share $ -0- $ -0-
Risk-Free Interest Rate 6.45% 6.85%
Expected Life of Options 5 years 5 years
Weighted-Average Fair Value of
Options Granted During Year $ 6.64 $ 5.58
</TABLE>
-44-
<PAGE> 49
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about stock options under the
Plan outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------------------
Range of Number Remaining Number Exercise
Exercise Prices Outstanding Contractual Life Exercisable Price
- --------------- ----------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
$14.50 $ 140,846 8.75 years 28,169 $ 14.50
$15.00 2,500 9.00 years -0- 15.00
$16.38 10,000 9.50 years -0- 16.38
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans, and no compensation cost has been recognized for the Plan. Had
compensation cost for the Company's Plan been determined based on the fair
value at the grant dates using Statement of Financial Accounting Standards No.
123, the Company's net income would have decreased by $152,400 and $168,800 and
earnings per share would have decreased by $.09 and $.10 for 1996 and 1995,
respectively. The effects of applying this statement for either recognizing
compensation cost or providing pro forma disclosures are not likely to be
representative of the effects on reported net income for future years because
options vest over several years and additional awards generally are made each
year.
NOTE 11: LEASES
The Company has constructed an office building from which the Savings Bank
uses a portion of the building as a branch location for banking operations.
Construction costs of the building totalled $3,364,893 and was completed in
January 1996. Accumulated depreciation totaled $90,000 at December 31, 1996.
The Savings Bank's branch operation will not require full use of the building,
so the Company will lease the excess space to other tenants. The following
minimum lease payments will be received as a result of leases signed as of
December 31, 1996:
<TABLE>
<S> <C>
1997 $ 199,772
1998 199,772
1999 199,772
2000 154,290
--------------
$ 753,606
==============
</TABLE>
-45-
<PAGE> 50
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
- ------------------------------------------
Real estate acquired in settlement of loans $52,392 $-0- $123,887
Sale and financing of foreclosed assets $57,571 $-0- $219,375
ADDITIONAL CASH PAYMENT INFORMATION
- -----------------------------------
Interest paid $12,224,519 $9,224,158 $5,107,831
Income taxes paid $1,163,976 $1,027,659 $796,651
</TABLE>
NOTE 13: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
AVAILABLE-FOR-SALE SECURITIES
Fair values for available-for-sale securities, which also are the amounts
recognized in the statement of financial condition, equal quoted market prices,
if available. If quoted market prices are not available, fair values are
estimates based on quoted market prices of similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same
-46-
<PAGE> 51
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
remaining maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
NOTE 13: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
INVESTMENT IN FHLB STOCK
Fair value of the Savings Bank's investment in FHLB stock approximates the
carrying value as no ready market exists for this investment and the stock
could only be sold back to the Federal Home Loan Bank at cost.
DEPOSITS
The fair value of demand deposits, savings accounts and interest-bearing
demand deposits is the amount payable on demand at the reporting date (i.e.,
their carrying amount). The fair value of fixed-maturity time deposits is
estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities. The carrying
amount of accrued interest payable approximates its fair value.
FEDERAL HOME LOAN BANK ADVANCES
Rates currently available to the Savings Bank for advances with similar
terms and remaining maturities are used to estimate fair value of existing
advances. The carrying amount of accrued interest payable approximates its
fair value.
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or
-47-
<PAGE> 52
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
on the estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date.
-48-
<PAGE> 53
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 13: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT (CONTINUED)
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. Because no market exists for certain of these financial
instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be sold
individually or in the aggregate.
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------
Carrying Fair
Amount Value
-------- -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 11,526,014 $ 11,526,014
Available-for-sale securities 18,880,277 18,880,277
Interest receivable 1,818,485 1,818,485
Loans, net of allowance for loan losses 255,469,576 256,023,000
Investment in FHLB stock 4,325,000 4,325,000
Financial liabilities:
Deposits 182,014,158 181,936,000
Federal Home Loan Bank advances 84,051,000 83,634,000
Unrecognized financial instruments
(net of contract amount):
Commitments to extend credit -0- -0-
Letters of credit -0- -0-
Lines of credit -0- -0-
</TABLE>
-49-
<PAGE> 54
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 13: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------
Carrying Fair
Amount Value
-------- -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,574,708 $ 5,574,708
Available-for-sale securities 20,810,487 20,810,487
Interest receivable 1,452,247 1,452,247
Loans, net of allowance for loan losses 214,445,042 219,578,000
Investment in FHLB stock 3,871,000 3,871,000
Financial liabilities:
Deposits 146,550,426 146,742,000
Federal Home Loan Bank advances 73,024,000 73,508,000
Unrecognized financial instruments
(net of contract amount):
Commitments to extend credit -0- -0-
Letters of credit -0- -0-
Lines of credit -0- -0-
</TABLE>
NOTE 14: COMMITMENTS AND CREDIT RISK
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Savings Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Savings Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate.
-50-
<PAGE> 55
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 14: COMMITMENTS AND CREDIT RISK (CONTINUED)
At December 31, 1996 and 1995, the Savings Bank had outstanding commitments
to originate loans aggregating approximately $2,225,000 and $7,806,000,
respectively. The commitments extend over varying periods of time with the
majority being disbursed within a thirty-day period. Loan commitments at fixed
rates of interest amounted to $515,000 and $2,771,000 with the remainder at
floating market rates at December 31, 1996 and 1995, respectively.
Letters of credit are conditional commitments issued by the Savings Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The Savings Bank had total outstanding letters of credit amounting to
$470,000 and $608,000, respectively, at December 31, 1996 and 1995, with terms
ranging from twelve months to five years from the date of origination.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. The Savings Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Savings Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate. The Savings Bank uses the
same credit policies in granting lines of credit as it does for on-balance
sheet instruments.
At December 31, 1996 and 1995, the Savings Bank had granted unused lines of
credit to borrowers aggregating approximately $407,000 and $392,000,
respectively, for commercial lines.
-51-
<PAGE> 56
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 14: COMMITMENTS AND CREDIT RISK (CONTINUED)
At December 31, 1995, the Savings Bank had $32.4 million of fixed rate
one-to-four family real estate loans with original maturities ranging primarily
from 15 - 30 years and $12.9 million of one-to-four family loans which have
fixed rates of interest for at least the next five years. The Savings Bank has
also purchased and participated in residential and commercial real estate loans
originated by various lenders throughout the United States. At December 31,
1996 and 1995, such purchased and participation loans secured by property
throughout Missouri aggregated approximately $15.8 million and $17.3 million,
respectively, and such loans secured by property in at least ten other states
aggregated approximately $2.7 million and $2.8 million, respectively.
At December 31, 1996, the Savings Bank had committed to purchase $2.0
million in available-for-sale securities.
NOTE 15: CONVERSION TO STOCK SAVINGS BANK
The Savings Bank's Board of Directors adopted a Plan of Conversion on
December 10, 1993, to convert from a federally-chartered mutual savings bank to
a federally-chartered stock savings bank. The conversion was effective on June
28, 1994, upon the issuance of 2,049,875 shares of the Company's common stock
(par value $.01) at an initial public offering price of $10 per share,
representing gross proceeds of $20,498,750. Costs related to the stock
issuance, which have been applied to reduce the gross proceeds, were
approximately $800,000.
A special liquidation account was established at the time of conversion for
eligible account holders in an amount equal to the total net worth of the
Savings Bank as of the date of the latest consolidated statement of financial
condition contained in the final offering circular. Each eligible deposit
account holder is entitled to a proportionate share of this account in the
event of a complete liquidation of the Savings Bank, and only in such an event.
This proportionate share will be reduced if the account holder's savings
deposit falls below the amount on the date of record (March 31, 1993), and will
cease to exist if the account is closed. The liquidation account will never
be increased despite any increase after conversion in the related savings
deposit of an account holder. The Savings Bank may not declare or pay a cash
dividend or purchase any of its stock, if the effect would be to reduce the net
worth of the Savings Bank below the amount of its liquidation account or below
its minimum regulatory capital.
-52-
<PAGE> 57
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 16: CONTINGENCIES
The Company and the Savings Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial condition of the Company.
NOTE 17: SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, federal legislation to recapitalize the Savings
Association Insurance Fund (SAIF) was passed requiring savings institutions
such as the Savings Bank to pay a one-time assessment to the SAIF of 65.7 basis
points, based on deposits as reported at March 31, 1995. The assessment
totaled $901,000 and has been included in noninterest expense on the Company's
consolidated financial statements for the year ended December 31, 1996. This
one-time assessment, net of income taxes, reduced consolidated net income for
the year ended December 31, 1996, by approximately $559,000.
NOTE 18: SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
Following is a summary of unaudited quarterly operating results for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $4,865,236 $5,168,191 $5,536,901 $5,703,031
Interest expense $2,830,551 $2,970,831 $3,229,891 $3,342,530
Provision for loan losses $20,000 $45,000 $45,000 $45,000
Net realized gains (losses) on
available-for-sale securities $-0- $(111,258) $-0- $91,008
Net income $550,425 $599,677 $184,332 $863,635
Earnings per common share $.32 $.36 $.11 $.56
</TABLE>
-53-
<PAGE> 58
SHO-ME FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 18: SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS (CONTINUED)
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------
Three Months Ended
-----------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C>
Interest income $3,331,073 $3,808,578 $4,245,458 $4,585,654
Interest expense $1,826,941 $2,252,587 $2,500,228 $2,751,620
Provision for loan losses $40,000 $45,000 $-0- $45,000
Net realized gains (losses)
on available-for-sale securities $-0- $2,867 $(2,325) $5,665
Net income $359,726 $388,447 $488,885 $509,362
Earnings per common share $.19 $.21 $.28 $.30
</TABLE>
-54-
<PAGE> 59
SHO-ME FINANCIAL CORP.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:00 p.m., Mt. Vernon,
Missouri time on April 23, 1997 at the main office of Sho-Me Financial Corp.,
109 North Hickory, Mt. Vernon, Missouri 65712.
STOCK LISTING
Sho-Me Financial Corp. common stock is traded on the National Association
of Securities Dealers, Inc. National Market under the symbol "SMFC."
PRICE RANGE OF COMMON STOCK
The per share price range of the common stock for each quarter since the
common stock began trading on June 28, 1994 was as follows:
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW DIVIDENDS
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . $ 15.75 $ 14.50 $ ---
Second Quarter . . . . . . . . . . . . . $ 16.75 $ 14.50 $ ---
Third Quarter . . . . . . . . . . . . . . $ 20.63 $ 15.50 $ ---
Fourth Quarter . . . . . . . . . . . . . $ 22.63 $ 18.50 $ ---
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW DIVIDENDS
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . $ 14.25 $ 9.75 $ ---
Second Quarter . . . . . . . . . . . . . $ 16.25 $ 13.50 $ ---
Third Quarter . . . . . . . . . . . . . . $ 16.13 $ 14.50 $ ---
Fourth Quarter . . . . . . . . . . . . . $ 16.25 $ 14.75 $ ---
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1994 HIGH LOW DIVIDENDS
<S> <C> <C> <C>
Second Quarter(1) . . . . . . . . . . . . $ 12.25 $ 10.00 $ ---
Third Quarter . . . . . . . . . . . . . . $ 12.25 $ 10.75 $ ---
Fourth Quarter . . . . . . . . . . . . . $ 11.50 $ 9.13 $ ---
- -----------------
</TABLE>
(1) Reflects the period from June 28, 1994 through June 30, 1994.
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. Automated Quotation System.
The average of the bid and asked prices of Sho-Me Financial Corp.'s common
stock on March 14, 1997 was $28.50.
At March 14, 1997, there were 1,538,325 shares of Sho-Me Financial Corp. common
stock issued and outstanding (including unallocated ESOP shares) and there were
616 holders of record.
55
<PAGE> 60
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Raymond G. Merryman, President Registrar and Transfer Co.
Sho-Me Financial Corp. 10 Commerce Drive
109 N. Hickory Street. Cranford, NJ 07016
Mt. Vernon, Missouri 65712
(417) 466-2171
ANNUAL AND OTHER REPORTS
A copy of Sho-Me Financial Corp.'s Annual Report on Form 10-KSB for
the year ended December 31, 1996, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Raymond G. Merryman,
President and Chief Executive Officer, Sho-Me Financial Corp., 109 N. Hickory
Street, Mt. Vernon, Missouri 65712.
SHO-ME FINANCIAL CORP.
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
109 N. Hickory Telephone: (417) 466-2171
Mt. Vernon, Missouri 65712 Fax: (417) 466-2158
DIRECTORS OF THE BOARD
Raymond G. Merryman Allan James Moore, Jr. (Chairman of the
President, Sho-Me Financial Corp. Board)
and 1st Savings Bank, f.s.b. Retired Owner and Operator of
Moore's, a retail mens and womens
apparel store
Chairman of Sho-Me Financial
Corp. and
Chairman of 1st Savings Bank, f.s.b.
David J. Tooley Donald R. Millsap
Executive Vice President, Sho-Me Retired supervising auditor for
Financial Corp. and 1st Savings Missouri Department of Revenue
Bank, f.s.b.
Stephen D. Maus, DDS Loryn McQuerter (Director Emeritus)
Practicing dentist
SHO-ME FINANCIAL CORP. EXECUTIVE OFFICERS
Raymond G. Merryman David J. Tooley
President and Chief Executive Officer Executive Vice President
Greg Steffens
Chief Financial Officer
56
<PAGE> 61
INDEPENDENT AUDITORS SPECIAL COUNSEL
Baird, Kurtz & Dobson Silver, Freedman & Taff, L.L.P.
901 St. Louis Street 1100 New York Avenue, NW
P.O. Box 1190 7th Floor
Springfield, Missouri 65801 Washington, DC 20005
57
<PAGE> 1
EXHIBIT 10.1
APPENDIX A
SHO-ME FINANCIAL CORP.
1994 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the
long-term interests of the Corporation and its stockholders by providing a
means for attracting and retaining directors, officers and employees of the
Corporation and its Affiliates. It is intended that designated Options granted
pursuant to the provisions of this Plan to persons employed by the Corporation
or its Affiliates will qualify as Incentive Stock Options. Options granted to
persons who are not employees will be Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the
Plan:
"Affiliate" - means any "parent corporation" or "subsidiary
corporation" of the Corporation, as such terms are defined in Section 424(e)
and (f), respectively, of the Code.
"Award" - means the grant of an Incentive Stock Option, a
Non-Qualified Stock Option, a Stock Appreciation Right or a Limited Stock
Appreciation Right, or any combination thereof, as provided in the Plan.
"Bank" - means 1st Savings Bank, f.s.b. and any successor
entity.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3
hereof.
"Continuous Service" - means the absence of any interruption
or termination of service as a director, advisory director, officer or employee
of the Corporation or an Affiliate, except that when used with respect to
persons granted an Incentive Option means the absence of any interruption or
termination of service as an employee of the Corporation or an Affiliate.
Service shall not be considered interrupted in the case of sick leave, military
leave or any other leave of absence approved by the Corporation or in the case
of transfers between payroll locations of the Corporation or between the
Corporation, its parent, its subsidiaries or its successor. With respect to
any advisory director, continuous service shall plan mean availability to
perform such functions as may be required of the Bank's advisory directors.
"Corporation" - means Sho-Me Financial Corp., a Delaware
corporation.
"Employee" - means any person, including an officer, who is
employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of
1974, as amended.
<PAGE> 2
"Exercise Price" - means (i) in the case of an Option, the
price per Share at which the Shares subject to such Option may be purchased
upon exercise of such Option and (ii) in the case of a Right, the price per
Share (other than the Market Value per Share on the date of exercise and the
Offer Price per Share as defined in Section 10 hereof) which, upon grant, the
Committee determines shall be utilized in calculating the aggregate value which
a Participant shall be entitled to receive pursuant to Sections 9, 10 or 12
hereof upon exercise of such Right.
"Incentive Stock Option" - means an option to purchase Shares
granted by the Committee pursuant to Section 6 hereof which is subject to the
limitations and restrictions of Section 8 hereof and is intended to qualify
under Section 422 of the Code.
"Limited Stock Appreciation Right" - means a stock
appreciation right with respect to Shares granted by the Committee pursuant to
Sections 6 and 10 hereof.
"Market Value" - means the average of the high and low quoted
sales price on the date in question (or, if there is no reported sale on such
date, on the last preceding date on which any reported sale occurred) of a
Share on the Composite Tape for the New York Stock Exchange-Listed Stocks, or,
if on such date the Shares are not quoted on the Composite Tape, on the New
York Stock Exchange, or, if the Shares are not listed or admitted to trading on
such Exchange, on the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which the Shares are listed or
admitted to trading, or, if the Shares are not listed or admitted to trading on
any such exchange, the mean between the closing high bid and low asked
quotations with respect to a Share on such date on the National Association of
Securities Dealers, Inc. Automated Quotations System, or any similar system
then in use, or, if no such quotations are available, the fair market value on
such date of a Share as the Committee shall determine.
"Non-Employee Director" - means a director who (i) is not
currently an Employee; (ii) does not receive compensation from the Corporation
or any Affiliate in any capacity other than as a director (except for an amount
that does not exceed the dollar amount for which disclosure would be required
pursuant to Item 404(a) of Regulation S-K); and (iii) does not possess an
interest in any other transactions and is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404(a) or
(b) of Regulation S-K.
"Non-Qualified Stock Option" - means an option to purchase
Shares granted by the Committee pursuant to Section 6 hereof, which option is
not intended to qualify under Section 422(b) of the Code.
"Option" - means an Incentive Stock Option or a Non-Qualified
Stock Option.
"Participant" - means any officer or employee of the
Corporation or any Affiliate who is selected by the Committee to receive an
Award and any director or advisory director of the Corporation who is granted
an Award pursuant to Section 20 hereof.
"Plan" - means the 1994 Stock Option and Incentive Plan of the
Corporation.
<PAGE> 3
"Related" - means (i) in the case of a Right, a Right which is
granted in connection with, and to the extent exercisable, in whole or in part,
in lieu of, an Option or another Right and (ii) in the case of an Option, an
Option with respect to which and to the extent a Right is exercisable, in whole
or in part, in lieu thereof has been granted.
"Right" - means a Limited Stock Appreciation Right or a Stock
Appreciation Right.
"Shares" - means the shares of common stock of the
Corporation.
"Stock Appreciation Right" - means a stock appreciation right
with respect to Shares granted by the Committee pursuant to Sections 6 and 9
hereof.
"Ten Percent Beneficial Owner" - means the beneficial owner of
more than ten percent of any class of the Corporation's equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934.
3. Administration. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be (i) a Non-Employee
Director and (ii) an "outside director" as set forth in Section 162(m) of the
Code and defined in the regulations promulgated thereunder. The members of the
Committee shall be appointed by the Board of Directors of the Corporation.
Except as limited by the express provisions of the Plan, the Committee shall
have sole and complete authority and discretion to (i) select Participants and
grant Awards; (ii) determine the number of Shares to be subject to types of
Awards generally, as well as to individual Awards granted under the Plan; (iii)
determine the terms and conditions upon which Awards shall be granted under the
Plan; (iv) prescribe the form and terms of instruments evidencing such grants;
and (v) establish from time to time regulations for the administration of the
Plan, interpret the Plan, and make all determinations deemed necessary or
advisable for the administration of the Plan. The Committee may maintain, and
update from time to time as appropriate, a list designating selected directors
as Non-Employee Directors. The purpose of such list shall be to evidence the
status of such individuals as Non-Employee Directors, and the Board of
Directors may appoint to the Committee any individual actually qualifying as a
Non- Employee Director, regardless of whether identified as such on said list.
A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
4. Participation in Committee Awards. The Committee may select
from time to time Participants in the Plan from those directors, officers and
employees of the Corporation or its Affiliates who, in the opinion of the
Committee, have the capacity for contributing to the successful performance of
the Corporation or its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the
operation of Section 11 hereof, the maximum number of Shares with respect to
which Awards may be made under the Plan is 10% of the total Shares issued in
the Bank's conversion to the capital stock form. The Shares with respect to
which Awards may be made under the Plan may be either authorized and
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<PAGE> 4
unissued shares or issued shares heretofore or hereafter reacquired and held as
treasury shares. Shares which are subject to Related Rights and Related
Options shall be counted only once in determining whether the maximum number of
Shares with respect to which Awards may be granted under the Plan has been
exceeded. An Award shall not be considered to have been made under the Plan
with respect to any Option or Right which terminates or with respect to
Restricted Stock which is forfeited, and new Awards may be granted under the
Plan with respect to the number of Shares as to which such termination or
forfeiture has occurred.
6. General Terms and Conditions of Options and Rights. The
Committee shall have full and complete authority and discretion, except as
expressly limited by the Plan, to grant Options and/or Rights and to provide
the terms and conditions (which need not be identical among Participants)
thereof. In particular, the Committee shall prescribe the following terms and
conditions: (i) the Exercise Price of any Option or Right, which shall not be
less than the Market Value per Share at the date of grant of such Option or
Right, (ii) the number of Shares subject to, and the expiration date of, any
Option or Right, which expiration date shall not exceed ten years from the date
of grant, (iii) the manner, time and rate (cumulative or otherwise) of exercise
of such Option or Right, and (iv) the restrictions, if any, to be placed upon
such Option or Right or upon Shares which may be issued upon exercise of such
Option or Right. The Committee may, as a condition of granting any Option or
Right, require that a Participant agree not to thereafter exercise one or more
Options or Rights previously granted to such Participant.
7. Exercise of Options or Rights.
(a) Except as provided herein, an Option or Right granted
under the Plan shall be exercisable during the lifetime of the Participant to
whom such Option or Right was granted only by such Participant and, except as
provided in paragraphs (c) and (d) of this Section 7, no such Option or Right
may be exercised unless at the time such Participant exercises such Option or
Right, such Participant has maintained Continuous Service since the date of
grant of such Option or Right.
(b) To exercise an Option or Right under the Plan, the
Participant to whom such Option or Right was granted shall give written notice
to the Corporation in form satisfactory to the Committee (and, if partial
exercises have been permitted by the Committee, by specifying the number of
Shares with respect to which such Participant elects to exercise such Option or
Right) together with full payment of the Exercise Price, if any and to the
extent required. The date of exercise shall be the date on which such notice
is received by the Corporation. Payment, if any is required, shall be made
either (i) in cash (including check, association draft or money order) or (ii)
by delivering (A) Shares already owned by the Participant and having a fair
market value equal to the applicable exercise price, such fair market value to
be determined in such appropriate manner as may be provided by the Committee or
as may be required in order to comply with or to conform to requirements of any
applicable laws or regulations, or (B) a combination of cash and such Shares.
(c) If a Participant to whom an Option or Right was
granted shall cease to maintain Continuous Service for any reason (including
total or partial disability and normal or early retirement, but excluding death
and termination of employment by the Corporation or any
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<PAGE> 5
Affiliate for cause), such Participant may, but only within the period of three
years immediately succeeding such cessation of Continuous Service and in no
event after the expiration date of such Option or Right, exercise such Option
or Right to the extent that such Participant was entitled to exercise such
Option or Right at the date of such cessation, provided, however, that such
right of exercise after cessation of Continuous Service shall not be available
to a Participant if the Committee otherwise determines and so provides in the
applicable instrument or instruments evidencing the grant of such Option or
Right. If the Continuous Service of a Participant to whom an Option or Right
was granted by the Corporation is terminated for cause, all rights under any
Option or Right of such Participant shall expire immediately upon the giving to
the Participant of notice of such termination.
(d) In the event of the death of a Participant while in
the Continuous Service of the Corporation or an Affiliate or within the three
year period referred to in paragraph (c) of this Section 7, the person to whom
any Option or Right held by the Participant at the time of his or her death is
transferred by will or the laws of descent and distribution, or in the case of
an Award other than an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title 1 of ERISA or the rules
thereunder may, but only to the extent such Participant was entitled to
exercise such Option or Right immediately prior to his or her death, exercise
such Option or Right at any time within a period of one year succeeding the
date of death of such Participant, but in no event later than ten years from
the date of grant of such Option or Right. Following the death of any
Participant to whom an Option was granted under the Plan, irrespective of
whether any Related Right shall have theretofore been granted to the
Participant or whether the person entitled to exercise such Related Right
desires to do so, the Committee may, as an alternative means of settlement of
such Option, elect to pay to the person to whom such Option is transferred by
will or by the laws of descent and distribution, or in the case of an Option
other than an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder, the amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the Exercise Price of such Option,
multiplied by the number of Shares with respect to which such Option is
properly exercised. Any such settlement of an Option shall be considered an
exercise of such Option for all purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be
granted only to Participants who are Employees. Any provision of the Plan to
the contrary notwithstanding, (i) no Incentive Stock Option shall be granted
more than ten years from the date the Plan is adopted by the Board of Directors
of the Corporation and no Incentive Stock Option shall be exercisable more than
ten years from the date such Incentive Stock Option is granted, (ii) the
Exercise Price of any Incentive Stock Option shall not be less than the Market
Value per Share on the date such Incentive Stock Option is granted, (iii) any
Incentive Stock Option shall not be transferable by the Participant to whom
such Incentive Stock Option is granted other than by will or the laws of
descent and distribution, and shall be exercisable during such Participant's
lifetime only by such Participant, (iv) no Incentive Stock Option shall be
granted to any individual who, at the time such Incentive Stock Option is
granted, owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Corporation or any Affiliate unless
the Exercise Price of such Incentive Stock Option is at least 110 percent of
the Market Value per Share at the date of grant and such Incentive Stock Option
is not exercisable after the expiration of five years from the date such
Incentive Stock Option is granted, and (v) the
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<PAGE> 6
aggregate Market Value (determined as of the time any Incentive Stock Option is
granted) of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by a Participant in any calendar year shall not
exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall,
upon its exercise, entitle the Participant to whom such Stock Appreciation
Right was granted to receive a number of Shares or cash or combination thereof,
as the Committee in its discretion shall determine, the aggregate value of
which (i.e., the sum of the amount of cash and/or Market Value of such Shares
on date of exercise) shall equal (as nearly as possible, it being understood
that the Corporation shall not issue any fractional shares) the amount by which
the Market Value per Share on the date of such exercise shall exceed the
Exercise Price of such Stock Appreciation Right, multiplied by the number of
Shares with respect of which such Stock Appreciation Right shall have been
exercised. A Stock Appreciation Right may be Related to an Option or may be
granted independently of any Option as the Committee shall from time to time in
each case determine. At the time of grant of an Option the Committee shall
determine whether and to what extent a Related Stock Appreciation Right shall
be granted with respect thereto; provided, however, and notwithstanding any
other provision of the Plan, that if the Related Option is an Incentive Stock
Option, the Related Stock Appreciation Right shall satisfy all the restrictions
and limitations of Section 8 hereof as if such Related Stock Appreciation Right
were an Incentive Stock Option and as if other rights which are Related to
Incentive Stock Options were Incentive Stock Options. In the case of a Related
Option, such Related Option shall cease to be exercisable to the extent of the
Shares with respect to which the Related Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option, any Related
Stock Appreciation Right shall terminate to the extent of the Shares with
respect to which the Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an
Option or Stock Appreciation Right to any Participant, the Committee shall have
full and complete authority and discretion to also grant to such Participant a
Limited Stock Appreciation Right which is Related to such Option or Stock
Appreciation Right; provided, however and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Limited Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Limited Stock Appreciation
Right were an Incentive Stock Option and as if all other Rights which are
Related to Incentive Stock Options were Incentive Stock Options.
Notwithstanding any other provision of the Plan, a Limited Stock Appreciation
Right shall be exercisable only during the period beginning on the first day
following the date of expiration of any "offer" (as such term is hereinafter
defined) and ending on the forty-fifth day following such date.
A Limited Stock Appreciation Right shall, upon its exercise, entitle
the Participant to whom such Limited Stock Appreciation Right was granted to
receive an amount of cash equal to the amount by which the "Offer Price per
Share" (as such term is hereinafter defined) or the Market Value on the date of
such exercise, as shall have been provided by the Committee in its discretion
at the time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to
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<PAGE> 7
be exercisable to the extent of the Shares with respect to which such Limited
Stock Appreciation Right was exercised. Upon the exercise or termination of a
Related Option or Related Stock Appreciation Right, any Related Limited Stock
Appreciation Right shall terminate to the extent of the Shares with respect to
which such Related Option or Related Stock Appreciation Right was exercised or
terminated.
For the purposes of this Section 10, the term "Offer" shall mean any
tender offer or exchange offer for Shares other than one made by the
Corporation, provided that the corporation, person or other entity making the
offer acquires pursuant to such offer either (i) 25% of the Shares outstanding
immediately prior to the commencement of such offer or (ii) a number of Shares
which, together with all other Shares acquired in any tender offer or exchange
offer (other than one made by the Corporation) which expired within sixty days
of the expiration date of the offer in question, equals 25% of the Shares
outstanding immediately prior to the commencement of the offer in question.
The term "Offer Price per Share" as used in this Section 10 shall mean the
highest price per Share paid in any Offer which Offer is in effect any time
during the period beginning on the sixtieth day prior to the date on which a
Limited Stock Appreciation Right is exercised and ending on the date on which
such Limited Stock Appreciation Right is exercised. Any securities or property
which are part or all of the consideration paid for Shares in the Offer shall
be valued in determining the Offer Price per Share at the higher of (A) the
valuation placed on such securities or property by the corporation, person or
other entity making such Offer or (B) the valuation placed on such securities
or property by the Committee.
11. Adjustments Upon Changes in Capitalization. In the event of
any change in the outstanding Shares subsequent to the effective date of the
Plan by reason of any reorganization, recapitalization, stock split, stock
dividend, combination or exchange of shares, merger, consolidation or any
change in the corporate structure or Shares of the Corporation, the maximum
aggregate number and class of shares as to which Awards may be granted under
the Plan and the number and class of shares with respect to which Awards
theretofore have been granted under the Plan shall be appropriately adjusted by
the Committee, whose determination shall be conclusive.
12. Effect of Merger. In the event of any merger, consolidation
or combination of the Corporation (other than a merger, consolidation or
combination in which the Corporation is the continuing entity and which does
not result in the outstanding Shares being converted into or exchanged for
different securities, cash or other property, or any combination thereof)
pursuant to a plan or agreement the terms of which are binding upon all
stockholders of the Corporation (except to the extent that dissenting
stockholders may be entitled, under statutory provisions or provisions
contained in the certificate of incorporation, to receive the appraised or fair
value of their holdings), any Participant to whom an Option or Right has been
granted shall have the right (subject to the provisions of the Plan and any
limitation applicable to such Option or Right), thereafter and during the term
of each such Option or Right, to receive upon exercise of any such Option or
Right an amount equal to the excess of the fair market value on the date of
such exercise of the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect
of a Share over the Exercise Price of such Right or Option, multiplied by the
number of Shares with respect to which such Option or Right shall have been
exercised. Such amount may be payable fully in
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<PAGE> 8
cash, fully in one or more of the kind or kinds of property payable in such
merger, consolidation or combination, or partly in cash and partly in one or
more of such kind or kinds of property, all in the discretion of the Committee.
13. Effect of Change in Control. Each of the events specified in
the following clauses (i) through (iii) of this Section 13 shall be deemed a
"change of control": (i) any third person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the
beneficial owner of shares of the Corporation with respect to which 25% or more
of the total number of votes for the election of the Board of Directors of the
Corporation may be cast, (ii) as a result of, or in connection with, any cash
tender offer, exchange offer, merger or other business combination, sale of
assets or contested election, or combination of the foregoing, the persons who
were directors of the Corporation shall cease to constitute a majority of the
Board of Directors of the Corporation or (iii) the stockholders of the
Corporation shall approve an agreement providing either for a transaction in
which the Corporation will cease to be an independent publicly owned entity or
for a sale or other disposition of all or substantially all the assets of the
Corporation; provided, however, that the occurrence of any such events shall
not be deemed a "change in control" if, prior to such occurrence, a resolution
specifically approving such occurrence shall have been adopted by at least a
majority of the Board of Directors of the Corporation. If a tender offer or
exchange offer for Shares (other than such an offer by the Corporation) is
commenced, or if the event specified in clause (iii) above shall occur, unless
the Committee shall have otherwise provided in the instrument evidencing the
grant of an Option or Stock Appreciation Right, all Options and Stock
Appreciation Rights theretofore granted and not fully exercisable shall become
exercisable in full upon the happening of such event and shall remain so
exercisable for a period of sixty days following such date, after which they
shall revert to being exercisable in accordance with their terms; provided,
however, that no Option or Stock Appreciation Right which has previously been
exercised or otherwise terminated shall become exercisable.
14. Assignments and Transfers. No Award nor any right or interest
of a Participant under the Plan in any instrument evidencing any Award under
the Plan may be assigned, encumbered or transferred except, in the event of the
death of a Participant, by will or the laws of descent and distribution or in
the case of Awards other than Incentive Stock Options pursuant to a qualified
domestic relations order, as defined in the Code or Title I of ERISA or the
rules thereunder.
15. Employee Rights Under the Plan. No director, officer or
employee shall have a right to be selected as a Participant nor, having been so
selected, to be selected again as a Participant and no director, officer,
employee or other person shall have any claim or right to be granted an Award
under the Plan or under any other incentive or similar plan of the Corporation
or any Affiliate. Neither the Plan nor any action taken thereunder shall be
construed as giving any employee any right to be retained in the employ of the
Corporation or any Affiliate.
16. Delivery and Registration of Stock. The Corporation's
obligation to deliver Shares with respect to an Award shall, if the Committee
so requests, be conditioned upon the receipt of a representation as to the
investment intention of the Participant to whom such Shares are to be
delivered, in such form as the Committee shall determine to be necessary or
advisable
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to comply with the provisions of the Securities Act of 1933 or any other
Federal, state or local securities legislation or regulation. It may be
provided that any representation requirement shall become inoperative upon a
registration of the Shares or other action eliminating the necessity of such
representation under such Securities Act or other securities legislation. The
Corporation shall not be required to deliver any Shares under the Plan prior to
(i) the admission of such shares to listing on any stock exchange on which
Shares may then be listed, and (ii) the completion of such registration or
other qualification of such Shares under any state or Federal law, rule or
regulation, as the Committee shall determine to be necessary or advisable.
17. Withholding Tax. The Corporation shall have the right to
deduct from all amounts paid in cash with respect to the exercise of a Right
under the Plan any taxes required by law to be withheld with respect to such
cash payments. Where a Participant or other person is entitled to receive
Shares pursuant to the exercise of an Option or Right pursuant to the Plan, the
Corporation shall have the right to require the Participant or such other
person to pay the Corporation the amount of any taxes which the Corporation is
required to withhold with respect to such Shares.
18. Amendment or Termination. The Board of Directors of the
Corporation may amend, suspend or terminate the Plan or any portion thereof at
any time, but (except as provided in Section 11 hereof) no amendment shall be
made without approval of the stockholders of the Corporation which shall (i)
materially increase the aggregate number of Shares with respect to which Awards
may be made under the Plan, (ii) materially increase the aggregate number of
Shares which may be subject to Awards to Participants who are not Employees or
(iii) change the class of persons eligible to participate in the Plan;
provided, however, that no such amendment, suspension or termination shall
impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
19. Effective Date and Term of Plan. The Plan shall become
effective upon its adoption by the Board of Directors of the Corporation,
subject to the Bank converting to a stock institution and approval of the Plan
by stockholders of the Corporation. It shall continue in effect for a term of
ten years unless sooner terminated under Section 18 hereof.
20. Initial Grant. By, and simultaneously with, the adoption of
this Plan, each member of the Board of Directors of the Corporation at the time
of the Bank's conversion to stock form who is not an Employee, is hereby
granted a ten year, Non-Qualified Stock Option to purchase a number of shares
equal to .50% of the shares issued in the conversion at an Exercise Price per
share equal to the per share price at which Shares are sold in the conversion.
In addition, each non-employee director of the Corporation elected after the
completion of the Bank's conversion to stock form is hereby granted as of the
date he or she is elected and qualified ("election date") a ten year
Non-Qualified Stock Option to Purchase 100 shares at the applicable market
price on the election date. Each such Option shall be evidenced by a Non-
Qualified Stock Option Agreement in a form approved by the Board of Directors
and shall be subject in all respects to the terms and conditions of this Plan,
which are controlling. All options granted pursuant to this Section 20 shall
be rounded down to the nearest whole share to the extent necessary to ensure
that no options to purchase stock representing fractional shares are granted.
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<PAGE> 1
EXHIBIT 10.2
APPENDIX B
SHO-ME FINANCIAL CORP.
MANAGEMENT RECOGNITION AND RETENTION PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining executive officers and directors of the Corporation
and its Affiliates.
2. Definitions. The following definitions are applicable to the
Plan:
"Award" - means the grant by the Committee of Restricted
Stock, as provided in the Plan.
"Affiliate" - means any "parent corporation" or "subsidiary
corporation" of the Corporation, as such terms are defined in Section 424(e)
and (f), respectively, of the Code.
"Bank" - means 1st Savings Bank, f.s.b., a savings institution
and its predecessors and successors.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 7
hereof.
"Continuous Service" - means the absence of any interruption
or termination of service as a director, advisory director, executive officer
or employee of the Corporation or any Affiliate. Service shall not be
considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Corporation or any Affiliate or in the case of
transfers between payroll locations of the Corporation or between the
Corporation, its subsidiaries or its successor.
"Corporation" - means Sho-Me Financial Corp, a Delaware
corporation.
"ERISA" - means the Employee Retirement Income Security Act of
1974, as amended.
"Non-Employee Director" - means a director who (i) is not
currently an Employee; (ii) does not receive compensation from the Corporation
or any Affiliate in any capacity other than as a director (except for an amount
that does not exceed the dollar amount for which disclosure would be required
pursuant to Item 404(a) of Regulation S-K; and (iii) does not possess an
interest in any other transactions and is not engaged in a business
relationship for which disclosure would be required pursuant to Items 404(a) or
(b) of Regulation S-K.
<PAGE> 2
"Participant" - means any director, advisory director,
executive officer or employee of the Corporation or any Affiliate who is
selected by the Committee to receive an Award.
"Plan" - means the Management Recognition and Retention Plan
of the Corporation.
"Restricted Period" - means the period of time selected by the
Committee for the purpose of determining when restrictions are in effect under
Section 3 hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently
awarded to a Participant by the Committee subject to the restrictions referred
to in Section 3 hereof, so long as such restrictions are in effect.
"Shares" - means the common stock, par value $0.01 per share, of the
Corporation.
3. Terms and Conditions of Restricted Stock. The Committee shall have
full and complete authority, subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (e) of this Section 3, to provide such
other terms and conditions (which need not be identical among Participants) in
respect of such Awards, and the vesting thereof, as the Committee shall
determine.
(a) At the time of an award of Restricted Stock, the
Committee shall establish for each Participant a Restricted Period, during
which or at the expiration of which, as the Committee shall determine and
provide in the agreement referred to in paragraph (d) of this Section 3, the
Shares awarded as Restricted Stock shall vest, and subject to any such other
terms and conditions as the Committee shall provide, shares of Restricted Stock
may not be sold, assigned, transferred, pledged, voted or otherwise encumbered
by the Participant, except as hereinafter provided, during the Restricted
Period. Except for such restrictions, and subject to paragraphs (c) and (e) of
this Section 3 and Section 4 hereof, the Participant as owner of such shares
shall have all the rights of a stockholder. Subject to compliance with OTS
Regulations, or a waiver therefrom, the Committee shall have the authority, in
its discretion, to accelerate the time at which any or all of the restrictions
shall lapse with respect thereto, or to remove any or all of such restrictions,
whenever it may determine that such action is appropriate by reason of changes
in applicable tax or other laws or other changes in circumstances occurring
after the commencement of such Restricted Period.
(b) Except as provided in Section 5 hereof, if a Participant
ceases to maintain Continuous Service for any reason (other than death, total
or partial disability or normal or early retirement), unless the Committee
shall otherwise determine, all Shares of Restricted Stock theretofore awarded
to such Participant and which at the time of such termination of Continuous
Service are subject to the restrictions imposed by paragraph (a) of this
Section 3 shall upon such termination of Continuous Service be forfeited and
returned to the Corporation. If a Participant ceases to maintain Continuous
Service by reason of death, total or partial disability or normal
<PAGE> 3
or early retirement, Restricted Stock then still subject to restrictions
imposed by paragraph (a) of this Section 3 will be free of those restrictions
at the time of such termination of Continuous Service.
(c) Each certificate in respect of Shares of Restricted Stock
awarded under the Plan shall be registered in the name of the Participant and
deposited by the Participant, together with a stock power endorsed in blank,
with the Corporation and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the Management Recognition and
Retention Plan of Sho-Me Financial Corp. Copies of such Plan are on
file in the offices of the Secretary of Sho-Me Financial Corp., 109
North Hickory Street, Mt. Vernon, Missouri 65712-1104.
(d) At the time of any Award, the Participant shall enter
into an Agreement with the Corporation in a form specified by the Committee,
agreeing to the terms and conditions of the Award and such other matters as the
Committee, in its sole discretion, shall determine (the "Restricted Stock
Agreement").
(e) At the time of an award of shares of Restricted
Stock, the Committee shall determine that the payment to the Participant of
dividends declared or paid on such shares, or specified portions thereof, by
the Corporation shall be deferred until the lapsing of the restrictions imposed
under paragraph (a) of this Section 3, and shall be held by the Corporation for
the account of the Participant until such time. There shall be credited at the
end of each year (or portion thereof) interest on the amount of the account at
the beginning of the year at a rate per annum as the Committee, in its
discretion, may determine. Payment of deferred dividends, together with
interest accrued thereon, shall be made upon the earlier to occur of the
lapsing of the restrictions imposed under paragraph (a) of this Section 3 or
upon death, total or partial disability or normal or early retirement of the
Participant.
(f) At the expiration of the restrictions imposed by
paragraph (a) of this Section 3, the Corporation shall redeliver to the
Participant (or where the relevant provision of paragraph (b) of this Section 3
applies in the case of a deceased Participant, to his legal representative,
beneficiary or heir) the certificate(s) and stock power deposited with it
pursuant to paragraph (c) of this Section 3 and the Shares represented by such
certificate(s) shall be free of the restrictions referred to in paragraph (a)
of this Section 3.
4. Adjustments Upon Changes in Capitalization. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan
by reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
granted under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any shares of stock or other securities
received, as a result of any of the foregoing, by a Participant with respect to
Restricted Stock shall be subject to the same
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<PAGE> 4
restrictions and the certificate(s) or other instruments representing or
evidencing such shares or securities shall be legended and deposited with the
Corporation in the manner provided in Section 3 hereof.
5. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 5 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of Shares of the Corporation or the Bank with respect to which 25% or
more of the total number of votes which may be cast for the election of the
Board of Directors of the Corporation, (ii) as a result of, or in connection
with, any cash tender offer, merger or other business combination, sale of
assets or contested election, or combination of the foregoing, the persons who
were directors of the Corporation or the Bank shall cease to constitute a
majority of the Board of Directors of the Corporation, or (iii) the
stockholders of the Corporation shall approve an agreement providing either for
a transaction in which the Corporation will cease to be an independent publicly
owned entity or for a sale or other disposition of all or substantially all the
assets of the Corporation or the Bank; provided, however, that the occurrence
of any such events shall not be deemed a "change in control" if, prior to such
occurrence, a resolution specifically approving such occurrence shall have been
adopted by at least a majority of the "Disinterested Directors" (as that term
is defined in the Corporation's Certificate of Incorporation) of the
Corporation. If the Continuous Service of any Participant of the Corporation
is involuntarily terminated for whatever reason, at any time within twelve
months after a change in control, unless the Committee shall have otherwise
provided, any Restricted Period with respect to Restricted Stock theretofore
awarded to such Participant shall lapse upon such termination and all Shares
awarded as Restricted Stock shall become fully vested in the Participant to
whom such Shares were awarded.
6. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the
Plan may be assigned, encumbered or transferred except, in the event of the
death of a Participant, by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined in the Code or
Title I of ERISA or the rules thereunder.
7. Administration. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be (i) a Non- Employee
Director and (ii) an "outside director" as set forth in Section 162(m) of the
Code and defined in the regulations promulgated thereunder. The members of the
Committee shall be appointed by the Board of Directors of the Corporation.
Except as limited by the express provisions of the Plan, the Committee shall
have sole and complete authority and discretion to (i) select Participants and
grant Awards; (ii) determine the number of shares to be subject to types of
Awards generally, as well as to individual Awards granted under the Plan; (iii)
determine the terms and conditions upon which Awards shall be granted under the
Plan; (iv) prescribe the form and terms of instruments evidencing such grants;
and (v) establish from time to time regulations for the administration of the
Plan, interpret the Plan, and make all determinations deemed necessary or
advisable for the administration of the Plan. The Committee may maintain, and
update from time to time as appropriate, a list designating selected directors
as Non-Employee Directors. The purpose of such list shall be to evidence the
status of such individuals as Non-Employee Directors, and the
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<PAGE> 5
Board of Directors may appoint to the Committee any individual actually
qualifying as a Non-Employee Director, regardless of whether identified as such
on said list.
A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
8. Shares Subject to Plan. Subject to adjustment by the
operation of Section 4 hereof, the maximum number of Shares with respect to
which Awards may be made under the Plan is 4% of the total Shares issued in the
Bank's conversion to stock form. The shares with respect to which Awards may
be made under the Plan may be either authorized and unissued shares or issued
shares heretofore or hereafter reacquired and held as treasury shares. An
Award shall not be considered to have been made under the Plan with respect to
Restricted Stock which is forfeited and new Awards may be granted under the
Plan with respect to the number of Shares as to which such forfeiture has
occurred.
9. Employee Rights Under the Plan. No director, officer or
employee shall have a right to be selected as a Participant nor, having been so
selected, to be selected again as a Participant and no director, officer,
employee or other person shall have any claim or right to be granted an Award
under the Plan or under any other incentive or similar plan of the Corporation
or any Affiliate. Neither the Plan nor any action taken thereunder shall be
construed as giving any employee any right to be retained in the employ of the
Corporation, the Bank or any Affiliate.
10. Withholding Tax. Upon the termination of the Restricted
Period with respect to any shares of Restricted Stock (or at any such earlier
time, if any, that an election is made by the Participant under Section 83(b)
of the Code, or any successor provision thereto, to include the value of such
shares in taxable income), the Corporation shall have the right to withhold
from any payment or distribution made under this Plan sufficient Shares to
cover any applicable withholding and employment taxes. The Corporation shall
have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments. No discretion or choice shall
be conferred upon any Participant with respect to the form, timing or method of
any such tax withholding.
11. Amendment or Termination. The Board of Directors of the
Corporation may amend, suspend or terminate the Plan or any portion thereof at
any time; provided, however, that no such amendment, suspension or termination
shall impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
12. Term of Plan. The Plan shall become effective upon its
adoption by the Board of Directors of the Corporation, subject to the Bank's
completion of the conversion to stock form. It shall continue in effect for a
term of ten years unless sooner terminated under Section 11 hereof.
13. Initial Grants. By, and simultaneously with, the adoption of
this Plan, each member of the Board of Directors of the Corporation at the time
of the Bank's conversion to
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<PAGE> 6
stock form, who is not a full-time Employee, is hereby granted an Award equal
to 0.2% of the shares issued in the mutual to stock conversion of the Bank plus
the sum of 0.015% of the shares issued in the Conversion multiplied by the
number of years of service on the Board of Directors prior to Conversion. Each
such Award shall be evidenced by a Restricted Stock Agreement in a form
approved by the Board of Directors and shall be subject in all respects to the
terms and conditions of this Plan, which are controlling. All Awards of
Restricted Stock granted pursuant to this Section 13 shall be rounded down to
the nearest whole share to the extent necessary to ensure that no shares of
Restricted Stock representing fractional shares are issued. Except as provided
in this paragraph 13, each of the Awards granted hereunder shall be vested at
the rate of 20% per year, with the first 20% vesting one year after the date of
grant, as long as the Director maintains Continuous Service with the Bank after
the Conversion; provided, however, no Plan Shares shall be earned in any fiscal
year in which the Bank fails to meet all of its fully phased-in capital
requirements.
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<PAGE> 1
EXHIBIT 10.3
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is made and
entered into as of this _________ day of ____________________, 1996, by and
between 1st SAVINGS BANK, a federally chartered savings institution (which,
together with any successor thereto which executes and delivers the assumption
agreement provided for in Section 11(a) hereof or which otherwise becomes bound
by the terms and provisions of this Agreement by operation of law, is
hereinafter referred to as the "Bank"), and ______________________ (the
"Employee") whose residence address is __________________.
WHEREAS, the Employee is currently serving as the
_________________________ of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that,
as is the case with publicly held corporations generally, the possibility of a
change in control of its parent, Sho-Me Financial Corp. (the "Holding
Company"), may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of key management personnel to the detriment of the Bank and its
stockholder; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order
to assure continuity of management of the Bank and to reinforce and encourage
the continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 1 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein contained, it is
AGREED as follows:
<PAGE> 2
1. TERM OF AGREEMENT.
The term of this Agreement shall be deemed to have commenced as of the
date hereof and shall continue for a period of three years thereafter.
Commencing on the first annual anniversary date of this Agreement and
continuing at each annual anniversary date thereafter, this Agreement shall be
extended for a period of one year in addition to the then-remaining term of
employment under this Agreement, unless either the Bank or the Employee gives
contrary written notice to the other not less than 90 days in advance of the
date on which the term of employment under this Agreement would otherwise be
extended.
Notwithstanding any other statement or provision in this Agreement to
the contrary, beginning on the first annual anniversary date of this Agreement,
this Agreement will not be automatically extended unless, prior thereto, the
Board of Directors of the Bank reviews and approves such extension.
2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL.
(a) In the event of the involuntary termination of the Employee's
employment, other than for cause, as defined in Section 2(d) hereof, occurring
within twelve months of a change in control (as herein defined) of the Bank or
the Holding Company, the provisions of Section 3 shall apply.
(b) A "change in control" of the Bank or the Holding Company is
defined solely as any acquisition of control (other than by a trustee or other
fiduciary holding securities under an employee benefit plan of the Holding
Company or a subsidiary of the Holding Company), as defined in 12 C.F.R.
Section 574.4, or any successor regulation, of the Bank or Holding Company
which would require the filing of an application for acquisition of control or
notice of change in control in a manner as set forth in 12 C.F.R. Section
574.3, or any successor regulation.
(c) The Employee's employment under this Agreement may be terminated
at any time by the Board of Directors of the Bank. The terms "involuntary
termination" or "involuntarily
2
<PAGE> 3
terminated" in this Agreement shall refer to the termination of the employment
of Employee without his express written consent. In addition, a material
diminution of the Employee's benefits or a material adverse change in the
quality of the work environment which would hamper the Employee's ability to
perform his job effectively shall be deemed and shall constitute an involuntary
termination of employment to the same extent as express notice of such
involuntary termination. By way of example and not by way of limitation, any
of the following actions, if unreasonable or materially adverse to the
Employee, shall constitute such diminution or interference unless consented to
in writing by the Employee: (1) change in the principal workplace of the
Employee to a location outside of a 30 mile radius from the Bank's headquarters
office as of the date hereof; (2) a material reduction or adverse change in the
salary, perquisites, benefits, contingent benefits or vacation time which had
theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all members of the
senior management of the Bank or the Holding Company; (3) a material permanent
increase in the required hours of work or the workload of the Employee; (4) a
material demotion of the employee; or (5) a material reduction in the number or
seniority of other Bank personnel reporting to the Employee or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Employee, other than as
part of a Bank- or Holding Company-wide reduction in staff.
(d) The Employee shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon termination for cause. For purposes
of this Agreement, termination for "cause" shall include termination for
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any material law, rule, or regulation (other than a law,
rule or regulation relating to a
3
<PAGE> 4
traffic violation or similar offense) or final cease-and-desist order, or
material breach of any provision of this Agreement. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors of the Bank at a meeting of the
Board called and held for such purpose (after reasonable notice to the Employee
and an opportunity for the Employee, together with the Employee's counsel, to
be heard before the Board), stating that in the good faith opinion of the Board
the Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
3. TERMINATION BENEFITS.
(a) In the event of the involuntary termination of the Employee's
employment, other than for cause, occurring within twelve months of a change in
control of the Bank or the Holding Company, the Bank shall pay to the Employee
in a lump sum in cash within 25 business days after the date of severance of
employment an amount equal to two hundred and ninety-nine percent (299%) of the
Employee's current annual base salary. At the election of the Employee, such
payment may be made, on a pro rata basis, semi-monthly during the twelve (12)
months following the Employee's termination.
(b) In the event of the involuntary termination of the Employee's
employment, other than for cause, occurring within twelve months of a change in
control of the Bank or the Holding Company, the Bank shall cause life and
health insurance coverage (substantially similar to the coverage maintained by
the Bank for the Employee prior to his severance) to be maintained for a period
of 12 months or for the remaining term of the Agreement, whichever is greater.
4
<PAGE> 5
4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK.
(a) Notwithstanding any other provisions of this Agreement, if
payments and benefits under this Agreement, together with any other payments
and benefits received or to be received by the Employee in connection with a
change in control, would cause any amount to be nondeductible by the Bank or
the Holding Company for federal income tax purposes pursuant to Section 280G of
the Code, then payments and benefits under this Agreement shall be reduced (not
less than zero) to the extent necessary so as to maximize payments and benefits
to the Employee without causing any amount to become nondeductible by the Bank
or the Holding Company by reason of Section 280G of the Internal Revenue Code
of 1986 as amended. The Employee shall determine the allocation of such
reduction among payments and benefits to the Employee.
(b) Notwithstanding any other provisions of this Agreement, payments
under Section 3 of this Agreement shall not exceed three times the Employee's
average annual compensation based on the most recent five taxable years.
(c) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(d) So long as 12 C.F.R. Section 563.39(b) (1995) remains in effect
and applicable to the Bank, in the event that any of the termination provisions
of this Agreement conflict with 12 C.F.R. Section 563.39(b) (1995), the latter
shall prevail.
5. REQUIRED REGULATORY PROVISIONS.
(a) The Bank may terminate the Employee's employment at any time, but
any termination by the Bank, other than a termination for cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Agreement. The Employee shall not have the right to
5
<PAGE> 6
receive compensation or other benefits for any period after a termination for
cause as defined in Section 2(d) hereinabove.
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. Section 1818(e)(3) and (g)(1), the Bank's obligations
under this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are dismissed,
the Bank may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of the obligations which were
suspended.
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section
1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall
terminate, as of the effective date of the order, but vested rights of the
parties shall not be affected.
(d) If the Bank becomes in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this provision shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director or his or her designee,
at the time the Federal Deposit Insurance Corporation ("FDIC") or the
Resolution Trust Corporation ("RTC") at the time the FDIC or the RTC enters
into an agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA, or (ii) by the Director of
the Office of Thrift Supervision ("OTS") or his or her designee at the time the
Director or his or her designee approves a supervisory merger to resolve
problems
6
<PAGE> 7
related to operation of the Bank or when the Bank is determined by the Director
to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by any such action.
6. REINSTATEMENT OF BENEFITS UNDER SECTION 5(b).
In the event the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice described
in Section 5(b) hereof (the "Notice") during the term of this Agreement and a
change in control occurs, the Bank will assume its obligation to pay and the
Employee will be entitled to receive all of the termination benefits provided
for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of
charges in the Notice.
7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and the Employee,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to the Employee of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that the Employee is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
8. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, the Employee, the Bank and their respective successors and assigns.
7
<PAGE> 8
9. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
10. NO MITIGATION.
The amount of any payment or benefit provided for in this Agreement
shall not be reduced by any compensation earned by the Employee as the result
of employment by another employer, by retirement benefits after the date of
termination or otherwise.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as
8
<PAGE> 9
the compensation pursuant to Section 3 hereof. For purposes of implementing
the provisions of Section 11(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would
still be payable to the Employee hereunder if the Employee had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Employee's devisee, legatee
or other designee or if there is no such designee, to the Employee's estate.
12. NOTICE.
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of
Directors of the Bank with a copy to the Secretary of the Bank), or to such
other address as either party may have furnished to the other in writing in
accordance herewith.
13. AMENDMENTS.
No amendments or additions to this Agreement shall be binding unless
in writing and signed by both parties, except as herein otherwise provided.
14. PARAGRAPH HEADINGS.
The paragraph headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
9
<PAGE> 10
15. SEVERABILITY.
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity
or enforceability of the other provisions hereof.
16. GOVERNING LAW.
This Agreement shall be governed by the laws of the United States to
the extent applicable and otherwise by the laws of the State of Missouri.
17. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
18. REIMBURSEMENT.
In the event the Bank purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 17 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
10
<PAGE> 11
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH
MAY BE ENFORCED BY THE PARTIES.
ATTEST: 1st SAVINGS BANK
_____________________________________ By: __________________________________
Barbara Rubison, Secretary Allan James Moore, Jr., Chairman
of the Board of Directors
WITNESS: EMPLOYEE
_____________________________________ By: __________________________________
11
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
- ---------------------------------- --------------------------------- ----------- -------------------
<S> <C> <C> <C>
Sho-Me Financial Corporation 1st Savings Bank, f.s.b. 100% Federal
1st Savings Bank, f.s.b. First Savings Financial Corporation 100% Missouri
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement of
Sho-Me Financial Corp. on Form S-8 (Registration No. 33-95348 and Registration
No. 33-95346), of our report dated February 7, 1997, on the 1996 consolidated
financial statements of Sho-Me Financial Corp., which report is included in the
1996 Annual Report on Form 10-KSB of Sho-Me Financial Corp.
/s/ Baird Kurtz & Dobson
March 26, 1997
Springfield, Missouri
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,688
<INT-BEARING-DEPOSITS> 9,838
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,880
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 255,470
<ALLOWANCE> 1,824
<TOTAL-ASSETS> 297,996
<DEPOSITS> 182,014
<SHORT-TERM> 42,000
<LIABILITIES-OTHER> 2,199
<LONG-TERM> 42,051
<COMMON> 20,018
0
0
<OTHER-SE> 10,014
<TOTAL-LIABILITIES-AND-EQUITY> 297,996
<INTEREST-LOAN> 19,817
<INTEREST-INVEST> 1,347
<INTEREST-OTHER> 109
<INTEREST-TOTAL> 21,273
<INTEREST-DEPOSIT> 7,795
<INTEREST-EXPENSE> 12,374
<INTEREST-INCOME-NET> 8,900
<LOAN-LOSSES> 155
<SECURITIES-GAINS> 128
<EXPENSE-OTHER> 6,594
<INCOME-PRETAX> 3,471
<INCOME-PRE-EXTRAORDINARY> 3,471
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,198
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 0
<LOANS-NON> 254
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 598
<ALLOWANCE-OPEN> 1,689
<CHARGE-OFFS> 33
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,824
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 420
</TABLE>
