-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HD1CN6H0voctnx8DM6LeD4ZxmccZ75wfnBoxTCcE5RjPB+pdQOFNSszcn4+7a680 CtOxa93FQGiW5QuUAjVEEQ== 0000946275-97-000493.txt : 19970924 0000946275-97-000493.hdr.sgml : 19970924 ACCESSION NUMBER: 0000946275-97-000493 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUARANTY FEDERAL BANCSHARES INC CENTRAL INDEX KEY: 0001046203 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-36141 FILM NUMBER: 97683932 BUSINESS ADDRESS: STREET 1: 1341 WEST BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65807 BUSINESS PHONE: 4178892494 MAIL ADDRESS: STREET 1: 1341 WEST BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65807 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on September 22, 1997 Registration No. 333- -------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ GUARANTY FEDERAL BANCSHARES, INC. --------------------------------- (Exact name of registrant as specified in charter) Delaware 6035 Applied For - ---------------------------- ----------------- ------------------ (State or other jurisdiction (Primary SIC No.) (I.R.S. Employer of incorporation or Identification No.) organization) 1341 W. Battlefield, Springfield, Missouri 65807 (417) 889-2494 ------------------------ (Address, including zip code, and telephone number, including area code, of principal executive offices) Mr. James E. Haseltine President and Chief Executive Officer Guaranty Federal Bancshares, Inc. 1341 W. Battlefield, Springfield, Missouri 65807 (417) 889-2494 ------------------------ (Name, address and telephone number of agent for service) Please send copies of all communications to: Charles E. Sloane, Esq. Gregory J. Rubis, Esq. Jean A. Milner, Esq. MALIZIA, SPIDI, SLOANE & FISCH, P.C. 1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.[ ]
CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------------ Title of Each Amount Proposed Maximum Proposed Maximum Amount of Class of Securities to be Offering Price Aggregate Offering Registration Fee To Be Registered Registered Per Share Price - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $0.10 par value per share 6,221,522 $10.00 $62,215,220 $18,853.10 - ------------------------------------------------------------------------------------------------------------------------------------
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Guaranty Federal Bancshares, Inc. (Proposed Holding Company for Guaranty Federal Savings Bank) [LOGO] Up to 5,410,019 Shares of Common Stock (Anticipated Maximum) Guaranty Federal Bancshares, Inc. (the "Company"), a Delaware corporation, is offering up to 5,410,019 shares (which may be increased up to 6,221,522 shares under certain circumstances described below) of its common stock, par value $0.10 per share (the "Common Stock"), in connection with (i) the Offerings and (ii) the Exchange to be effected in connection with the reorganization of Guaranty Federal Savings Bank ("Guaranty Federal" or the "Bank") as a subsidiary of the Company as described herein. All references herein to price or number of shares of the common stock of the Bank are stated giving retroactive effect to the exercise of stock options. References herein to the Bank or Guaranty Federal refer to Guaranty Federal Savings Bank either prior to the Conversion and Reorganization or following the Conversion and Reorganization, as the context may indicate. See "Glossary" for an explanation of certain capitalized terms. FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE CALL THE STOCK CENTER AT (417) ____________. For a discussion of certain factors that should be considered by each prospective investor, see "Risk Factors" beginning on page __. ---------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
=================================================================================================================================== Minimum Midpoint Maximum Adjusted Maximum(4) - ----------------------------------------------------------------------------------------------------------------------------------- Price Per Share ....................... $10.00 $10.00 $10.00 $10.00 - ----------------------------------------------------------------------------------------------------------------------------------- Number of Shares (1)................... 2,805,000 3,300,000 3,795,000 4,364,250 - ----------------------------------------------------------------------------------------------------------------------------------- Underwriting Fees, Commissions $915,000 $915,000 $915,000 $915,000 and Expenses (2)..................... ($0.33 per share) ($0.28 per share) ($0.24 per share) ($0.21 per share) - ----------------------------------------------------------------------------------------------------------------------------------- $27,135,000 $32,085,000 $37,035,000 $42,727,500 Net proceeds to Company (3)............ ($9.67 per share) ($9.72 per share) ($9.76 per share) ($9.79 per share) ===================================================================================================================================
(1) Based upon the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, respectively. Does not include shares of Common Stock issued to Public Stockholders in the Exchange. (2) Consists of the estimated costs to the Primary Parties to be incurred in connection with the Conversion and Reorganization of $915,000, including marketing fees and expenses of $200,000 to be paid to Friedman, Billings, Ramsey & Co., Inc. ("FBR") in connection with the Offerings. See "The Conversion and Reorganization -Marketing Arrangements." The actual fees and expenses may vary substantially from the estimates. See "Pro Forma Data." The fees paid to FBR may be deemed to be underwriting fees. (3) Actual net proceeds may vary substantially from estimated amounts depending on the number of shares sold in the Offerings and other factors. Does not give effect to purchases of shares of Conversion Stock by the ESOP, which initially will be deducted from the Company's stockholders' equity. For the effects of such purchases, see "Capitalization" and "Pro Forma Data." (4) Gives effect to an increase in the number of shares which could occur without a resolicitation of subscribers or any right of cancellation due to an increase in the Offering Range of up to 15% above the maximum of the Offering Range to reflect changes in market and financial conditions following commencement of the Offerings or to fill in part or in whole the stock order of the ESOP. See "The Conversion and Reorganization - Stock Pricing and Number of Shares To Be Issued." FRIEDMAN, BILLINGS, RAMSEY & CO., INC. The date of this Prospectus is _________ ___, 1997 - -------------------------------------------------------------------------------- SUMMARY This summary highlights selected information from this Prospectus and may not contain all the information that is important to you. To understand the stock offering fully, you should read carefully this entire Prospectus, including the consolidated financial statements and the notes to the consolidated financial statements of Guaranty Federal Savings Bank.
Common Stock to be Outstanding After the Offerings and Exchange....................................... 3,998,709 to 5,410,019 shares (1) Common Stock Offered in the Offerings ("Conversion Stock")......................................... 2,805,000 to 3,795,000 shares (2) Common Stock to be Received in Exchange...................... 1,193,709 to 1,615,019 shares (3) Number of Shares of Bank to be Exchanged..................... 972,365 shares Shares of Bank to be Canceled................................ 2,152,635 shares Exchange Ratio............................................... From 1.2276 to 1.6609 for each Public Bank Share (4) Use of Proceeds.............................................. Purchase of all of the capital stock of the Bank, and for general corporate purposes. Dividends.................................................... Expected annual rate of $0.30 per share to be paid semi-annually. Nasdaq National Market Symbol................................ GFED Issuer....................................................... Guaranty Federal Bancshares, Inc. Selling Agent................................................ Friedman, Billings, Ramsey & Co., Inc. Issue Price.................................................. $10.00 Offering Period.............................................. The subscription offering will terminate at __________ on December _____, 1997 and the public stockholders' offering and community offering will terminate no later than January _____ 1998. Purchase and Ownership Limitations........................... $250,000 of Common Stock (including Exchange Shares) except for the ESOP.
- -------------------- (1) Represents the minimum and maximum of the Total Valuation Range. At the maximum, as adjusted, of the Total Valuation Range, 6,221,522 shares would be outstanding. (2) Represents the minimum and maximum of the Offering Range. At the maximum, as adjusted, of the Offering Range, 4,364,250 shares would be offered. Excludes shares of Common Stock to be issued in exchange for Public Bank Shares. (3) Represents the minimum and maximum of the Total Valuation Range. At the maximum, as adjusted, of the total Valuation Range, 1,857,272 shares could be received in exchange of existing Bank Common Stock. (4) Represents the minimum and maximum of the Total Valuation Range. At the maximum, as adjusted, of the Total Valuation Range, 1.9101 shares would be exchanged. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Companies Guaranty Federal Bancshares, Inc. 1341 W. Battlefield Springfield, Missouri 65807 (417) 889-2494 Guaranty Federal Bancshares, Inc. is not an operating company and has not engaged in any significant business to date. It was formed in September 1997 as a Delaware-chartered corporation to be the holding company for Guaranty Federal Savings Bank. The holding company structure will provide greater flexibility in terms of operations, expansion and diversification. See page _____. Guaranty Federal Savings Bank 1341 W. Battlefield Springfield, Missouri 65807 (417) 889-2494 Guaranty Federal Savings Bank is a community and customer oriented federal savings bank. The Bank provides financial services to individuals, families and small businesses. Historically, the Bank has emphasized residential mortgage lending, primarily originating one- to four-family mortgage loans. See pages _____ to _____. Guaranty Federal Bancshares, M.H.C. 1341 W. Battlefield Springfield, Missouri 65807 (417) 889-2494 Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company") was formed in April 1995 as part of the Bank's reorganization into the mutual holding company structure. The Mutual Holding Company owns 68.9% of the Bank's issued and outstanding shares. See page _____. Stock Purchases The shares of Conversion Stock will be offered on the basis of priorities. The shares will be offered first in a Subscription Offering to depositor and borrower members. Any remaining shares will be offered first to public stockholders of the Bank in a Public Stockholders' Offering and then to certain members of the general public in a Community Offering. See pages ______ to _____. Subscription Rights Subscription rights may neither be sold nor assigned. Any transfer of subscription rights is prohibited by law. The Exchange The following table sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, the following: (i) the total number of shares of Common Stock and Exchange Shares to be issued in the Conversion and Reorganization, (ii) the percentage of the total 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stock represented by the Common Stock and the Exchange Shares, and (iii) the Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing fractional Exchange Shares.
Conversion Stock to Exchange Shares to be Issued(1) be Issued(1) Total Shares of ---------------------- --------------------- Common Stock Exchange Amount Percent Amount Percent to be Outstanding(1) Ratio(1) ------ ------- ------ ------- -------------------- -------- Minimum................. 2,805,000 70.15% 1,193,709 29.85% 3,998,709 1.2276 Midpoint................ 3,300,000 70.15 1,404,364 29.85 4,704,364 1.4443 Maximum................. 3,795,000 70.15 1,615,019 29.85 5,410,019 1.6609 15% above maximum....... 4,364,250 70.15 1,857,272 29.85 6,221,522 1.9101
- ----------------- (1) Assumes that exercisable options to purchase 14,383 shares of Bank Common Stock at June 30, 1997 are not exercised prior to consummation of the Conversion and Reorganization. Assuming that all of such options are exercised prior to such consummation, the percentages represented by the Conversion Stock and the Exchange Shares would amount to 69.84% and 30.16%, respectively, and the Exchange Ratio would amount to 1.2222, 1.4379, 1.6536, and 1.9016, at the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, respectively. Procedure for Purchasing Shares in the Offerings. To help ensure that each purchaser receives a Prospectus at least 48 hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no Prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the order form will confirm receipt or delivery of the Prospectus in accordance with Rule 15c2-8. Order forms will only be distributed with a Prospectus. To purchase Conversion Stock in the Offerings, an executed order form with the required payment for each share subscribed for, or with appropriate authorization for withdrawal from a deposit account at the Bank (which may be given by completing the appropriate blanks on the order form), must be received by the Bank at any of its offices by 12:00 p.m., Missouri Time, on the Expiration Date. Order forms which are not received by such time or are executed defectively or are received without full payment (or appropriate withdrawal instructions) are not required to be accepted. In addition, the Bank may not accept orders submitted or photocopied or telecopied order forms. The Primary Parties have the right to waive or permit the correction of incomplete or improperly executed forms, but do not represent that they will do so. The waiver of an irregularity on an order form, the allowance by the Primary Parties of a correction of an incomplete or improperly executed order form, or the acceptance of an order after 12:00 p.m. on the Expiration Date in no way obligates the Primary Parties to waive an irregularity, allow a correction, or accept an order with respect to any other order form. The interpretation by the Primary Parties of the acceptability of an order form will be final. Once received, an executed order form may not be modified, amended or rescinded without the consent of the Primary Parties, unless the Offerings have not been completed within 45 days after the end of the Subscription, Public Stockholders, and Community Offerings, unless such period has been extended. In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priority, depositors as of the close of business on the Eligibility Record Date (December 31, 1995) or the Supplemental Eligibility Record Date (September 30, 1997) or the voting record date (___________, 1997) must list on the order form all 3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- accounts in which they have an ownership interest at the applicable eligibility date, giving all names in each account and the account numbers. Payment for subscriptions and orders may be made (i) in cash if delivered in person at any office of the Bank, (ii) by check or money order or (iii) by authorization of withdrawal from deposit accounts maintained with the Bank. The Primary Parties also may elect to receive payment for shares of Conversion Stock by wired funds, but are not required to do so. Funds will be deposited in a segregated account at the Bank and interest will be paid on funds made by cash, check or money order at the Bank's passbook rate of interest from the date payment is received until completion or termination of the Conversion and Reorganization. If payment is made by authorization of withdrawal from certificate accounts, the funds authorized to be withdrawn from a Bank deposit account will continue to accrue interest at the contractual rates until completion or termination of the Conversion and Reorganization, but a hold will be placed on such funds, thereby making them unavailable to the depositor until completion or termination of the Conversion and Reorganization. If a subscriber authorizes the Bank to withdraw the aggregate amount of the purchase price from a deposit account, the Bank will do so as of the effective date of the Conversion and Reorganization. The Bank will waive any applicable penalties for early withdrawal from certificate accounts. If the remaining balance in a certificate account is reduced below the applicable minimum balance requirement at the time that the funds actually are transferred under the authorization, the certificate will be canceled at the time of the withdrawal, without penalty, and the remaining balance will be returned to the subscriber. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes, but rather may pay for such shares of Conversion Stock subscribed for upon consummation of the Offerings, provided that there is in force from the time of its subscription until such time, a loan commitment from an unrelated financial institution or the Company to lend to the ESOP, at such time, the aggregate purchase price of the shares for which it has subscribed. A depositor interested in using his or her IRA funds to purchase Conversion Stock must do so through a self-directed IRA. Since the Bank does not offer such accounts, it will allow a depositor to make a trustee-to-trustee transfer of the IRA funds to a trustee offering a self-directed IRA program with the agreement that such funds will be used to purchase the Conversion Stock in the Offerings. There will be no early withdrawal or IRS interest penalties for such transfers. The new trustee would hold the Conversion Stock in a self-directed account in the same manner as the Bank now holds the depositor's IRA funds. An annual administrative fee may be payable to the new trustee. Depositors interested in using funds in a Bank IRA to purchase Conversion Stock should contact the Stock Center as soon as possible so that the necessary forms may be forwarded for execution and returned prior to the Expiration Date. 4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Structure of the Conversion and Reorganization. The following diagram outlines the organizational structure of the Primary Parties prior to the adoption of the Plan and their ownership interests: - ----------------------------------------- ------------------------------------- | | | | | Guaranty Federal Bancshares, M.H.C. | | Holders of Public Bank Stock | | | | | - ----------------------------------------- ------------------------------------- | | | 68.88% 31.12% | | | -------------------------------------------- | | | Guaranty Federal Savings Bank | | | -------------------------------------------- In order to complete the Conversion and Reorganization, (i) Mutual Holding Company (following its conversion to an interim federal stock savings bank ("Interim A")) will merge with and into the Bank, with the Bank surviving the merger (ii) the Company will form a subsidiary interim federal stock savings bank ("Interim B") and Interim B will merge with the Bank, with the Bank surviving the merger, resulting in the Bank as a subsidiary of the Company, pursuant to which the Public Bank Shares will be converted into Exchange Shares, and (iii) the Company will offer Common Stock. The following diagram reflects the organizational structure and ownership interests (after adjustment to give effect to the market value of assets held by the Mutual Holding Company) after the Conversion and Reorganization and assumes that there are no fractional shares and does not give effect to purchases of Common Stock by Public Stockholders or the exercise of outstanding stock options. - ------------------------------------- ----------------------------------------- | | | | | Purchasers of Conversion Stock | | Former Holders of Public Bank Stock | | | | | - ------------------------------------- ----------------------------------------- | | | 70.15% 29.85% | | | ------------------------------------------ | | | Guaranty Federal Bancshares, Inc. | | | ------------------------------------------ | | 100% | ------------------------------------------- | | | Guaranty Federal Savings Bank | | | ------------------------------------------- For further information see "The Conversion and Reorganization." 5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Benefits to Management from the Conversion and Reorganization Employees of the Bank will participate in the Conversion and Reorganization through individual stock purchases and stock purchases by the employee stock ownership plan, which is a form of retirement plan. The Company intends to implement a restricted stock plan and a stock option plan following completion of the conversion, which may benefit the President and other officers and directors. However, the restricted stock plan and stock option plan may not be adopted until after the conversion and are subject to stockholder approval and compliance with OTS regulations. Officers and directors may be granted common stock under a restricted stock plan without payment of cash. Risks in Owning Common Stock Before you decide to purchase stock in the offering, you should read the Risk Factors section on pages _____ - _____ of this Prospectus. 6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following tables include certain information concerning the financial position of the Bank (including consolidated data from operations of subsidiaries) as of the dates indicated. Certain amounts have been reclassified to conform to the current presentation. Dollar amounts are expressed in thousands except per share data. This information is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto of the Bank presented elsewhere in this Prospectus. Selected Consolidated Financial Condition Data The following table sets forth certain information concerning the financial position of the Bank at the dates indicated:
As of June 30, ------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------- -------------- ASSETS Cash and cash equivalents.................................... $ 3,817 $ 2,675 $ 4,350 $ 3,569 $ 11,012 Investment securities........................................ 11,946 17,708 24,118 28,899 22,753 Mortgage-backed securities................................... 15,814 20,067 13,855 14,138 24,101 Loans receivable, net........................................ 158,135 135,029 119,842 105,265 96,142 Accrued interest receivable.................................. 1,312 1,381 1,274 1,124 1,066 Prepaid and other assets..................................... 1,964 1,913 1,802 2,675 60 Foreclosed assets............................................ 210 2 656 805 936 Premises and equipment....................................... 6,267 6,392 4,987 2,375 2,241 ------- ------- ------- ------- ------- Total assets........................................ $199,465 $185,167 $170,884 $158,850 $158,311 ======= ======= ======= ======= ======= LIABILITIES Deposits..................................................... $151,246 $157,008 $139,595 $ 141,017 $142,529 Federal Home Loan Bank advances.............................. 18,151 -- 4,000 -- -- Other liabilities............................................ 2,578 1,573 1,245 1,271 1,265 ------- ------- ------- ------- ------- Total liabilities................................... 171,975 158,581 144,840 142,288 143,794 ------- ------- ------- ------- ------- STOCKHOLDERS' EQUITY Common stock................................................. 3,125 3,125 3,125 --(1) --(1) Additional paid-in capital................................... 3,687 3,556 3,900 --(1) --(1) Retained earnings............................................ 18,620 18,646 17,892 16,562 14,517 ------- ------- ------- ------- ------- 25,432 25,327 24,917 16,562 14,517 Unrealized appreciation on available-for-sale securities, net 2,058 1,259 1,127 -- -- ------- ------- ------- --------- ------- Total stockholders' equity.......................... 27,490 26,586 26,044 16,562 14,517 ------- ------- ------- ------- ------- Total liabilities and stockholders' equity.......... $199,465 $185,167 $170,884 $158,850 $158,311 ======= ======= ======= ======= =======
- --------------- (1) The Bank had no common stock or capital prior to its conversion from the mutual to stock form in April 1995. 7 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Selected Operating Data The following table summarizes the Bank's results of operations for each of the periods indicated:
Years Ended June 30, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------- -------- -------- -------- -------- Interest income.................................. $14,711 $13,702 $11,637 $10,858 $11,480 Interest expense................................. 8,310 8,239 6,595 5,924 6,657 ------ ------ ------ ------ ------ Net interest income.............................. 6,401 5,463 5,042 4,934 4,823 Provision (credit) for loan losses............... -- (1,212) 16 14 (98) -------- ------ ------ ------ ------- Net interest income after provision (credit) for loan losses....................... 6,401 6,675 5,026 4,920 4,921 Noninterest income (loss)........................ 530 221 71 (50) 269 Noninterest expense (1).......................... 5,105 4,117 3,077 2,815 2,514 ------ ------ ------ ------ ------ Income before income taxes....................... 1,826 2,779 2,020 2,055 2,676 Provision for income taxes....................... 664 1,026 690 637 815 ------- ------ -------- ------ --- Income before change in accounting principle..... 1,162 1,753 1,330 1,418 1,861 Change in accounting principle................... -- -- -- 628 -- -------- -------- --------- ------ -------- Net income....................................... $ 1,162 $ 1,753 $ 1,330 $ 2,046 $ 1,861 ====== ====== ====== ====== ====== Earnings per common share ....................... $ 0.37 $ 0.56 $ 0.10(2) -- (3) -- (3) ======= ======= ====== ======= ======= Shares used to calculate earnings per share...... 3,149,062 3,125,933 3,125,000 -- (3) -- (3)
- ------------------------- (1) For 1997, includes a $932,000 special assessment for the recapitalization of the SAIF. (2) Consists of earnings following the conversion of the Bank from mutual to stock form on April 7, 1995 through June 30, 1995. (3) The Bank had no common shares prior to its conversion from the mutual to stock form in April 1995. 8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Key Operating Ratios and Other Data The table below sets forth certain performance ratios and other data of the Bank for the periods indicated.
At or For the Year Ended June 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Performance Ratios: Return on average assets (net earnings divided by average total assets) (1).. 0.61% 0.96% 0.81% 0.89% 1.19% Return on average equity (net earnings divided by average equity) (1)........ 4.34 6.61 6.67 9.12 13.70 Net interest rate spread..................................................... 2.87 2.48 2.71 2.86 2.96 Net interest margin (net interest income as a percentage of average interest-earning assets)........................................ 3.53 3.13 3.19 3.18 3.24 Net interest income to average assets........................................ 3.37 2.99 3.08 3.07 3.09 Average interest-earning assets to average interest-bearing liabilities...... 114.16 113.80 111.57 108.53 106.78 Noninterest expense/average assets........................................... 2.69 2.25 1.88 1.75 1.61 Efficiency ratio(2).......................................................... 73.65 72.43 60.18 57.64 49.37 Quality Ratios: Non-performing loans to total loans (3)...................................... 0.74 0.27 1.47 1.92 2.25 Non-performing assets to total assets........................................ 0.74 0.21 1.51 2.02 2.09 Allowance for loan losses to total loans (3)................................. 1.27 1.45 1.34 1.48 1.64 Capital Ratios: Average equity to average assets ratio (average equity divided by average total assets).............................................................. 14.10 14.49 12.16 9.96 8.75 Equity to assets at period end............................................... 13.78 14.36 15.24 10.43 9.17 Number of: Mortgage loans serviced...................................................... 2,476 2,280 2,211 2,120 1,988 Non-mortgage loans serviced.................................................. 566 315 127 106 112 Deposit accounts............................................................. 17,223 15,039 13,477 13,284 13,349 Offices (all full service)................................................... 4 4 3 3 3 Per Share Data(4)(5): Book value per share......................................................... $ 8.80 $ 8.51 $ 8.33 N/A N/A Earnings per share........................................................... 0.37 0.56 0.10 N/A N/A Dividends declared per share................................................. 0.38 0.32 N/A N/A N/A Dividend payout ratio (dividends declared per share divided by net income per share)(6)........................................ 102.70 57.14 N/A N/A N/A
- ----------------- (1) For 1997, had the $932,000 special assessment for the recapitalization of the SAIF not been incurred, the return on average assets would have been 0.92% and the return on average equity would have been 6.42%. (2) Noninterest expense to sum of net interest income and noninterest income. (3) Total loans exclude mortgage/asset-backed securities. (4) Based on outstanding shares at period end. (5) The Bank had no common stock or capital prior to its conversion from the mutual to stock form in April 1995. (6) Includes dividends received by the Mutual Holding Company. Represents dividends declared divided by net income. 9 - -------------------------------------------------------------------------------- RISK FACTORS Before investing in shares of the Common Stock offered hereby, prospective investors should carefully consider the matters presented below in addition to those discussed elsewhere in this Prospectus. Intent to Remain Independent; Unsuitability as Short-Term Investment The directors and executive officers of the Company and the Bank believe that it is in the best interests of the Bank, the Company and the Company's shareholders for the Company and the Bank to remain independent, with the objective of long-term enhancement of shareholder value. Accordingly, an investment in the Common Stock of the Company may not be suitable for investors who are seeking short-term returns through a sale of the Company. Certain Anti-Takeover Provisions Certain provisions of the Company's certificate of incorporation and bylaws, as well as certain federal regulations, assist the Company in maintaining its status as an independent publicly owned corporation and serve to render a hostile takeover more difficult. These provisions provide for, among other things, limits on voting rights, supermajority voting, authorized but unissued shares of common and preferred stock, staggered terms for members of the board of directors, noncumulative voting for directors, limits on the calling of special meetings, and restrictions on certain business combinations. In particular, the Company's Certificate of Incorporation provides that beneficial owners of more than 10% of the Company's outstanding common stock may not vote the shares owned in excess of the 10% limit, and for a period of five years from the completion of the Conversion and Reorganization, no person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the Company. The impact of these provisions on the submission of a proxy on behalf of a beneficial holder of more than 10% of the Common Stock is to disregard for voting purposes and require divestiture of the amount of stock held in excess of 10% (if within five years of the Conversion and Reorganization more than 10% of the Common Stock is beneficially owned by a person). Unless the grantor of a revocable proxy is an affiliate or an associate of a 10% holder or there is an arrangement, agreement, or understanding with such 10% holder, these provisions would not restrict (1) the ability of a 10% holder of revocable proxies to exercise revocable proxies for which the 10% holder is neither a beneficial nor record owner or (2) the ability of a beneficial owner of less than 10% of the Common Stock to solicit revocable proxies during a public proxy solicitation for a particular meeting of stockholders and vote such proxies. However, these provisions may discourage potential proxy contests. Additional restrictions apply after the completion of the Conversion and Reorganization. Furthermore, the Bank intends to enter into employment agreements with nine members of management of the Bank whereby such individuals would be entitled to lump sum compensation in the event of termination of employment following a change-in-control of the Bank or the Company. Assuming there was a change-in-control on June 30, 1997, and the agreements were triggered, the eight individuals would be entitled to aggregate compensation of approximately $1.2 million. See "Management of the Bank - Executive Compensation - Employment Agreements." Despite the belief of the Bank and the Company that such anti-takeover provisions benefit stockholders of the Company, such provisions may have the effect of discouraging a future takeover attempt not approved by the Company's Board of Directors, pursuant to which stockholders might receive a substantial premium for their shares over then-current market prices. As a result, stockholders who 10 might desire to participate in such a transaction might not have any opportunity to do so. Such provisions will also render the removal of the Company's Board of Directors and management more difficult and, therefore, may serve to perpetuate current management. The Boards of Directors of the Bank and the Company, however, have concluded that the potential benefits outweigh the possible disadvantages, because they believe that such provisions encourage potential acquirors to negotiate directly with the Boards of Directors. The Boards of Directors believe that they are in the best position to act on behalf of all stockholders. Further, the Board of Directors of the Company has the ability to waive certain restrictions on acquisition, provided that the proposed acquisition is approved by a majority of the disinterested members of the Board of Directors. See "Certain Restrictions on Acquisition of the Company." Construction Lending Risks Prompted by demand for new residential housing units in its market area, the Bank has been an active originator of residential construction loans, predominantly speculative loans to approximately 48 local residential builders. Residential construction loans constituted $25,149,000 or 14.71% of the loan portfolio at June 30, 1997. Subject to market conditions, the Bank intends to continue originating residential construction loans. Construction lending generally involves greater credit risk than one-to four-family mortgage lending. Construction loans generally have higher loan balances than one-to four-family mortgage loans. In addition, the potential for cost overruns because of the inherent difficulties in estimating construction costs and, therefore, collateral values and the difficulties and costs associated with monitoring construction progress, among other things, are major contributing factors to this greater credit risk. Speculative construction loans have the added risk that there is not an identified buyer for the completed home when the loan is originated, with the risk that the builder will have to service the construction loan debt and finance the other carrying costs of the completed home for an extended time period until a buyer is identified. Furthermore, the demand for construction loans and the ability of construction loan borrowers to service their debt depends on the state of the local economy, and market interest rate levels. A material downturn in economic conditions would be expected to have a material adverse effect on the credit quality of the construction loan portfolio, and may require management to establish additional provisions for loan losses, which would have a material adverse effect on net income. See "Business of the Bank - Lending Activities - Construction Loans." Potential Impact of Changes in Interest Rates The Bank's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, primarily loans and securities, and its interest expense on interest-bearing liabilities, primarily deposits and other borrowings (the interest rate spread). The Bank's loans and investments generally have longer effective maturities than its deposits. As a result, the yield on interest-earning assets will adjust to changes in interest rates at a slower rate than the cost of the Bank's interest-bearing liabilities. During periods of increasing interest rates, net interest income is likely to be negatively affected because the Bank's interest rate sensitive liabilities would be expected to reprice faster than its interest rate sensitive assets, causing a decline in the Bank's interest rate spread and margin. This would result from an increase in the Bank's cost of funds that would not be immediately offset by an increase in its yield on loans and investments. An increase in the cost of funds without an equivalent increase in the yield on funds would tend to reduce net interest income. In times of falling interest rates, the lag in repricing of interest rate sensitive assets could be expected to 11 have the opposite effect on the Bank. However, falling interest rates may result in the refinancing by customers of loans at lower interest rates or the investment of funds by the Bank at lower interest rates, either of which would reduce the interest rate spread and margin of the Bank and, therefore, reduce net interest income. For additional discussion of interest rate risk and the Bank's management of its interest-bearing liabilities and interest-earning assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management Strategy" and "- Asset/Liability Management." As discussed under "Business of the Bank," more than 87% of the mortgage loan portfolio consists of adjustable rate loans due more than one year after June 30, 1997, and more than 53% of the mortgage-backed securities portfolio are secured by adjustable rate loans. Decreased Return on Average Equity and Increased Expenses Immediately After Conversion and Reorganization Return on average equity (net income divided by average equity) is a ratio used by many investors to compare the performance of a savings institution to its peers. As a result of the Conversion and Reorganization, the Company's equity will increase substantially. The Company's expenses also will increase because of the costs associated with the employee stock ownership plan, restricted stock ownership plan, and the costs of being a public company. Because of the increases in equity and expenses, return on equity may decrease as compared to performance in previous years. Initially, the Company and the Bank intend to invest the net proceeds in short term investments which generally have lower yields than residential mortgage loans. For the years ended June 30, 1997 and 1996, return on average equity was 4.3% (6.4% without the SAIF assessment) and 6.6%, respectively. A lower return on equity could reduce the trading price the Company's shares. See "Use of Proceeds." Possible Dilutive Effect of Issuance of Additional Shares Various possible and planned issuances of common stock could dilute the interests of prospective stockholders of the Company or existing stockholders of the Bank who will become stockholders of the Company following consummation of the Conversion and Reorganization, as noted below. The number of shares to be sold in the Conversion and Reorganization may be increased to up to 4,364,250 shares as a result of an increase in the Offering Range of up to 15% to reflect changes in market and financial conditions following the commencement of the Offerings, or to fill in whole or in part the stock order of the ESOP. An increase in the number of shares will decrease net income per share and stockholders' equity per share. See "Capitalization" and "Pro Forma Data." The ESOP intends to purchase 8% of the Conversion Stock to be issued in the Offerings (excluding exchanged shares). In the event that there are insufficient shares available to fill the ESOP's order due to an oversubscription by Eligible Account Holders, and the ESOP is unable to fulfill its subscription through the use of its first priority with respect to Common Stock sold above the maximum of the Offering Range, the Company may issue authorized but unissued shares of common stock to the ESOP after the conclusion of the Offerings in an amount sufficient to fill the ESOP's order or the ESOP may purchase shares in the open market. In the event that additional shares of Common Stock are issued to the ESOP to fill its order, stockholders would experience dilution of their ownership interests by 5.3%, assuming the ESOP purchased no shares in the Offerings) and per share stockholders' equity and per share net income would decrease as a result of an increase in the number of outstanding shares of Common Stock. See "Management of the Bank - Certain Benefits - Employee Stock Ownership Plan" 12 and "The Conversion and Reorganization - The Offerings - Subscription Offering - ESOP (Second Priority)." The 1998 RSP intends to acquire an amount of common stock equal to 4.0% of the shares of Conversion Stock issued in the Offerings. Such shares of common stock may be acquired in the open market with funds provided by the Company, if permissible, or from authorized but unissued shares of Common Stock. In the event that additional shares of common stock are issued to the 1998 RSP, resulting in a 2.8% overall increase in outstanding shares of common stock, stockholders would experience dilution of their ownership interests by 2.7% and per share stockholders' equity and per share net income would decrease. See "Pro Forma Data" and "Management of the Company - Proposed Future Stock Benefit Plans - - 1998 Management Recognition Plan." The Company intends to reserve for future issuance pursuant to the 1998 Option Plan a number of authorized shares of common stock equal to an aggregate of 10% of the Conversion Stock issued in the Offerings (330,000 shares, based on the midpoint of the Offering Range). In the event that such shares are issued, resulting in a 7.0% overall increase in outstanding shares of common stock, stockholders would experience dilution of their ownership interests by 6.6% and per share stockholders' equity and per share net income would decrease. See "Pro Forma Data" and "Management of the Company - Proposed Future Stock Benefit Plans - - 1998 Stock Option Plan." The Bank previously adopted and maintains the 1994 Stock Option Plan ("1994 Option Plan"), which reserved for issuance 97,237 shares of Bank Common Stock. As of June 30, 1997, no shares had been issued as a result of the exercise of options granted under the 1994 Option Plan. Upon consummation of the Conversion and Reorganization, this plan will become a plan of the Company and common stock of the Company will be issued in lieu of Bank Common Stock pursuant to the terms of such plans. Assuming an exchange ratio of 1.4443, the 97,237 unexercised options under the 1994 Option Plan at June 30, 1997 would be converted into options to purchase 140,439 shares of common stock. See "Management of the Bank - Certain Benefits -1994 Stock Option Plan." Voting Power of Directors and Executive Officers Directors and executive officers of the Company, who currently hold 135,205 shares (including unexercised stock options) or 4.3% of the outstanding Bank Common Stock, expect to hold approximately 5.5% to 5.1% of the shares of common stock outstanding upon consummation of the Conversion and Reorganization (based upon the exchange of Bank Common Stock and anticipated purchases of Conversion Stock at the minimum and the maximum of the Offering Range, respectively). See "Beneficial Ownership of Capital Stock." Executive officers of the Company, as well as other eligible employees of the Company, also will hold shares of common stock which are allocated to the accounts established for them pursuant to the ESOP. The ESOP intends to purchase 8% of the Conversion Stock to be issued in the Offerings (264,000 shares based on the midpoint of the Offering Range). Under the terms of the ESOP, shares of common stock that have not yet been allocated to the accounts of employee participants in the ESOP, or for which no voting instructions have been received, will be voted by the trustees of the ESOP, who are directors of the Company in accordance with the direction of the ESOP Committee. The Bank's 1994 Recognition and Retention Plan and Trust ("1994 RRP") purchased 38,895 shares of Bank Common Stock in connection with the MHC Reorganization. In addition, subject to stockholder approval following the consummation of the Conversion and Reorganization, the Company 13 expects to acquire common stock on behalf of the 1998 RSP, a non-tax qualified restricted stock plan, in an amount equal to 4.0% of the Conversion Stock issued in the Offerings (132,000 shares based on the midpoint of the Offering Range). Under the terms of the 1994 RRP and 1998 RSP, directors and executive officers are allocated shares of common stock over which they have voting power and the trustees of such plan, who also are directors of the Company, will have authority to vote all shares held by such plan that have not been earned and distributed, as directed by the trustees of the plan. Subject to stockholder approval, the Company also intends to reserve for future issuance pursuant to the 1998 Option Plan a number of authorized shares of common stock equal to an aggregate of 10% of the Conversion Stock issued in the Offerings (330,000 shares, based on the midpoint of the Offering Range). These options are in addition to the unexercised options for 97,237 shares of Bank Common Stock previously granted under the 1994 Option Plan at June 30, 1997 adopted in connection with the MHC Reorganization. See "Management of the Company - Proposed Future Stock Benefit Plans" and "Management of the Bank - Certain Benefits." Management's potential voting power could, together with additional stockholder support, preclude or make more difficult takeover attempts which do not have the support of the Company's Board of Directors and may tend to perpetuate existing management. Moreover, such voting control will enable the Company's Board of Directors and management to block approval of transactions requiring the approval of 80% of the stockholders. See "Comparison of Stockholders' Rights - Amendment of Governing Instruments" and "Certain Restrictions on Acquisition of the Company. Competition The Bank faces significant competition both in making loans and in attracting deposits. The State of Missouri has a high density of financial institutions, several of which are branches of significantly larger institutions that have greater financial resources than the Bank. All of these institutions are competitors of the Bank to varying degrees including large commercial banks and thrift institutions with headquarters outside of Missouri that have branch offices in the market area. The Bank's competition for loans comes principally from other savings institutions, credit unions, regional bank and thrift holding companies and commercial banks located in its primary market area. Significant competition for the Bank's other deposit products and services comes from money market mutual funds, brokerage firms, and insurance companies. The primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by various financial institutions. Competition for origination of real estate loans normally comes from other savings institutions, commercial banks, mortgage bankers, mortgage brokers and insurance companies. The Bank's primary competition consists of financial institutions with offices located near the Bank's branch offices and includes five thrift institutions and 17 commercial banks and 12 credit unions. See "Business of the Bank - Competition." Geographic Concentration The primary market area of the Bank is Greene County, Missouri. As a result, economic conditions in this one county can significantly impact the deposit and loan activities of the Bank. Although this area is economically diversified, an economic downturn in this area could negatively impact the operations of the Bank. See "Business of the Bank - Market Area." 14 Expected Increase in the Provision for Loan Losses The Bank recorded no provisions for loan losses during the 1997 fiscal year and recorded a $1,211,502 credit to the provision for the 1996 fiscal year due to net recoveries of amounts previously charged to income. As a result, net income reported during recent years by the Bank has been favorably impacted by the nonrecurring credit and the lack of provisions. Provisions for loan losses reduce net income and credits increase net income. It is expected that provisions for loan losses will be taken within the next year if the past growth in the loan portfolio continues or if conditions otherwise necessitate additional provisions. These expected provisions will negatively impact net income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operation - Comparison of Years Ended June 30, 1997 and 1996 - Provision for Loan Losses." Possible Delay in Completing the Offerings The Bank intends to end the Offerings on _________________ and complete the Conversion and Reorganization before _____________. However, certain events are beyond the control of the Primary Parties, including, among other things, market conditions, subscriber interest, an update of the appraisal after the end of the Offerings, the results of meetings of stockholders and members of the Bank and Mutual Holding Company, and regulatory review and approval. If the Offerings are extended beyond _____________, completion of the Conversion and Reorganization will be delayed. See "The Conversion - Required Approvals." The Offerings may not extend beyond ___________ without the approval of the OTS and the OTS may require a resolicitation of subscribers if the Conversion and Reorganization cannot be completed before __________________. Solely in the event of a resolicitation, subscribers will have the right to confirm, increase, decrease, or rescind their subscription and the failure of a subscriber to provide an affirmative response will result in the rescission of the subscription and the prompt return of funds, including interest at the Bank's passbook rate, following the end of the resolicitation period. Subscribers should be aware that payment for shares, whether made by check, money order, or authorization for withdrawal from accounts maintained at the Bank, will be unavailable to the subscriber until the Offerings are completed or terminated. Regulatory Oversight and Proposed Legislation The Bank is subject to extensive regulation, supervision, and examination by the OTS as its chartering authority and primary federal regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures its deposits up to applicable limits. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Des Moines. As the savings and loan holding company of the Bank, the Company is also subject to regulation and oversight by the OTS. Such regulation and supervision governs the activities in which an institution can engage and is intended primarily for the protection of the FDIC insurance fund and depositors. Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities. See "Regulation." A bill has been passed by the House Banking Committee that would consolidate the OTS with the Office of the Comptroller of the Currency ("OCC") and eliminate the federal thrift charter. All federal thrifts, such as the Bank, would be forced to convert to national banks, state banks or state thrifts. Under current law and regulations, a unitary savings and loan holding company, such as the Company, 15 which has only one thrift subsidiary that meets the qualified thrift lender ("QTL") test, such as the Bank, has essentially unlimited investment authority. See "Regulation - Company Regulation." Legislation has also been proposed which, if enacted, would limit the non-banking related activities of the savings and loan holding company to those activities permitted for bank holding companies. Lack of IRS Private Letter Ruling The IRS has placed transactions which involve certain "downstream mergers" (such as the merger of the Mutual Holding Company, after the Conversion, into the Bank) into a "no rule" area. However, the Bank has obtained a tax opinion from counsel, which supports the tax-free nature of the transaction, but is not binding upon the IRS. Management does not believe the fact that the IRS has placed this transaction into a "no rule" area will result in the IRS treating the Conversion and the Reorganization as taxable transactions. If the IRS determines that the tax effects of the transaction are to be treated differently from that presented in the tax opinion, the Mutual Holding Company, Bank and stockholders may be subject to adverse tax consequences as a result of the Conversion and Reorganization. Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights The Primary Parties have received an opinion of RP Financial that subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members have no value. However, this opinion is not binding on the IRS. If the subscription rights granted are deemed to have an ascertainable value, receipt of such rights likely would be taxable in an amount equal to such value (as capital gain or ordinary income) only to those Eligible Account Holders, Supplemental Eligible Account Holders or Other Members who exercise the subscription rights. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. See "The Conversion and Reorganization - Effects of the Conversion and Reorganization" and "- Tax Aspects." Possible Year 2000 Computer Program Problems A great deal of information has been disseminated about the global computer crash that may occur in the year 2000. Many computer programs that can only distinguish the final two digits of the year entered (a common programming practice in earlier years) are expected to read entries for the year 2000 as the year 1900 and compute payment, interest or delinquency based on the wrong date or are expected to be unable to compute payment, interest or delinquency. Rapid and accurate data processing is essential to the operation of the Bank. Data processing is also essential to most other financial institutions and many other companies. All of the material data processing of the Bank that could be affected by this problem is provided by a third party service bureau. The service bureau of the Bank has advised the Bank that it expects to resolve this potential problem before the year 2000. However, if the service bureau is unable to resolve this potential problem in time, the Bank would likely experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have a significant adverse impact on the financial condition and results of operation of the Bank. 16 GUARANTY FEDERAL BANCSHARES, INC. The Company was organized in September 1997 at the direction of the Board of Directors of the Bank for the purpose of holding all of the capital stock of the Bank and in order to facilitate the Conversion and Reorganization. The Company has applied for the approval of the OTS to become a savings and loan holding company and as such will be subject to regulation by the OTS. After completion of the Conversion and Reorganization, the Company will conduct business initially as a unitary savings and loan holding company. See "Regulation - Company Regulation." Upon consummation of the Conversion and Reorganization, the Company will have no significant assets other than (i) all of the outstanding shares of stock of the Bank, (ii) notes evidencing the Company's loans to the ESOP and to the Bank, (iii) real estate (with a carrying value of $1.2 million at June 30, 1997) purchased by the Mutual Holding Company and partially funded with a loan from the Bank (the Mutual Holding Company expects to repay this loan prior to the completion of the Conversion and Reorganization), and (iv) the portion of the net proceeds from the Offerings retained by the Company, and the Company will have no significant liabilities. See "Use of Proceeds." Initially, the management of the Company and the Bank will be substantially similar, and the Company will use the premises, equipment and furniture of the Bank. At the present time, the Company does not intend to employ any persons other than executive officers who are also executive officers of the Bank, and the Company will utilize the support staff of the Bank from time to time. Additional employees will be hired as appropriate to the extent the Company expands or changes its business in the future. Management believes that the holding company structure will provide the Company with additional flexibility to diversify, should it decide to do so, its business activities through existing or newly formed subsidiaries, or through acquisitions of or mergers with other financial institutions and financial services related companies. Although there are no current arrangements, understandings or agreements regarding any such opportunities or transactions, the Company will be in a position after the Conversion and Reorganization, subject to regulatory limitations and the Company's financial position, to take advantage of any such acquisition and expansion opportunities that may arise. The initial activities of the Company are anticipated to be funded by the proceeds to be retained by the Company and earnings thereon, as well as dividends from the Bank. See "Dividend Policy." The Company's principal executive office is located at the home office of the Bank at 1341 W. Battlefield, Springfield, Missouri 65807, and its telephone number is (417) 889-2494. THE BANK Guaranty Federal is a federally chartered stock savings bank that was formed as a result of the reorganization of Guaranty Federal Savings and Loan Association of Springfield (the "Mutual Association") from a federal mutual savings association into a federal mutual holding company structure in April 1995 (the "MHC Reorganization"). The current name was obtained during the MHC Reorganization. The Bank was originally chartered in 1913 by the State of Missouri as Guaranty Savings and Loan Association. A federal charter was granted to the Mutual Association in 1935, the same year that its deposit accounts became federally insured and the Mutual Association became a member of the FHLB System. The Bank's deposits are now insured by the FDIC under the Savings Association Insurance Fund (the "SAIF"), and the Bank is regulated by the OTS. The principal business of the Bank consists of attracting deposits from the general public and using such deposits to originate mortgage loans secured by one- to four-family residences and, to a lesser 17 extent, multi-family, construction and commercial real estate loans and consumer and business loans. The Bank also uses these funds to purchase loans secured by one- to four-family residences, mortgage-backed securities, US government and agency obligations and other permissible securities. When cash outflows exceed inflows, the Bank uses borrowings as an additional financing source. Guaranty Federal's income is derived largely from interest on interest-earning assets such as loans, mortgage-backed securities and investments. Its principal expenses are interest paid on deposits and borrowings, operating expenses and provisions for loan losses. GUARANTY FEDERAL BANCSHARES, M.H.C. The Mutual Holding Company is a federally chartered mutual holding company that was chartered in April 1995, in connection with the MHC Reorganization. Pursuant to the MHC Reorganization, (i) the Bank was formed as a new federal stock savings bank subsidiary of the Mutual Association, (ii) the Mutual Association transferred substantially all of its assets and all of its liabilities to the Bank, and (iii) the Mutual Association amended its mutual savings bank charter into a mutual holding company charter and was renamed Guaranty Federal Bancshares, M.H.C. Concurrently with the MHC Reorganization, 972,365 shares of the Bank Common Stock representing 31.1% of the then issued and outstanding shares of the Bank Common Stock were issued in a subscription and community offering to certain depositor and borrower members of Guaranty Federal and certain other persons. Each share of Bank Common Stock was issued and sold at a price of $8.00 per share. As of June 30, 1997, the Mutual Holding Company owned 68.9% (2,152,635 shares) of the outstanding Bank Common Stock, which is the Mutual Holding Company's primary asset. At June 30, 1997, the Mutual Holding Company's other assets included real property with a carrying value of $1.2 million for which a $600,000 loan balance existed with the Bank, cash and cash equivalents of $691,000, and equity securities in the amount of $116,000. Pursuant to applicable regulations, the Mutual Holding Company is required to own at least a majority of the Common Stock, and therefore the Mutual Holding Company is able to elect the Board of Directors and otherwise direct the affairs of the Bank. Voting and liquidation rights in the Mutual Holding Company are held by the depositors and certain borrowers of the Bank. Accordingly, the depositors and certain borrowers indirectly control the affairs of the Bank as a result of their authority to direct the Board of Directors and otherwise control the affairs of the Mutual Holding Company. As part of the Reorganization, the Mutual Holding Company will convert from mutual to stock form and simultaneously merge into the Bank, with the Bank being the surviving entity. USE OF PROCEEDS Net proceeds from the sale of the Conversion Stock are estimated to be between $27,135,000 and $37,035,000 ($42,727,500 assuming an increase in the Offering Range by 15%). See "Pro Forma Data" as to the assumptions used to arrive at such amounts. The Company will use at least 50% of the net proceeds to purchase all of the capital stock of the Bank and will use the balance of the net proceeds, less the amount of the loan by the Company to the ESOP, as its initial capitalization. The net proceeds contributed to the Bank will become part of the Bank's general funds for use in its business, through its current activities, subject to applicable regulatory restrictions. The portion of the net proceeds retained by the Company initially may be used to, among other possible investments, invest in U.S. Government and federal agency securities of various maturities, high-grade short-term and medium-term marketable securities, adjustable and fixed rate mortgage-backed securities, equity securities, deposits of or loans to the Bank, a combination thereof or to repay existing 18 borrowings. The Bank may likewise use the proceeds it receives to, among other things, repay a portion of its borrowings from the FHLB, invest in high grade securities of various maturities, including federal government and agency securities, and mortgage-backed securities or it may use the proceeds in a combination thereof. Ultimately, the portion of net proceeds retained by the Company may be used: (i) to fund the 1998 RSP ($1,122,000 and $1,518,000 based on the sale of 2,805,000 and 3,795,000 shares of Conversion Stock at $10.00 per share at the minimum and maximum of the Offering Range, respectively), (ii) to support the Bank's lending activities, (iii) to support future expansion of operations through establishment of additional branch offices or other customer facilities, (iv) to support acquisitions of other financial service organizations, such as other mutual or stock savings institutions and commercial banks, (v) to support future expansion into other lending markets, (vi) to support future diversification into other banking related businesses (although no such transactions are specifically being considered at this time), and (vii) for other business and investment purposes, including the possible payment of dividends, and repurchases of the Common Stock. The Company intends to lend funds to the ESOP sufficient to enable the ESOP to purchase up to 8% of the Conversion Stock. Based upon the sale of 2,805,000 or 3,795,000 shares of Conversion Stock at the minimum and maximum of the Offering Range, respectively, the loan to the ESOP to purchase 8% of the Conversion Stock would be approximately $2,244,000 or $3,036,000, respectively. The ESOP loan is currently expected to be for 10 years at an adjustable interest rate approximately equal to the prime rate published in The Wall Street Journal. Upon completion of the Conversion and Reorganization, the Board of Directors will have the authority to adopt stock repurchase plans, subject to any applicable statutory and regulatory requirements. Based upon facts and circumstances which may arise following Conversion and Reorganization, the Board of Directors may determine to repurchase stock in the future. Such facts and circumstances may include, but are not limited to, (i) market and economic factors such as the price at which the stock is trading in the market, the volume of trading, the attractiveness of other investment alternatives in terms of the rate of return and risk involved in the investment, the ability to increase the book value and/or earnings per share of the remaining outstanding shares, and an improvement in the Company's return on equity; (ii) the avoidance of dilution to stockholders by not having to issue additional shares to cover the exercise of stock options or to fund employee stock benefit plans; or (iii) any other circumstances in which repurchases would be in the best interests of the Company and its shareholders. Any stock repurchases will be subject to the determination of the Board of Directors that both the Company and the Bank will be capitalized in excess of all applicable regulatory requirements after any such repurchases and that capital will be adequate taking into account, among other things, the level of non-performing and other risk assets, the Company's and the Bank's current and projected results of operations and asset/liability structure, the economic environment, and tax and other considerations. For a discussion of regulatory restrictions on the repurchase of stock during the first three years after the Conversion and Reorganization, see "The Conversion and Reorganization - Certain Restrictions on Purchase or Transfer of Shares After the Conversion and Reorganization." 19 DIVIDEND POLICY Upon completion of the Conversion and Reorganization, the Board of Directors of the Company will have the authority to declare dividends on the Common Stock, subject to statutory and regulatory requirements. Following consummation of the Conversion and Reorganization, the Board of Directors of the Company intends to pay semi-annual cash dividends on the Common Stock commencing with the second quarter of the calendar year, in an annual amount of approximately $0.30 per share. Declarations of dividends by the Board of Directors will depend upon a number of factors, including, but not limited to: (i) the amount of net proceeds from the Offerings retained by the Company, (ii) investment opportunities available to the Company or the Bank, (iii) capital requirements, (iv) regulatory limitations, (v) the Company's and the Bank's financial condition and results of operations, (vi) tax considerations, and (vii) general economic conditions. Consequently, there can be no assurance that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. Dividends from the Company will depend, in part, upon receipt of dividends from the Bank, because the Company initially will have no source of income other than dividends from the Bank, earnings from the investment of proceeds from the sale of Common Stock retained by the Company, and principal and interest payments with respect to the Company's loan to the ESOP. A regulation of the OTS imposes limitations on "capital distributions" by savings institutions, including cash dividends, payments by savings institution to repurchase or otherwise acquire its stock, payments to stockholders of another savings institution in a cash-out merger and other distributions charged against capital. The regulation establishes a three-tiered system, with the greatest flexibility being afforded to well-capitalized or Tier 1 savings institutions and the least flexibility being afforded to under-capitalized or Tier 3 savings institution. As of June 30, 1997, the Bank was a Tier 1 savings institution and is expected to continue to so qualify immediately following the consummation of the Conversion and Reorganization. Any payment of dividends by the Bank to the Company which would be deemed to be a distribution from the Bank's bad debt reserves for federal income tax purposes would require a payment of taxes at the then-current tax rate by the Bank on the amount of earnings deemed to be removed from the reserves for such distribution. At June 30, 1997, the Bank's bad debt reserves for which no federal deferred tax liabilities are recorded amounted to $5.1 million, and as a result for tax purposes (but not regulatory purposes) the Bank could declare approximately $22.4 million of dividends without having to recognize additional Federal income tax expense on its bad debt reserves for federal income tax purposes. The Bank has no current intention of making any distribution that would create such a federal tax liability either before or after the Conversion and Reorganization. See "Federal and State Taxation" and "Risk Factors - Regulatory Oversight and Possible Recapture of Bad Debt Reserve." Unlike the Bank, the Company is not subject to the aforementioned regulatory restrictions on the payment of dividends to its stockholders, although the source of such dividends will be, in part, dependent upon dividends from the Bank in addition to the net proceeds retained by the Company and earnings thereon. The Company is subject, however, to the requirements of Missouri law. See "Comparison of Stockholders' Rights - Payments of Dividends." 20 MARKET FOR COMMON STOCK There is an established, but relatively illiquid, market for the Bank Common Stock, which is currently listed on the National Market of The Nasdaq Stock Market under the symbol "GFED." At June 30, 1997, there were 3,125,000 shares of Bank Common Stock outstanding including 972,365 Public Bank Shares, which were held of record by 637 stockholders. The Bank Common Stock had 12 market makers as of June 30, 1997. The Company, however, is newly formed and has never issued capital stock. Consequently, there is no market for the Company's Common Stock. It is expected that the Company's Common Stock will be more liquid than the Bank Common Stock because there will be significantly more outstanding shares owned by the public. However, there can be no assurance that an active and liquid trading market for the Common Stock will develop or, if developed, will be maintained. The Company expects to have the Common Stock succeed the Bank Common Stock in being quoted on the National Market of The Nasdaq Stock Market under the Bank's current symbol, "GFED." The Company expects to obtain several market makers in the Common Stock. FBR has advised the Company that upon completion of the conversion it intends to continue as a market maker in the Common Stock depending upon the volume of trading and subject to compliance with applicable laws and regulatory requirements. FBR will assist the Company in obtaining additional market makers, but there can be no assurance that additional market makers will be identified. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. The following table shows the high and low per share sales prices of the Bank Common Stock as reported by The Nasdaq Stock Market and the dividends declared per share during the periods indicated.
High Low Dividends(1) ---- --- ------------ Fiscal Year Ended June 30, 1997 Quarter Ended June 30, 1997 $21.50 $12.38 $0.20 Quarter Ended March 31, 1997 13.00 11.50 -- Quarter Ended December 31, 1996 12.25 10.25 0.18 Quarter Ended September 30, 1996 11.75 9.75 -- Fiscal Year Ended June 30, 1996 Quarter Ended June 30, 1996 $12.25 $11.25 $0.16 Quarter Ended March 31, 1996 12.50 11.50 -- Quarter Ended December 31, 1995 12.25 9.25 0.16 Quarter Ended September 30, 1995 9.75 8.00 --
- ------------------ (1) The aggregate dividends paid were $1,000,000 for the 1996 fiscal year and $1,187,500 for the 1997 fiscal year. The closing price of a share of Public Bank Shares was $15.62 on May 20, 1997, the most recent day on which trading of the Bank Common Stock occurred preceding the Bank's announcement of the Conversion and Reorganization and ______ on ___________, 1997, the date of this Prospectus. There can be no assurances as to future prices of the Bank Common Stock prior to completion of the Conversion and Reorganization or the Common Stock of the Company upon consummation of the Conversion and Reorganization. 21 CAPITALIZATION The following table presents, as of June 30, 1997, the unaudited historical capitalization of the Bank and the pro forma consolidated capitalization of the Company after giving effect to the Conversion and Reorganization, and other assumptions set forth below and under "Pro Forma Data" based upon the sale of shares at the minimum, midpoint, maximum, and 15% above the maximum of the Offering Range:
Minimum Midpoint Maximum Maximum, 2,805,000 3,300,000 3,795,000 as adjusted Shares at a Shares at a Shares at a 4,364,250 Guaranty Price of Price of Price of Shares at a Federal $10.00 $10.00 $10.00 Price of $10.00 Historical Per Share Per Share Per Share Per Share(1) ---------- --------- --------- --------- ------------ (Dollars in Thousands) Deposits(2).................................. $151,246 $151,246 $151,246 $151,246 $151,246 Borrowings................................... 18,151 18,151 18,151 18,151 18,151 Other liabilities............................ 2,578 2,578 2,578 2,578 2,578 -------- -------- -------- -------- -------- Total liabilities............................ $171,975 $171,975 $171,975 $171,975 $171,975 ======= ======= ======= ======= ======= Stockholders' equity:(3) Common stock(4)............................ 3,125 400 470 541 622 Preferred stock(5)......................... -- -- -- -- -- Additional paid-in capital (6)............. 3,687 33,547 38,427 43,306 48,918 Retained earnings (6)...................... 18,620 20,055 20,055 20,055 20,055 Unrealized gain on securities available-for-sale......................... 2,058 2,058 2,058 2,058 2,058 Less: Proposed Plans Common Stock acquired by ESOP(7)......... -- (2,244) (2,640) (3,036) (3,491) Common Stock acquired by RSP(7).......... -- (1,122) (1,320) (1,518) (1,746) --------- ------ ------ ------ ------ Total stockholders' equity (6)............... $ 27,490 $ 52,694 $ 57,050 $ 61,406 $ 66,416 ======= ======= ======= ======= =======
- --------------------- (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Offering Range of up to 15% to reflect changes in market and financial conditions following the commencement of the Offerings. (2) Does not reflect withdrawals from deposit accounts for the purchase of Conversion Stock in the Offerings. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals. (3) Assumes (i) that the 972,365 Public Bank Shares outstanding at June 30, 1997 are converted into 1,193,709, 1,404,364, 1,615,019 and 1,857,272 Exchange Shares at the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, respectively, and (ii) that no fractional shares of Exchange Shares will be issued by the Company. (4) Par value of historical Bank Common Stock is $1.00 per share and par value of pro forma Common Stock is $0.10 per share. (5) The Bank has 2,000,000 shares of Preferred Stock authorized with a par value of $1.00 per share and none outstanding. The Company has 2,000,000 shares of Preferred Stock authorized, $.10 par value per share, none of which are currently outstanding or will be outstanding after the completion of the Conversion and Reorganization. 22 (6) The pro forma retained earnings include $1,435,000 of assets of the Mutual Holding Company. The pro forma additional paid in capital and retained earnings reflect a restriction of the original retained earnings of the Bank prior to the conversion into the mutual holding company form in April 1995. (7) Assumes that 8% and 4% of the shares sold in the Offerings will be purchased by the ESOP and 1998 RSP, respectively, although no shares will be purchased by the RSP in the Offerings. Such purchases by the 1998 RSP would occur upon receipt of stockholder approval no earlier than six months after completion of the Conversion and Reorganization. A purchase by the RSP in the Offerings has been included on a pro forma basis to give an indication of its effect on capitalization. The pro forma presentation does not show the impact of (a) results of operations after the Conversion and Reorganization, (b) changing market prices of shares of Common Stock after the Conversion and Reorganization, (c) a smaller than 4% purchase by the 1998 RSP, or (d) the purchase by the RSP of Common Stock out of authorized but unissued shares. Assumes that the funds used to acquire the ESOP shares will be borrowed from the Company for a ten year term at the prime rate. For an estimate of the impact of the loan on earnings, see "Pro Forma Data." If the ESOP obtained a loan from a third party, other borrowings would increase by the amount of Common Stock acquired by the ESOP. The Bank intends to make contributions to the ESOP sufficient to service and retire its debt. The amount to be acquired by the ESOP and 1998 RSP is reflected as a reduction of stockholders' equity. The issuance of authorized but unissued shares for the 1998 RSP in an amount equal to 4% of the outstanding shares of Conversion Stock issued in the Offerings could have the effect of diluting existing shareholders by approximately 2.7%. There can be no assurance that stockholder approval of the 1998 RSP will be obtained. See "Management of the Bank - Certain Benefits - Employee Stock Ownership Plan" and "Management of the Company - Proposed Future Stock Benefit Plans - 1998 Management Recognition Plan." 23 HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE The following table presents the historical regulatory capital of the Bank at June 30, 1997, and the pro forma regulatory capital of the Bank as of that date, after giving effect to the Conversion and the Reorganization, based upon the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, respectively. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data." The definitions of the terms used in the table are those provided in the capital regulations issued by the OTS. For a discussion of the capital standards applicable to the Bank, see "Regulation - Regulation of the Bank - Regulatory Capital Requirements."
Pro Forma as of June 30, 1997 ------------------------------------------------------------------------------------- Historical, as of $28,050,000 $33,000,000 $37,950,000 $43,642,500 June 30, 1997 Minimum Midpoint Maximum Maximum, as adjusted ------------------- ------------------- ---------------------- ------------------- -------------------- Percent Percent Percent Percent Percent Amount of Assets Amount of Assets Amount of Assets Amount of Assets Amount of Assets ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- (Dollars in Thousands) GAAP Capital...............$27,490 13.78% $39,126 18.34% $41,007 19.02% $42,888 19.68% $45,052 20.43% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== Tangible Capital(1)(2).....$25,432 12.96% $37,068 17.64% $38,949 18.34% $40,830 19.02% $42,994 19.79% Tangible Capital Requirement.............. 2,943 1.50 3,151 1.50 3,185 1.50 3,220 1.50 3,259 1.50 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Excess.....................$22,489 11.46% $33,917 16.14% $35,764 16.84% $37,610 17.52% $39,735 18.29% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== Core Capital(1)(2)(3)......$25,432 12.96% $37,068 17.64% $38,949 18.34% $40,830 19.02% $42,994 19.79% Core Capital Requirement... 5,886 3.00 6,302 3.00 6,371 3.00 6,439 3.00 6,518 3.00 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Excess.....................$19,546 9.96% $30,766 14.64% $32,578 15.34% $34,391 16.02% $36,476 16.79% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== Total Risk-Based Capital(1)(2)(4)(5)......$26,872 23.32% $38,508 32.63% $40,389 34.09% $42,270 35.55% $44,434 37.20% Risk-Based Capital Requirement.............. 9,218 8.00 9,441 8.00 9,477 8.00 9,513 8.00 9,555 8.00 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Excess.....................$17,654 15.32% $29,067 24.63% $30,912 26.09% $32,757 27.55% $34,879 29.20% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- ----------------- (1) Net unrealized gains or losses on securities classified as available for sale are excluded from regulatory capital when computing core and risk-based capital. The net unrealized gain on securities classified as available for sale amounted to $2,058,000 as of June 30, 1997. (2) Tangible capital is computed as a percentage of adjusted total assets of $196.2 million prior to the consummation of the Offerings and $210.1 million, $212.4 million, $214.6 million and $217.3 million following the issuance of 3,998,709, 4,704,364, 5,410,019 and 6,221,522 shares of Common Stock in the Conversion and Reorganization, respectively. Core capital is computed as a percentage of adjusted total assets of $196.2 million prior to the consummation of the Offerings and $210.1 million, $212.4 million, $214.6 million and $217.3 million following the issuance of 3,998,709, 4,704,364, 5,410,019 and 6,221,522 shares of Common Stock in the Conversion and Reorganization, respectively. Risk-based capital is computed as a percentage of adjusted risk-weighted assets of $115.2 million prior to the consummation of the Offerings and $118.0 million, $118.5 million, $118.9 million and $119.4 million following the issuance of 3,998,709, 4,704,364, 5,410,019 and 6,221,522 shares of Common Stock in the Conversion and Reorganization, respectively. (3) Does not reflect proposed amendments to regulatory capital requirements or, in the case of the core capital requirement, the 4.0% requirement to be met in order for an institution to be "adequately capitalized" under applicable laws and regulations. See "Regulation - Regulation of the Bank - Regulatory Capital Requirements." (4) The pro forma risked-based capital ratios (i) reflect the receipt by the Bank of the assets held by the Mutual Holding Company and of 50% of the estimated net proceeds from the Offerings, and a reduction due to the 1998 RSP purchase and the ESOP purchase, (ii) assume no repayment of FHLB advances, and (iii) assume the investment of the net remaining proceeds received by the Bank in assets that have a 20% risk-weighting, as if such net proceeds had been received and so applied at June 30, 1997. (5) Risk-weighted assets on a pro forma basis are calculated based on the percentage of risk-weighted assets to leveraged assets at June 30, 1997. Includes the $1.44 million of general allowance for loan losses that was included in risk-based capital as of June 30, 1997. 24 PRO FORMA DATA The actual net proceeds from the sale of the Conversion Stock cannot be determined until the Conversion and Reorganization is completed. However, net proceeds are currently estimated to be between $27.14 million and $37.04 million. Actual Conversion and Reorganization expenses may vary from those estimated. Under the Plan of Conversion, the Conversion Stock must be sold in the Offerings at an aggregate subscription price not less than nor greater than the Offering Range, which is subject to adjustment. The Offering Range, as established by the Board of Directors is between a minimum of $28.05 million and a maximum of $37.95 million, with a midpoint of $33.00 million. This represents a range between a minimum of 2,805,000 shares and a maximum of 3,795,000 shares, based upon the Purchase Price of $10.00 per share. If the Offering Range is increased by up to 15% to reflect market or general financial conditions following the commencement of the Offerings, the adjusted maximum number of shares of Conversion Stock to be sold would be 4,364,250, for estimated net proceeds of $42.73 million. Pro forma consolidated net income of the Company for the fiscal year ended June 30, 1997 has been calculated as if the Company had been in existence and estimated net proceeds received by the Company and the Bank had been invested at an assumed interest rate of 6.62% for the fiscal year ended June 30, 1997. The assumed interest rates for the Bank were calculated as the arithmetic average of the weighted average yield earned by the Bank on its interest-earning assets and weighted average rate paid on its interest-bearing deposits, as is required by OTS regulations. The effect of withdrawals from deposit accounts for the purchase of Common Stock has not been reflected. The earning assets to be consolidated from the Mutual Holding Company have not been reflected. The pro forma blended after-tax yield on the estimated net proceeds is assumed to be 4.17% for the fiscal year ended June 30, 1997, based on an effective tax rate of 37.0%. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of Common Stock. No effect has been given in the pro forma stockholders' equity calculations for the assumed earnings on the net proceeds. It is assumed that the Company will retain 50% of the estimated adjusted net proceeds, less the amount of the ESOP loan. The following pro forma information may not be representative of the financial effects of the foregoing transactions at the dates on which such transactions actually occur and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders' equity represents the difference between the stated amount of assets and liabilities of the Company computed in accordance with generally accepted accounting principles ("GAAP"). The pro forma stockholders' equity is not intended to represent the fair market value of the Common Stock and may be greater than amounts that would be available for distribution to stockholders in the event of liquidation. The following table includes assets held by the Mutual Holding Company that have been consolidated into the financial condition of the Bank. The following tables summarize historical data of the Bank and pro forma data of the Company at or for the year ended June 30, 1997, based on assumptions set forth above and in the table and should not be used as a basis for projections of market value of the Common Stock following the Conversion and Reorganization. No effect has been given in the tables to the possible issuance of additional shares reserved for future issuance pursuant to currently outstanding stock options or the 1998 Option Plan, nor does book value give any effect to the liquidation account to be established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders or the bad debt reserve in liquidation. See "The Conversion and Reorganization - Liquidation Rights," and "Management of the Bank - Directors' Compensation," "- Executive Compensation," and "- Certain Benefits." 25
At or For the Year Ended June 30, 1997 -------------------------------------------------------------- Maximum, Minimum Midpoint Maximum as adjusted 2,805,000 3,300,000 3,795,000 4,364,250 Shares at Shares at Shares at Shares at $10.00 $10.00 $10.00 $10.00 Per Share Per Share Per Share Per Share(1) --------- --------- --------- ------------ (Dollars in Thousands) Gross proceeds ................................... $ 28,050 $ 33,000 $ 37,950 $ 43,642 Less expenses .................................... 915 915 915 915 ----------- ----------- ----------- ----------- Estimated net proceeds ......................... 27,135 32,085 37,035 42,727 Less: Common Stock purchased by ESOP(2) ....... (2,244) (2,640) (3,036) (3,491) Less: Common Stock purchased by RSP(3) ........ (1,122) (1,320) (1,518) (1,746) ----------- ----------- ----------- ----------- Estimated net proceeds, as adjusted .......... $ 23,769 $ 28,125 $ 32,481 $ 37,490 =========== =========== =========== =========== Consolidated net income Historical ..................................... $ 1,162 $ 1,162 $ 1,162 $ 1,162 Pro forma income on net proceeds ............... 991 1,173 1,355 1,564 Pro forma ESOP adjustment(2) ................... (141) (166) (191) (220) Pro forma RSP adjustment(3) .................... (141) (166) (191) (220) ----------- ----------- ----------- ----------- Pro forma net income ......................... $ 1,871 $ 2,003 $ 2,135 $ 2,286 =========== =========== =========== =========== Per share net income (reflects SOP 93-6)(4)(5)(6): Historical ..................................... $ 0.31 $ 0.26 $ 0.23 $ 0.20 Pro forma income on net proceeds ............... 0.26 0.27 0.27 0.27 Pro forma ESOP adjustment(2) ................... (0.04) (0.04) (0.04) (0.04) Pro forma RSP adjustment(3) .................... (0.04) (0.04) (0.04) (0.04) ----------- ----------- ----------- ----------- Pro forma net income per share(4) ............ $ 0.49 $ 0.45 $ 0.42 $ 0.39 =========== =========== =========== =========== Purchase Price as a multiple of pro forma earnings 20.41x 22.22x 23.81x 25.64x =========== =========== =========== =========== Number of shares used in earnings per share calculations ................................... 3,796,749 4,466,764 5,136,779 5,907,296 =========== =========== =========== =========== Stockholders' equity(7): Historical ..................................... $ 27,490 $ 27,490 $ 27,490 $ 27,490 Estimated net proceeds ......................... 27,135 32,085 37,035 42,727 Add: Assets consolidated from MHC ............. 1,435 1,435 1,435 1,435 Less: Common Stock acquired by ESOP(2) ........ (2,244) (2,640) (3,036) (3,491) Less: Common Stock acquired by RSP(3) ......... (1,122) (1,320) (1,518) (1,746) ----------- ----------- ----------- ----------- Pro forma stockholders' equity ............... $ 52,694 $ 57,050 $ 61,406 $ 66,415 =========== =========== =========== =========== Stockholders' equity per share(4)(5)(6): Historical combined ............................ $ 6.87 $ 5.84 $ 5.08 $ 4.42 Estimated net proceeds ......................... 6.79 6.82 6.84 6.87 Add: Assets consolidated from MHC ............. 0.36 0.31 0.27 0.23 Less: Common Stock acquired by ESOP(2) ........ (0.56) (0.56) (0.56) (0.56) Less: Common Stock acquired by RSP(3) ......... (0.28) (0.28) (0.28) (0.28) ----------- ----------- ----------- ----------- Pro forma stockholders' equity per share(4) .. $ 13.18 $ 12.13 $ 11.35 $ 10.68 =========== =========== =========== =========== Purchase Price as a percent of pro forma equity .. 75.87% 82.44% 88.11% 93.63% =========== =========== =========== =========== Number of shares used in book value per share calculations ................................... 3,998,709 4,704,364 5,410,019 6,221,522 Pro forma equity as a percent of pro forma assets 23.45% 24.91% 26.31% 27.86%
(footnotes on following page) 26 - -------------------- (1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the Offering Range to reflect changes in market and financial conditions following the commencement of the Offerings. (2) Assumes that 8% of shares of Conversion Stock offered in the Offerings will be purchased by the ESOP. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from the net proceeds of the Offerings retained by the Company. The Bank intends to make annual contributions to the ESOP in an amount at least equal to the principal of the debt and interest due. The ESOP debt is payable over 10 years. Statement of Position ("SOP") 93-6 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the ESOP shares are allocated in ten equal annual installments and the fair value of the Company's stock remains at the Purchase Price and the effective tax rates are assumed to be 37.0%. The unallocated ESOP shares are reflected as a reduction of stockholders' equity. No reinvestment is assumed on proceeds contributed to fund the ESOP. The pro forma net income further assumes (i) that 22,440, 26,400, 30,360 and 34,914 shares were committed to be released during the fiscal year ended June 30, 1997, in each case at the minimum, midpoint, maximum, and 15% above maximum, respectively, and (ii) in accordance with SOP 93-6, only the ESOP shares committed to be released during the respective periods were considered outstanding for purposes of net income per share calculations. See "Management of the Bank - Certain Benefits - Employee Stock Ownership Plan." (3) Subject to the approval of the Company's stockholders, the 1998 RSP intends to purchase an aggregate number of shares of Common Stock equal to 4% of the shares of Conversion Stock to be sold in the Offerings. The shares may be acquired directly from the Company, or through open market purchases. The funds to be used by the RSP to purchase the shares will be provided by the Bank or the Company. See "Management of the Company - Proposed Future Stock Benefit Plans - 1998 Management Recognition Plan." Assumes that the 1998 RSP acquires the shares through open market purchases at the Purchase Price with funds contributed by the Bank, and that 20% of the amount contributed to the 1998 RSP is amortized as an expense during the fiscal year ended June 30, 1997. If the 1998 RSP purchases authorized but unissued shares instead of making open market purchases, (i) the voting interests of then existing stockholders would be diluted by approximately 2.7%, (ii) the pro forma net income per share for the fiscal year ended June 30, 1997 would be $0.47, $0.43, $0.40 and $0.37 and pro forma stockholders' equity at June 30, 1997 would be $13.09, $12.07, $11.31 and $10.66 in each case at the minimum, midpoint, maximum, and 15% above maximum of the Offering Range, respectively. (4) Per share figures include shares of Exchange Stock that will be exchanged for Public Bank Shares in the Exchange. Net income per share computations are determined by taking the number of shares of Common Stock assumed to be issued in the Conversion and Reorganization and, in accordance with SOP 93-6, subtracting the ESOP shares that have not been committed for release during the respective period. See Note 2 above. The number of Exchange Shares to be issued were then added to such amounts. The number of shares of Conversion Stock actually sold and the corresponding number of Exchange Shares may be more or less than the assumed amounts. (5) No effect has been given to the issuance of additional shares of Common Stock pursuant to the 1998 Option Plan, which is expected to be adopted by the Company following the Offerings and presented to stockholders for approval at the Company's 1998 Annual Meeting. An amount equal to 10% of the Conversion Stock sold in the Offerings will be reserved for future issuance upon the exercise of options to be granted under the 1998 Option Plan, if approved by stockholders. The issuance of authorized but previously unissued shares of Common Stock pursuant to the exercise of options under such plan would dilute existing stockholders' interests. Assuming stockholder approval of the 1998 Option Plan, that all the options were exercised at the end of the period at an exercise price equal to the Purchase Price per share shown for each column, and that the 1998 RSP purchases shares in the open market at such purchase price per share, (i) pro forma net income per share for the year ended June 30, 1997 would be $0.46, $0.43, $0.40 and $0.37, and pro forma stockholders' equity per share at June 30, 1997 would be $12.97, $11.99, $11.26 and $10.63, in each case at the minimum, midpoint, maximum and 15% above maximum of the Offering Range, respectively. (6) Per share figures include shares of Common Stock that will be exchanged for Public Bank Shares in the Exchange. Stockholders' equity per share calculations are based upon the sum of (i) the number of shares of Conversion Stock assumed to be sold in the Offering, and (ii) Exchange Shares equal to the minimum, midpoint, maximum and 15% above maximum of the Offering Range, respectively. The Exchange Shares reflect an Exchange Ratio of 1.2276, 1.4443, 1.6609, and 1.9101, respectively, at the minimum, midpoint, maximum, and 15% above maximum of the Offering Range, respectively. The number of Conversion Stock actually sold and the corresponding number of Exchange Shares may be more or less than the assumed amounts. (7) The retained earnings of the Bank will be substantially restricted after the Conversion and Reorganization. See "Dividend Policy," "The Conversion and Reorganization - Effects of the Conversion and Reorganization - Effect on Liquidation Rights" and "Regulation - Regulation of the Bank - Dividend and Other Capital Distribution Limitations." 27 GUARANTY FEDERAL SAVINGS BANK STATEMENTS OF INCOME Years Ended June 30, 1997, 1996 and 1995 The following Consolidated Statements of Income of the Bank for the years ended June 30, 1997, 1996 and 1995 have been audited by Baird Kurtz & Dobson, independent accountants, whose report thereon appears elsewhere in this Prospectus. These statements should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Prospectus.
1997 1996 1995 ------------ ------------ ------------ INTEREST INCOME Loans $ 12,346,820 $10,534,323 $ 8,638,585 Investment securities 551,741 1,317,152 1,529,819 Mortgage-backed securities 1,412,302 1,370,770 1,175,826 Other 400,422 479,911 293,320 ------------- ------------ ------------ 14,711,285 13,702,156 11,637,550 ------------- ------------ ------------ INTEREST EXPENSE Deposits 7,471,093 8,200,026 6,443,596 Federal Home Loan Bank advances 839,082 39,077 151,752 ------------- ------------ ------------ 8,310,175 8,239,103 6,595,348 ------------- ------------ ------------ NET INTEREST INCOME 6,401,110 5,463,053 5,042,202 PROVISION (CREDIT) FOR LOAN LOSSES -- (1,211,502) 16,350 -------------- ------------- ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,401,110 6,674,555 5,025,852 ------------- ------------ ------------ NONINTEREST INCOME (LOSS) Service charges 264,649 97,092 65,869 Late charges and other fees 85,673 69,754 49,444 Gain (loss) on loans, investment securities and mortgage-backed securities 61,468 43,065 (103,473) Income on foreclosed assets 17,896 -- 16,843 Other income 100,115 11,492 42,478 ------------- ------------ ------------ 529,801 221,403 71,161 ------------- ------------ ------------ NONINTEREST EXPENSE Salaries and employee benefits 2,030,213 1,992,534 1,660,790 Occupancy 653,851 655,783 275,349 SAIF deposit insurance premiums 1,141,148 338,697 324,037 Data processing 359,403 222,097 175,823 Advertising 319,162 316,556 244,877 Other expense 600,854 590,879 396,152 ------------- ------------ ------------ 5,104,631 4,116,546 3,077,028 ------------- ------------ ------------ INCOME BEFORE INCOME TAXES 1,826,280 2,779,412 2,019,985 PROVISION FOR INCOME TAXES 664,500 1,026,000 690,000 ------------- ------------ ------------ NET INCOME $ 1,161,780 $ 1,753,412 $ 1,329,985 ============= ============ ============ EARNINGS PER COMMON SHARE Since conversion $ 0.37 $ 0.56 $ 0.10 ============= ============ ============
See Notes to Consolidated Financial Statements 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Guaranty Federal's results of operations are primarily dependent on its net interest income, which is the difference between interest income earned on its loan, mortgage-backed and other asset-backed securities and investment portfolios, and its cost of funds, consisting of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities as well as the relative yields and costs of those assets and liabilities. The Bank's net income also is affected by its provision for loan losses, as well as the amount of noninterest income, including service charges and late fees, and noninterest expense. Operating results are also affected to a lesser extent by the type of lending, fixed rate versus adjustable or long-term versus short-term, each of which has a different rate and fee structure. The Bank's operating expenses principally consist of employee compensation, occupancy expenses, federal insurance premiums and other general and administrative expenses. Earnings of the Bank are also affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. The principal business of the Bank consists of attracting deposits from the general public and using such deposits 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. The Bank also uses these funds to purchase loans secured by one- to four-family residences, mortgage-backed securities, US government and agency obligations and other permissible securities. When cash outflows exceed inflows, the Bank uses borrowings as an additional financing source. The Bank derives revenues principally from interest earned on loans and investments and, to a lesser extent, from fees charged for services. General economic conditions and policies of the financial institution regulatory agencies, including the OTS and the FDIC significantly influence the Bank's operations. Interest rates on competing investments and general market interest rates influence the Bank's cost of funds. Lending activities are affected by the interest rates at which such financing may be offered. The Bank intends to continue to focus on its lending programs for both one- to four-family lending and consumer lending throughout southwestern Missouri. Financial Condition The Bank's total assets increased $14,297,932 (8%), from $185,167,107 as of June 30, 1996, to $199,465,039 as of June 30, 1997. Net loans receivable increased by $20,619,460 (16%), from $131,612,835 as of June 30, 1996, to $152,232,295 as of June 30, 1997. During this period, permanent loans secured by both owner and non-owner occupied one- to four- unit residential real estate increased by $15,036,217 (16%) and construction loans increased by $3,419,080 (16%). Loans past maturity and past due 90 days or more decreased $949,000 from $1,777,000 (1.4% of net loans) as of June 30, 1996, to $828,000 (0.5% of net loans) as of June 30,1997. Of these loans, a loan of $113,200 is past maturity and still on accrual status as management believes the loan is well secured and expects full collection of principal and interest. As of June 30, 1997, management considers $1,257,352 as impaired with a related allowance for loan losses of $206,897. Growth in loans receivable is anticipated to continue and represents a major part of the Bank's planned asset growth. Securities available-for-sale decreased $4,482,380 (57%) from $7,842,380 as of June 30 1996, to $3,360,000 as of June 30, 1997, and securities held-to-maturity decreased $1,279,966 (13%), from $9,865,719 as of June 30, 1996, to $8,585,753 as of June 30, 1997. The Bank redeployed these funds to higher yielding loans. The Bank continues to hold 96,000 shares of Federal Home Loan Mortgage Corporation ("FHLMC") stock with an amortized cost of $94,000 in the securities available-for-sale category. As of June 30, 1997, the gross unrealized gain on the stock was $3,266,000, an increase from $1,958,000 as of June 30, 1996. 29 Mortgage-backed securities, held-to-maturity, decreased $4,253,359 (21%), from $20,067,249 as of June 30, 1996, to $15,813,890 as of June 30, 1997. This decrease is attributable to repayments received during the year. There were no purchases of mortgage-backed securities during the year ended June 30, 1997. As of June 30, 1997, and June 30, 1996, there were no mortgage-backed securities classified as available-for-sale. The Bank increased the allowance for loan losses $389,743 (23%) in fiscal year 1996, and $68,950 (3%) in fiscal year 1997. During fiscal year 1996, the Bank recovered $1,406,860 primarily on a large commercial loan and after evaluating the adequacy of the allowance, the Bank reduced the allowance by crediting income $1,211,502. During fiscal year 1997, the allowance increased due to recoveries net of charge-offs of $68,950. The allowance for loan losses as of June 30, 1997, was 1.49% of average net loans outstanding versus 1.66% as of June 30, 1996. As of June 30, 1997, the allowance for loan losses was 173% of impaired loans versus 536% as of June 30, 1996. Foreclosed assets held for sale as of June 30, 1997, include a duplex acquired in July 1996, and a single family residence acquired in June 1997. The Bank carries these properties at their fair value of $210,155 as of June 30, 1997. Premises and equipment decreased $124,586 (2%), from $6,391,743 as of June 30, 1996, to $6,267,157 as of June 30, 1997. In September 1995, the Bank completed construction of a new main office facility. The facility is expected to assist with planned growth by attracting new customers and providing additional work space for employees. The Bank does not currently require full use of the new facility and it leases the excess space. As of June 30, 1997, the Bank had signed leases for all 8,938 square feet of excess space available for lease in the building. Deposits decreased $5,761,408 (4%), from $157,007,890 as of June 30, 1996, to $151,246,482 as of June 30, 1997. During this period, core deposit accounts increased by $4,944,356 (21%), while certificates of deposit decreased by $10,705,764 (8%). The majority of this increase in checking and passbook accounts can be attributed to an aggressive marketing campaign initiated in early 1997 designed to attract checking deposit customers. The decrease in certificate deposits can be attributed to management's decision to allow high cost accounts to run off and replace these funds with FHLB advances at a lower marginal cost. As a result of the overall decrease in deposits and the continued increase in loan demand, the Bank increased borrowings from the FHLB to $18,150,844 as of June 30, 1997. There were no outstanding FHLB advances as of June 30, 1996. The Bank has the ability to borrow additional funds from the FHLB should the need arise. Stockholders' equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $903,991 (3%), from $26,586,164 as of June 30, 1996, to $27,490,155 as of June 30, 1997. Unrealized appreciation on securities available-for-sale, net of tax, contributed $798,169 ($0.26 per share) to the increase in stockholders' equity. On a per share basis, stockholders' equity increased from $8.51 per share as of June 30, 1996, to $8.80 per share as of June 30, 1997. Stockholders' equity includes no contributed capital from the issuance of 2,152,635 shares of common stock to Guaranty Federal Bancshares, M.H.C. 30 Average Balances, Interest and Average Yields The following tables show (1) the average monthly balances of various categories of interest-earning assets and interest-bearing liabilities, (2) the total interest earned or paid thereon, and (3) the resulting weighted average yields and costs. In addition, the table shows the Bank's rate spreads and net yields. Average balances are based on daily balances. Tax-free income is not material; accordingly, interest income and related average yields have not been calculated on a tax equivalent basis. Average loan balances include non-accrual loans.
As of June 30, 1997 Year Ended June 30, 1997 Year Ended June 30, 1996 Year Ended June 30, 1995 --------------------- --------------------------- --------------------------- ---------------------------- Yield Average Yield Average Yield Average Yield Balance /Cost Balance Interest /Cost Balance Interest /Cost Balance Interest /Cost ------- ----- ------- -------- ----- ------- -------- ----- ------- -------- ----- (Dollars in Thousands) Interest- earning assets: Loans................. $158,135 8.43% $146,468 $12,347 8.43% $127,485 $10,534 8.26% $113,134 $8,638 7.64% Investment securities.......... 8,586 6.13 8,879 552 6.22 19,271 1,317 6.83 24,715 1,530 6.19 Mortgage-backed securities.......... 15,814 7.70 18,032 1,412 7.83 18,522 1,371 7.40 13,964 1,176 8.42 Other assets.......... 8,494 4.51 8,160 400 4.90 9,494 480 5.06 6,126 293 4.78 ------- ------- ------ ------- ------ ------- ------ Total interest- earning assets...... 191,029 8.09 181,539 14,711 8.10 174,772 13,702 7.84 157,939 11,637 7.37 ------ ------ ------ Non-interest- earning assets...... 8,436 8,387 8,137 6,009 ------- ------- ------- ------- $199,465 $189,926 $182,909 $163,948 ======= ======= ======= ======= Interest-bearing liabilities: Savings accounts...... $ 8,621 2.76 $ 9,191 258 2.81 $10,272 315 3.07 $12,976 462 3.56 Transaction accounts.. 17,674 2.94 13,846 406 2.93 10,355 276 2.67 9,524 245 2.57 Certificates of Deposit............. 122,617 5.58 122,219 6,807 5.57 132,265 7,609 5.75 116,477 5,736 4.92 FHLB advances......... 18,151 6.12 13,767 839 6.09 690 39 5.65 2,583 152 5.88 ------- ------- ----- ------ ----- -------- ------ Total interest- bearing liabilities......... 167,063 5.21 159,023 8,310 5.23 153,582 8,239 5.36 141,560 6,595 4.66 ----- ------ ------ Non-interest- bearing liabilities......... 4,912 4,122 2,821 2,460 ------- ------- ------- ------- Total liabilities..... 171,975 163,145 156,403 144,020 Stockholders' equity.. 27,490 26,781 26,506 19,928 ------- ------ ------ ------ $199,465 $189,926 $182,909 $163,948 ======= ======= ======= ======= Net earning balance... $ 23,966 $ 22,516 $21,190 $ 16,379 ======= ======= ====== ======= Earning yield less costing rate........ 2.88% 2.87% 2.48% 2.71% ==== ==== ==== ==== Net interest income, and net yield spread on interest- earning assets...... 3.52% $6,401 3.53% $5,463 3.13% $5,042 3.19% ==== ===== ==== ===== ==== ===== ==== Ratio of interest- earning assets to interest- bearing liabilities. 114% 114% 114% 112% === === === ===
31 The following table sets forth information regarding changes in interest income and interest expense for the periods indicated resulting from changes in average balances and average rates shown above. For each category of interest-earning assets and interest-bearing liabilities information is provided with respect to changes attributable to: (i) changes in balance (change in balance multiplied by the old rate), (ii) changes in interest rates (change in rate multiplied by the old balance); and (iii) the combined effect of changes in balance and interest rates (change in balance multiplied by change in rate).
Year Ended June 30, 1997 versus 1996 Year Ended June 30, 1996 versus 1995 ----------------------------------------- ---------------------------------------------- Rate & Rate & Balance Rate Balance Total Balance Rate Balance Total ------- ---- ------- ----- ------- ---- ------- ----- Interest income: Loans.......................... $1,568 $ 213 $ 31 $1,813 $1,096 $ 710 $ 90 $1,896 Investment securities.......... (710) (119) 64 (765) (337) 159 (35) (213) Mortgage-backed securities..... (36) 79 (2) 41 384 (142) (47) 195 Other assets................... (67) (15) 2 (80) 161 17 9 187 ------ ------ ------- ----- ----- ---- --- ----- Net change in interest income.... 755 158 96 1,009 1,304 744 17 2,065 ------ ------ ------- ----- ----- ---- --- ----- Interest expense: Savings accounts............... (33) (27) 3 (57) (96) (64) 13 (147) Transaction accounts........... 93 29 8 130 21 9 1 31 Certificates of deposit........ (578) (245) 21 (802) 777 965 131 1,873 Advances....................... 739 3 58 800 (111) (6) 4 (113) ------ ------ ------ ----- ------ ------ ----- ----- Net change in interest expense... 221 (240) 90 71 591 904 149 1,644 ------- ------ ------ ----- ------ ------ ----- ----- Change in net interest income....$ 534 $ 398 $ 6 $ 938 $ 713 $ (160) $ (132) $ 421 ====== ====== ====== ====== ====== ====== ===== =====
Results of Operations - Comparison of Years Ended June 30, 1997 and 1996 Interest Income - The weekly average yield for US Treasury securities adjusted to a constant maturity of one year increased 21 basis points from 5.48% for the year ended June 30, 1996, to 5.69% for the year ended June 30, 1997. A basis point is 0.01%. Total interest income increased $1,009,129 (7%) as the average balance of interest-earning assets increased $6,767,000 (4%) while the average yield on those interest-earning assets increased 26 basis points from 7.84% to 8.10%. This increase was due primarily to an increase in loan interest of $1,812,497 (17%). During the year, the average loan receivable balance increased $18,983,000 (15%) at the same time the average yield on loans increased 17 basis points from 8.26% to 8.43%. Average balances of investment securities declined $10,392,000 (54%) during the year as the Bank replaced securities with higher yielding loans. To the extent possible, subject to market conditions and competition, the Bank intends to emphasize loan production and will purchase investment securities and mortgage-backed securities only if spreads between the asset yield and the liability cost net an arbitrage profit over a range of potential interest rate scenarios. Interest Expense. Total interest expense increased $71,072 (1%) as the average balance of interest-bearing liabilities increased $5,441,000 (3%) while the average cost of those interest-bearing liabilities decreased 13 basis points from 5.36% to 5.23%. The average balances of certificates of deposit decreased $10,046,000 (8%) and the average cost of those certificates decreased 18 basis points from 5.75% to 5.57%. The decrease in the average balances of certificates of deposit was partially offset by an increase in the average balances of checking accounts of $3,491,000 (34%). The average cost of these checking accounts increased 26 basis points from 2.67% to 2.93%. In order to fund the increase in assets and decrease in deposits, the Bank borrowed additional funds from the FHLB. The average 32 balance of FHLB advances increased by $13,077,000 from $690,000 to $13,767,000. Management attempts to price certificates of deposit so that the marginal cost of attracting deposits is equal to the marginal cost of FHLB advances on a duration adjusted basis. Net Interest Income. The Bank's net interest income increased $938,057 (17%) from $5,463,053 to $6,401,110. During the year ended June 30, 1997, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $22,516,000, an increase in the average net earning balance of $1,326,000 (6%). At the same time the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 39 basis points from 2.48% to 2.87%. Provision for Loan Losses. Provisions for loan losses are charged or credited to earnings to bring the total allowance to a level considered adequate by the Bank to provide for potential loan losses in the existing portfolio. When making the assessment, the Bank considers prior loss experience, volume and type of lending, industry standards and past due loans in the Bank's portfolio. In addition, the Bank considers general economic conditions and other factors related to collectibility of the Bank's portfolio. During fiscal year 1996 the Bank recovered $1,211,502 on a commercial loan which was previously partially charged off. The loan recovery represents amounts recovered in excess of the carrying balance of the loan as reflected by the original terms of the loan, including accrued interest and previously charged-off principal. Consequently, the Bank determined that the allowance for loan losses was sufficient prior to the recovery, and credited the provision for loan losses. During the fiscal year 1997, the bank again experienced a net recovery and based on a review as discussed above, elected to make no further addition to the allowance. Management anticipates the need to begin adding to loss reserves through charges to the provision for loan losses within the next year if the growth in the loan portfolio continues as anticipated. Non-Interest Income. Non-interest income, which consists of service charges and other fees, income from foreclosed assets and gains or losses on sale of assets, increased $308,393 (139%) from $221,403 to $529,801. This increase is primarily due to the increase in service charges on checking accounts which increased $167,557 (172%) due to the success of the Bank's new checking account promotion in generating new checking accounts. Non-Interest Expense. Non-interest expense increased $988,085 (24%), from $4,116,546 to $5,104,631. This increase was primarily due to a special one-time assessment by the FDIC on all assessable deposits as of March 31, 1995. This assessment resulted in a $802,451 (237%) increase in SAIF premiums. While this special assessment had a negative impact on earnings for fiscal year 1997, deposit premiums in the future are expected to be materially lower. Beginning January 1, 1997, deposit premiums declined from an average of 23.4 basis points to an average of 6.4 basis points. Data processing expense increased $137,306 (62%) due to the increased volume of transactions handled. Excluding the increase in SAIF premiums, non-interest expense increased by $185,634 (5%). Income Taxes. The change in income tax is a direct result of changes in the Bank's taxable income and allowable bad debt deduction. Cash Dividends Paid. The Bank paid cash dividends of $562,500 ($0.18 per share) on December 2, 1996, to the stockholders of record as of November 1, 1996, and of $625,000 ($0.20 per share) on May 30, 1997, to the stockholders of record as of May 2, 1997. 33 Results of Operations - Comparison of Years Ended June 30, 1996 and 1995 Interest Income. The weekly average yield for US Treasury securities adjusted to a constant maturity of one year decreased 71 basis points from 6.19% for the twelve months ended June 30, 1995, to 5.48% for the twelve months ended June 30, 1996. Total interest income increased $2,064,606 (18%) as the average balance of interest-earning assets increased $16,833,000 (11%) while the average yield on those interest-earning assets increased 47 basis points from 7.37% to 7.84%. This increase was due primarily to an increase in loan interest of $1,895,738 (22%). During the year, the average loan receivable balance increased $14,351,000 (13%) and the average yield on loans increased 62 basis points from 7.64% to 8.26%. Average balances of investment securities declined $5,444,000 (22%) during the year as the Bank replaced securities with higher yielding loans and mortgage-backed securities, which mortgage-backed securities increased $4,558,000 (33%). Interest Expense. Total interest expense increased $1,643,755 (25%) as the average balance of interest-bearing liabilities increased $12,022,000 (8%) while the average cost of those interest-bearing liabilities increased 70 basis points from 4.66% to 5.36%. The increase in interest expense was primarily due to the increase in average balances of certificates of deposit of $15,788,000 (14%) combined with the increase in average cost of those certificates of 83 basis points from 4.92% to 5.75%. Net Interest Income. The Bank's net interest income increased $420,851 (8%) from $5,042,202 to $5,463,053. During the year ended June 30, 1996, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $21,190,000, an increase in the average net earning balance of $4,811,000 (29%). This increase more than off-set the decline in the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities of 23 basis points from 2.71% to 2.48%. Provision for Loan Losses. Refer to the prior discussion of the fiscal year 1996 loan loss recovery. In fiscal year 1995, the provision was $16,350. Non-Interest Income. Non-interest income, which consists of service charges and other fees, income from foreclosed assets, gain or losses on sale of assets and loan recoveries, increased $150,242 (211%) from $71,161 to $221,403. This increase was due primarily to the gain on asset sales in 1996 versus a loss in 1995. Non-Interest Expense. Non-interest expense increased $1,039,518 (34%), from $3,077,028 to $4,116,546. The increases in salaries and employee benefits of $331,744 (20%), occupancy of $380,434 (138%), and advertising of $71,679 (29%) were primarily the result of increased staffing and other costs related to opening a new facility in September 1995. Income Taxes. The change in income tax is a direct result of changes in the Bank's taxable income and allowable bad debt deduction. Cash Dividends Paid. On December 6, 1995, the Bank paid a cash dividend of $500,000 ($0.16 per share) to the stockholders of record as of November 17, 1995, and again on May 31, 1996, the Bank paid a cash dividend of $500,000 ($0.16 per share) to the stockholders of record as of May 3, 1996. Asset/Liability Management The goal of the Bank's asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Bank's net 34 interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, it offers deposit rates and loan rates in an attempt to maximize net interest income. Management also attempts to fund the Bank's assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank's net interest income. Since the relative spread between financial assets and liabilities is constantly changing, the Bank's current net interest income may not be an indication of future net interest income. The Bank's initial efforts to manage interest rate risk included implementing an adjustable rate mortgage loan ("ARM") program beginning in the early 1980s. The ARMS have met with excellent customer acceptance. As of June 30, 1997, ARMs constituted 75% of the Bank's mortgage loan portfolio. The Bank is also managing interest rate risk by the origination of construction loans. As of June 30, 1997, such loans made up 15% of the Bank's loan portfolio. In general, these loans have higher yields, shorter maturities and greater interest rate sensitivity than other real estate loans. The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank's asset/liability management objectives and spread requirements. As of June 30, 1997, the Bank's savings accounts, checking accounts and money market deposit accounts totaled $28,629,148 or 19% of its total deposits. The Bank believes, based on historical experience, that a substantial portion of such accounts represent non-interest rate sensitive core deposits. Interest Rate Sensitivity Analysis The value of the Bank's loan portfolio will change as interest rates change. Rising interest rates will decrease the Bank's net portfolio value, while falling interest rates increase the value of that portfolio. The following table sets forth as of June 30, 1997, (the most recent available) OTS estimate of the projected changes in net portfolio value ("NPV") in the event of 100, 200, 300, and 400 basis points ("bp") instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.
Estimated Net Portfolio Value NPV as % of PV of Assets BP Change -------------------------------------------------------------- ------------------------------------- in Rates $ Amount $ Change % Change NPV Ratio BP Change -------- -------- -------- -------- --------- --------- +400 bp $24,395 $-9,913 -29% 12.82% -393 bp +300 27,754 -6,554 -19 14.26 -250 +200 30,698 -3,610 -11 15.45 -130 +100 32,933 -1,375 -4 16.30 -46 NC 34,308 16.75 -100 34,817 510 +1 16.84 +9 -200 34,904 597 +2 16.75 0 -300 35,180 872 +3 16.74 -2 -400 35,898 1,590 +5 16.89 +14
35 Computations of prospective effects of hypothetical interest rate changes are calculated by the OTS from data provided by the Bank and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit runoffs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. Management cannot predict future interest rates or their effect on the Bank's NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable rate loans, which represent the bank's primary loan product, have features which restrict changes in interest rates during the initial term and over the remaining life of the asset. In addition, the proportion of adjustable rate loans in the Bank's portfolio could decrease in future periods due to refinancing activity if market interest rates remain or decrease in future periods due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. The Bank's Board of Directors is responsible for reviewing the asset and liability policies. The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank's management is responsible for administering the policies and determinations of the Board of Directors with respect to the Bank's asset and liability goals and strategies. Management expects that the Bank's asset and liability policies and strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years. Liquidity and Capital Resources The Bank is required by OTS regulations to maintain minimum levels of specified liquid assets. Currently, specified liquid assets must be at least equal to 5% of deposits and short-term borrowings. The Bank's liquidity ratio as of June 30, 1997, was 8.2%. The Bank's principal sources of funds for investments and operations are net income, deposits from its primary market area, principal and interest payments on loans and mortgage-backed securities, and proceeds from maturing investment securities. The Bank considers deposits as the primary, and FHLB advances as the secondary, source of funds. The Bank's most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank's operating, financing and investment activities at any given time. Then Bank's cash and cash equivalents totaled $3,817,351 as of June 30, 1997. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. As of June 30, 1997, the Bank had no conditional commitments in the form of letters of credit. Outstanding loan commitments were $2,084,000. As of June 30, 1997, the Bank had granted unused lines of credit to borrowers aggregating approximately $266,000 and $2,275,000 for commercial lines and open-end consumer lines, respectively. As of June 30, 1997, the Bank had $81,479,645 in certificates of deposit which were scheduled to mature in one year or less. It is anticipated that the majority of these certificates will be renewed in the normal course of operations. 36 The Bank's capital position of $27,490,155 is 14% of total assets on June 30, 1997. The Bank has an excess of $22,489,000, $19,546,000 and $17,654,000 of required regulatory levels of tangible, core and risk-based capital, respectively. Under current regulatory guidelines, the Bank is classified as well-capitalized. Other than the stock offering, which will significantly increase both the liquidity and capital resources of the Bank, the Bank is not aware of any trends or uncertainties that will have or are likely to have a material effect on the Bank's liquidity or capital resources. Impact of Inflation and Changing Prices The Bank prepared the consolidated financial statements and related data presented herein in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most companies, the assets and liabilities of a financial institution are primarily monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. Impact of New Accounting Pronouncements During the fiscal year ended June 30, 1997, the Bank implemented the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 requires that mortgage banking enterprises recognize as separate assets, rights to service mortgage loans for others. The balance sheet as of June 30, 1997, includes an asset representing such mortgage servicing rights in the amount of $39,006. During the fiscal year ended June 30, 1997, the Bank implemented the FASB SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This accounting statement extends the rules in SFAS 122 to all loan servicing. The implementation of SFAS No,. 125 had no impact on the financial statements of the Bank. The FASB has issued SFAS No. 123, "Accounting for Stock-based Compensation." This statement establishes a fair value method of accounting for stock-based compensation plans. It encourages entities to adopt that method in place of the provisions of Accounting Principles Board 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. Management has elected to continue to account for its stock-based compensation plans in accordance with the provision of APB No. 25 and therefore SFAS 123 had no impact on the Bank's consolidated financial statements. A footnote to the consolidated financial statements discloses the pro forma impact of SFAS 123, if the Bank would have elected to adopt SFAS 123. The FASB recently adopted SFAS 128, "Earnings Per Share." This statement replaces the presentation of primary earnings per share with a presentation of basic earnings per share. The statement also requires dual presentation of basic and diluted earnings per share by entities with complex capital 37 structures and requires a reconciliation of the numerators and denominators between the two calculations. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Management has not determined the impact, if any, of adopting SFAS 128 on the Bank's financial statements. BUSINESS OF THE BANK In April 1995, Guaranty Federal Savings & Loan Association reorganized from a mutual savings and loan association into a mutual holding company, Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company"). Concurrent with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank was chartered. The Bank issued 3,125,000 shares of common stock in connection with the reorganization, the majority of which are owned by the Mutual Holding Company (68.88% of the outstanding shares). The principal business of the Bank consists of attracting deposits from the general public and using such deposits 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. The Bank also uses these funds to purchase loans secured by one- to four-family residences, mortgage-backed securities, US government and agency obligations and other permissible securities. The Bank's revenues are derived principally from interest on its investments and fees charged for services provided. The Bank's primary sources of funds are: deposits; borrowings; amortization and prepayments of loan principal; and amortizations, prepayments and maturing of mortgage-backed securities. In May 1997, the Boards of Directors of the Bank and the Mutual Holding Company announced a plan whereby the Bank would be wholly owned by a newly formed stock holding company. Each share of Bank Common Stock currently owned by Public Stockholders will be automatically converted into shares of the holding company Common Stock based upon an Exchange Ratio. Subscription rights to purchase the remainder of the conversion stock will be granted to certain eligible depositors and other members of the Bank and Mutual Holding Company. Any shares not sold in the subscription offering will be offered to certain persons in a community offering. The Conversion and Reorganization are subject to several contingencies, including the receipt of regulatory approval, the approval of the depositors of the Bank and the approval of the stockholders of the Bank. Market Area The Bank's primary market area is Greene County, which is in the southwestern corner of Missouri. While the population of Greene County increased 12.4% between 1980 and 1990 and its per capita income grew approximately 32% between 1985 and 1990, the average per capita income in 1990 still was lower than the average per capita income for Missouri and the United States. Springfield has a Metropolitan Statistical Area population of approximately 250,000. The local economy is well diversified with the majority of jobs in light manufacturing and service industries. There is a large regional health care presence with two large regional hospitals employing over 8,000 persons. There also are four accredited colleges and one major university with total enrollment approaching 25,000. Part of Greene County's growth can be attributed to its proximity to Branson, Missouri, which has developed a strong tourism industry related to country music and entertainment. Branson is located 30 miles south of Springfield, and has between five and six million tourist visitors each year, many of which pass through Springfield. 38 Lending Activities Set forth below is selected data relating to the composition of the Bank's loan portfolio at the dates indicated: Composition of Loan Portfolio
At June 30, 1997 1996 1995 --------------------- ------------------------- ----------------- $ % $ % $ % --- --- --- --- --- -- (Dollars in Thousands) Type of Loans: Mortgage loans (includes loans held-for-sale): One- to four-family....................... $116,441 68.11% $ 98,918 68.26% $92,104 71.84% Multi-family.............................. 15,457 9.04 13,701 9.45 12,169 9.49 Construction.............................. 25,149 14.71 21,729 14.99 17,887 13.95 Commercial real estate.................... 8,323 4.87 8,739 6.03 5,162 4.03 ------- ---- ------- ---- --------- ------ Total mortgage loans................... 165,370 96.73 143,087 98.73 127,322 99.30 ------- ----- ------- ----- --------- ------ Commercial business loans................... 383 0.22 255 0.18 219 0.17 Share loans................................. 720 0.42 530 0.37 522 0.41 Automobile loans............................ 1,765 1.03 1,005 0.69 106 0.08 Other....................................... 2,727 1.60 48 0.03 45 0.04 ------- ---- ------- ---- --------- ------ Total consumer and other loans......... 5,595 3.27 1,838 1.27 892 0.70 ------- ------ ------- ------ --------- ------ Total loans.......................... 170,965 100.00% 144,925 100.00% 128,214 100.00% ====== ====== ====== Less: Loans in process.......................... 10,476 7,572 6,537 Deferred loan costs, net.................. (39) (22) (116) Unearned discounts........................ 216 238 233 Allowance for loan losses................. 2,177 2,108 1,718 ------- ------- ------ Total loans, net............................ $158,135 $135,029 $119,842 ======= ======= =======
The following table sets forth the dollar amount, before deductions for unearned discounts, deferred loan costs and allowance for loan losses, at June 30, 1997 of all loans due after June 30, 1998, which have pre-determined interest rates and which have adjustable interest rates. Fixed and Adjustable Rate Loans by Type
Fixed Adjustable Rates Rates Total ----- ----- ----- (In Thousands) One- to four-family.................. $13,728 $ 98,344 $112,072 Multi-family......................... 1,187 13,709 14,896 Construction......................... 308 2,632 2,940 Commercial real estate............... 790 4,741 5,531 Consumer and Other................... 1,601 2,303 3,904 --------- --------- ---------- Total (1).......................... $17,614 $121,729 $139,343 ====== ======= =======
- -------------- (1) Before deductions for unearned discounts, deferred loan costs, net and allowances for loan losses. 39 The following table sets forth the Bank's loan originations and loan purchases, sales and principal repayments. Origination, Purchase and Sale of Loans
Year Ended June 30, ------------------------------------------------------ 1997 1996 1995 ------ ------ ----- (In Thousands) Total gross loans receivable at beginning of period......................................... $144,925 $127,981 $115,380 ------- ------- ------- Loans originated: One- to four-family.......................................... 47,942 32,448 26,078 Multi-family................................................. 2,259 2,903 -- Construction ................................................ 28,863 26,680 22,824 Commercial real estate....................................... 3,398 7,053 241 Consumer and other........................................... 4,499 3,521 1,636 ------- -------- -------- Total loans originated......................................... 86,961 72,605 50,779 Loans purchased: Total loans purchased.......................................... -- -- -- Loans sold: Whole loans.................................................. (4,134) (5,319) -- Loan principal repayments...................................... (45,923) (41,867) (28,864) Other (net)(1)................................................. (10,864) (8,475) (9,314) ------- -------- ------- Net loan activity.............................................. 26,040 16,944 12,601 ------- -------- ------- Total gross loans receivable at end of period.............................................. $170,965 $144,925 $127,981 ======= ======= =======
- -------------------- (1) Includes non-cash portion of loan originations. 40 The following table sets forth the maturity of the Bank's loan portfolio at June 30, 1997. The table shows loans that have adjustable-rates as due in the period during which they contractually mature. The table does not include prepayments or scheduled principal amortization. Prepayments and scheduled principal repayments on loans totaled $45.9 million and $41.8 million for the years ended June 30, 1997 and 1996, respectively. Loan Maturities
1-4 Family Residential Multi-family Commercial Real Residential Real Consumer Estate Real Estate Construction Estate and Other Total ------ ----------- ------------ ------ --------- ----- (In Thousands) Amounts Due: 1 Year or less............. $ 4,355 $ 561 $12,307 $2,232 $1,691 $ 21,146 ----- ------ ------ ----- ----- ------ After 1 year: 1 to 5 years............. 12,106 2,425 935 1,796 3,895 21,157 Over 5 years............. 99,966 12,471 2,005 3,735 9 118,186 ------- ------ ------ ----- ------ ------- Total due after one year... 112,072 14,896 2,940 5,531 3,904 139,343 -------- ------ ------ ----- ----- ------- Total amount due........... $116,427 $15,457 $15,247 $7,763 $5,595 160,489 ======= ====== ====== ===== ===== Less: Allowance for loan losses.. 2,177 Unearned discounts......... 216 Deferred loan costs, net... (39) --------- Loans receivable, net.... $158,135 =======
One- to Four-Family Mortgage Loans. The Bank offers fixed- and adjustable-rate first mortgage loans secured by one- to four-family residences in the Bank's primary lending area. Typically, such residences are single family homes that serve as the primary residence of the owner. However, there are a significant number of loans originated by the Bank which are secured by non-owner occupied properties due to the large student population and high number of service sector jobs. Loan originations are generally obtained from existing or past customers, members of the local community, referrals from attorneys, established builders, and realtors within the Bank's market area. Originated mortgage loans in the Bank's portfolio include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. As of June 30, 1997, 68.1% of mortgage loans receivable consisted of one- to four-family residential loans, of which 86.3% were ARM loans. The Bank offers ARM loans that have fixed interest rates for either one, three or five years and, following that initial fixed period, adjust annually. The Bank has also offered ARM loans for which interest rates adjust every one, three or five years. Generally, ARM loans provide for limits on the maximum interest rate adjustment ("caps") that can be made at the end of each applicable period and throughout the duration of the loan. ARM loans are originated for a term of up to 30 years on owner-occupied properties and generally up to 25 years on non-owner occupied properties. Typically, interest rate adjustments are calculated based on U.S. treasury securities adjusted to a constant maturity of one year (CMT), plus a 2.75% margin. Interest rates charged on fixed-rate 41 loans are competitively priced based on market conditions and the cost of funds. The Bank's fixed-rate mortgage loans currently are made for terms of 15 and 30 years. Generally, ARM loans pose credit risks different from the risks inherent in fixed-rate loans, primarily because as interest rates rise the underlying payments of the borrower rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Bank does not originate ARM loans which provide for negative amortization. The Bank generally originates one- to four-family residential mortgage loans in amounts up to 80% of the appraised value or the selling price of the mortgaged property, whichever is lower. The Bank typically requires private mortgage insurance for the excess percentage over 80% of mortgage loans with loan to value percentages over 80%. The Bank originates mortgage loans secured by non-owner occupied, one- to four-family residential properties at typically up to 75% of the appraised value or the selling price of the mortgaged property, whichever is lower. The Bank, however, may on occasion make such investor loans with higher loan-to-value ratios. The Bank has two separate investors who have accumulated, primarily, single family rental properties with mortgages totalling $7.7 million as of June 30, 1997. Both borrowers are current as of June 30, 1997 and are in good standing with the Bank. Such loans represent a risk to the Bank in that the borrowers' ability to make monthly payments is to an extent dependent on the rental market for one- to four-family homes in Springfield, Missouri. Multi-Family Mortgage Loans. The Bank originates multi-family mortgage loans in its primary lending area. As of June 30, 1997, $15.5 million or 9.0% of the Bank's total loan portfolio consisted of multi-family residential loans. With regard to multi-family mortgage loans, the Bank generally requires personal guarantees of the principals as well as security interest in real estate. Multi-family mortgage loans are generally originated in amounts of up to 75% of the appraised value of the property. The loan-to-one-borrower limitation, $4.1 million as of June 30, 1997, is the maximum the Bank will lend on a multi-family real estate loan. This limit will increase as a result of the proceeds received by the Bank from the Offerings. Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Construction Loans. As of June 30, 1997, construction loans totaled $25.1 million or 14.7% of the Bank's total loans outstanding. Construction loans are made to certain builders for construction of single family homes for resale, as well as to individuals in connection with long-term, permanent loans to be made upon completion of the construction. This portfolio predominantly consists of speculative loans i.e. loans to builders who are speculating that they will be able to locate a purchaser for the underlying property prior to or shortly after the time construction has been completed. The Bank principally finances the construction of single-family homes. Construction loans are made to contractors who have sufficient financial strength and a proven track record, for the purpose of resale, as well as on a "pre-sold" basis. Construction loans made for the purpose of resale generally provide for interest only payments at fixed rates and have terms of six months to one year. Construction 42 loans on "pre-sold" homes may convert into a permanent ARM loan upon completion of construction. Construction loans to a borrower who will occupy a home, or to a builder who has pre-sold the home, will be considered for loan to value ratios of up to 85%. Construction loans for speculative purposes, models, and commercial properties may be considered for loan to value ratios of up to 80%. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. The Bank employs inspectors rather than paying title companies for construction disbursement purposes. Construction lending by its nature entails significant additional risks as compared with one-to four-family mortgage lending, attributable primarily to the fact that funds are advanced upon the security of the project under construction prior to its completion. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower or guarantor to repay the loan. Because of these factors, the analysis of the prospective construction loan projects require an expertise that is different in significant respects from that which is required for residential mortgage lending. The Bank has attempted to address these risks through its underwriting procedures. Commercial Real Estate. As of June 30, 1997, the Bank had commercial real estate loans totaling $8.3 million or 4.9% of the Bank's total loan portfolio. Commercial real estate loans are generally originated in amounts up to 75% of the appraised value of the mortgaged property. The Bank's commercial real estate loans are generally permanent, adjustable rate loans secured by improved property such as office buildings, retail stores, small shopping centers, medical offices, churches and other non-residential buildings. All originated commercial real estate loans are within the Bank's market area. To originate commercial real estate loans, the Bank generally requires a security interest in the real estate, personal guarantees of the principals, a security interest in personal property, and a standby assignment of rents and leases. The Bank has established its loan-to-one borrower limitation, which was $4.1 million as of June 30, 1997, as its maximum commercial real estate loan amount. This limit will increase as a result of the proceeds received by the Bank from the Offerings. Commercial loans above 75% loan to value ratio require Board of Director approval on a case-by-case basis. Because of the small number of commercial real estate loans made, and the relationship of each borrower to the Bank, each such loan has differing terms and conditions applicable to the particular borrower. Loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent on successful operation or management of the properties, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by limiting the number of such loans, lending only to established customers and borrowers otherwise known to the Bank, and generally restricting such loans to its primary market area. At June 30, 1997, the Bank also included approximately $3.4 million in loans to develop land into residential lots and loans on completed lots in the commercial real estate loan portfolio. The Bank utilizes its knowledge of the local market conditions and appraisals to evaluate the development cost, and estimate projected lot prices and absorption rates to assess loans on residential subdivisions. The Bank typically loans up to 70% of the appraised value over terms up to two years. Development loans generally involve a greater degree of risk than residential mortgage loans because (1) the funds are advanced upon the security of the land which has a materially lower value prior to completion of the infrastructure required of a subdivision, (2) the cash flow available for debt repayment is a function of the sale of the individual lots, and (3) the interest required to service the debt is a function of the time required to complete the development and sell the lots. 43 Consumer and Other Lending. The Bank also offers other loans, primarily loans secured by share accounts, commercial business assets, consumer loans, and automobile loans. As of June 30, 1997, $5.6 million or 3.3%, of the Bank's loan portfolio consisted of such loans. The Bank will continue to expand its consumer lending as opportunities present themselves. Loan Approval Authority and Underwriting. All loans secured by real estate must have the approval of the members of the loan committee which consists of six senior officers. The loan committee meets periodically to review and approve loans made within the scope of its authority. Real estate loans in excess of $500,000 require prior approval by the Board of Directors. For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is requested, income, assets, and certain other information are verified and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is generally required, which currently is performed by certified appraisers designated and approved by the Board of Directors. It is the Bank's policy to obtain appropriate insurance protection on all real estate first mortgage loans. Borrowers generally must also obtain hazard insurance prior to closing. Borrowers generally are required to advance funds for certain items such as real estate taxes, flood insurance and private mortgage insurance, when applicable. Delinquencies and Problem Assets. Delinquent Loans. As of June 30, 1997, the Bank had 9 loans with a total principal balance of $828,000, 90 days or more past due and 16 loans with total principal balances of $1.2 million between 30 and 89 days past due. The Bank generally does not accrue interest on loans past due more than 90 days unless they are well secured and the Bank expects that the account will be collected within 30 days. 44 The following table sets forth the Bank's loans that are 90 days or more delinquent. Delinquency Summary
At June 30, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family............................ $279 $ -- $ -- $ -- $ -- Multi-family................................... 286 -- -- -- -- Construction................................... 150 273 -- -- -- Commercial real estate......................... -- -- 1,882 2,013 2,313 --- --- ----- ----- ----- Total mortgage loans............................. 715 273 1,882 2,013 2,313 --- --- ----- ----- ----- Non-mortgage loans Commercial..................................... -- 120 -- -- -- Consumer and other............................. -- -- -- 6 11 --- ------- ------ ------- ------ Total non-mortgage loans......................... -- 120 -- 6 11 --- ------ ------ ------- ------ Total non-accrual loans.......................... 715 393 1,882 2,019 2,324 --- ------ ------ ----- ----- Accruing loans which are past maturity and contractually past due 90 days or more: Mortgage loans: One- to four-family............................ -- 246 -- -- -- Multi-family................................... -- -- -- -- -- Construction................................... 113 1,047 -- -- -- Commercial real estate......................... -- 91 -- -- -- --- ----- ----- ----- ----- Total mortgage loans............................. 113 1,381 -- -- -- --- ----- ----- ----- ----- Non-mortgage loans: Commercial..................................... -- -- -- -- -- Consumer and other............................. -- -- -- -- -- ---- ------- ------- ------- ------- Total non-mortgage loans......................... -- -- -- -- -- ---- ------- ------- ------- ------- Total accruing loans............................. 113 1,384 -- -- -- --- ----- ------- ------- ------- Total non-accrual and accrual loans.............. $828 $1,777 $1,882 $2,019 $2,324 === ===== ===== ===== ===== Total non-accrual and accrual loans as a percentage of net loans................... .52% 1.32% 1.57% 1.92% 2.42% === ==== ==== ==== ==== Total non-accrual and accrual loans as a percentage of total assets................ .42% .96% 1.10% 1.27% 1.46% === === ==== ==== ====
45 Non-Performing Assets. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Mortgage loans are placed on non-accrual status generally when either principal or interest is more than 90 days past due. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is deemed a foreclosed asset held for sale until such time as it is sold. When a foreclosed asset held for sale is acquired it is recorded at its estimated fair value, less estimated selling expenses. Valuations are periodically performed by management, and any subsequent decline in fair value is charged to operations. As of July 1, 1995, the Bank implemented Statement of Financial Accounting Standards No. 114 (SFAS 114). While implementation had no material effect on net income, in accordance with the new pronouncement, loans totaling $851,818, net of the valuation allowance, which were previously classified as in-substance foreclosures, and reported as part of foreclosed assets held-for-sale have been reclassified to loans along with $199,033 of related allowances for collectibility. Prior to the implementation of SFAS 114, the Bank considered collateral for a loan to be in-substance foreclosed if: (1) the borrower had little or no equity in the collateral; (ii) proceeds for repayment of the loan could be expected to come only from the operation or sale of the collateral; and (iii) the borrower had either formally or effectively abandoned control of the collateral to the Bank, or retained control of the collateral but was unlikely to be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. Cash flow attributable to in-substance foreclosures was used to reduce the carrying value of the collateral. 46 The following table shows the principal amount of non-performing assets and the resulting impact on interest income for the periods then ended. Non-Performing Assets
As of June 30, ------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- ----------------- --------------- ------------- -------------- (Dollars in Thousands) Mortgage Loans: One- to four-family...................... $ 279 $ -- $ -- $ -- $ -- Multi-family............................. 286 -- -- -- -- Construction............................. 190 273 -- -- -- Commercial real estate................... 502 -- 1,882 2,013 2,313 ----- --- ----- ----- ----- Total mortgage loans....................... 1,257 273 1,882 2,013 2,313 ----- --- ----- ----- ----- Non-mortgage loans: Commercial............................... -- 120 -- -- -- Consumer and other....................... -- -- -- 6 11 ----- --- ----- ------ ------ Total non-mortgage loans................... -- 120 - 6 11 ----- --- ----- ------ ------ Total non-performing loans................. 1,257 393 1,882 2,019 2,324 Foreclosed assets held for sale............ 210 2 4 6 7 Non-performing loans classified as in-substance foreclosures................ -- -- 698 846 974 ----- --- ------ ----- ------ Total non-performing assets ............... $1,467 $395 $2,584 $2,871 $3,305 ===== === ===== ===== ===== Total non-performing loans as a percentage of net loans............................. .79% .29% 1.57% 1.92% 2.55% Total non-performing assets as a percentage of total assets.......................... .74% .21% 1.51% 2.02% 2.09% Impact on interest income for the period: Interest income that would have been recorded on non-accruing loans........... $ 31 $ 15 $ -- $ -- $ 1
47 Problem Assets. Federal regulations require that the Bank review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values, questionable, and there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations have also created a special mention category, described as assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require the institution to establish general allowance for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. A portion of general loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. As of June 30, 1997, the Bank had total classified assets of $2.2 million of which $2.2 million were considered substandard and $0 were classified as loss. Special mention assets totaled $930,000 as of June 30, 1997. One borrower had three non-accrual loans with the Bank that were classified as substandard or special mention at June 30, 1997. These loans, aggregating approximately $373,000, are cross collateralized by a partially completed single family residence and three duplexes. The Bank has provided reserves against the estimated potential loss for these loans. One bankrupt borrower had three non-accrual loans with the Bank that were classified as substandard at June 30, 1997. These loans, aggregating approximately $306,000, are secured by first deeds on multi-family properties and a second deed on a single family residence. The Bank believes that the borrower may abandon these properties and that the Bank will ultimately take possession of these properties. The Bank has established a reserve equal to 20% of the outstanding balance. Nine non-accrual loans originated by the Bank to a builder were classified as substandard at June 30, 1997. Of these loans, aggregating approximately $580,000, three are secured by first deeds on nonowner occupied residences, four are secured by first deeds on partially completed single family residences, one is a commercial loan and one is a consumer loan. The Bank has established a reserve equal to 20% of the outstanding balance. One borrower had 16 loans past due less than 30 days that were classified as special mention at June 30, 1997. These loans, aggregating approximately $534,000, were secured by first deeds on three single family residences and 13 duplex units. This borrower also holds loans from the Bank on nine condominium units secured by first and second deeds of trust, aggregating approximately $314,000 at June 30, 1997 and current at that date. This same borrower also owes the Bank approximately $503,000 to the Bank through a first deed of trust on a multi-family dwelling. This loan was also current at June 30, 1997. The Bank has provided reserves against all of the loans by this borrower due to past payment performance. 48 Classification of Assets The following table shows the aggregate amounts of the Bank's classified assets as of June 30, 1997.
As of June 30, 1997 ----------------------------------------------------------------------------- Substandard Doubtful Loss Special Mention ------------------ ----------------- --------------- ----------------- Number Balance Number Balance Number Balance Number Balance ------ ------- ------ ------- ------ ------- ------ ------- (In Thousands) Loans: 1-4 family............................ 10 $ 384 -- $ -- -- $ -- 15 $747 Multi-family.......................... 4 1,077 -- -- -- -- 1 183 Commercial real estate................ 1 19 -- -- -- -- -- -- Construction and land................. 7 473 -- -- -- -- -- -- Other loans........................... 1 8 -- -- -- -- -- -- -- --- ---- Total loans........................ 23 $1,961 -- $ -- -- $ -- 16 $930 == ===== === === === === == === Foreclosed assets held-for-sale: 1-4 family............................ 2 $ 210 -- $ -- -- $ -- -- $ -- Commercial real estate................ -- -- -- -- -- -- -- -- Land and other loans.................. -- -- -- -- -- -- -- -- -- ----- --- --- --- --- -- --- Total foreclosed assets............ 2 210 -- -- -- -- -- -- -- -- ---- Total.............................. 25 $2,171 -- $ -- -- $ -- 16 $930 == ===== === === === === == ===
49 Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on 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 loan loss allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. As of June 30, 1997, the Bank's total allowance for loan losses was $2.2 million which amounted to 1.3% of total loans. This allowance reflects not only management's determination to maintain an allowance for loan losses consistent with regulatory expectations for non-performing assets, but also reflects the Bank's policy of evaluating the risks inherent in its loan portfolio, and the regional economy. In March 1996 the Bank had $1.2 million of loan recovery on a commercial loan which was previously partially charged off. The loan recovery represents amounts recovered in excess of the carrying balance of the loan as reflected by the original terms of the loan, including accrued interest and previously charged-off principal. Consequently, the Bank determined that the allowance for loan losses was sufficient prior to the recovery, and credited the provision for loan losses. During fiscal year 1997, the Bank again experienced a net recovery and based on a review discussed above, elected to make no further addition to the allowance. Management anticipates the need to begin adding to loss reserves through charges to provision for loan losses within the next year if growth in the loan portfolio continues as anticipated. 50 The following tables set forth certain information concerning the Bank's allowance for possible loan losses at the dates indicated. Allowance for Loan Losses
Year Ended June 30, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Allowance for loan losses: Beginning balance........................................... $2,108 $1,718 $1,703 $1,687 $1,792 ----- ----- ----- ----- ----- Gross loan charge offs (non-residential, commercial and residential 1-4 family)............................... (63) (4) (5) (2) (13) Recoveries (residential 1-4 family and non-residential)... 132 1,407 4 4 6 ---- ----- ----- ----- ----- Net loan recoveries (charge-offs)........................... 69 1,403 (1) 2 (7) Provision (credit) for loan losses (charged to expense)..... -- (1,212) 16 14 (98) Allowances reclassified to loans which were previously classified as in-substance foreclosures................... -- 199 -- -- -- ------ ------ ------- ------ ------ Ending balance.............................................. $2,177 $2,108 $1,718 $1,703 $1,687 ===== ===== ===== ===== ===== Net recoveries (charge-offs) as a percentage of average loans, net........................................ 0.05% 1.10% --% --% 0.01% Allowance for loan losses as a percentage of average loans, net........................................ 1.49 1.66 1.52 1.62 1.82 Allowance for loan losses as a percentage of total non-performing loans...................................... 173.19 536.39 91.29 84.35 72.59
51 Allocation of Allowance for Loan Losses
June 30, ---------------------------------------------------------------------------------------------------- 1997 1996 1995 -------------------------------- ----------------------------- --------------------------------- Percent of Percent of Percent of Loans in Loans in Loans in Each Each Each Category Category Category to Total to Total to Total Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Mortgage loans(1)........... $2,099 96.73% $2,071 98.73% $1,700 99.30% Consumer and other loans.... 78 3.27 37 1.27 18 0.70 ----- ------ ----- ------ ------ ------ Total.................. $2,177 100.00% $2,108 100.00% $ 1,718 100.00% ===== ====== ===== ====== ====== ======
- ---------------- (1) Includes an allowance for loan losses for construction loans of $450,000 and $195,000 at June 30, 1997 and 1996, respectively. Mortgage-Backed Securities The Bank has significant investments in mortgage-backed securities and has at times utilized such investments to complement its mortgage lending activities. As of June 30, 1997, the Bank held mortgage-backed securities totaling $15.8 million or 7.9%, of total assets. The estimated fair value of such securities totaled $16.1 million as of June 30, 1997. All of the Bank's mortgage-backed securities are insured and are guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Bank ("GNMA"), or the Federal National Mortgage Association ("FNMA"). The following table sets forth the Bank's mortgage-backed portfolio by the amount of such securities backed by fixed-rate and adjustable-rate mortgages. Composition of Mortgage-Backed Securities by Fixed and Adjustable Rates
At June 30, 1997 ------------------------------------------------------- Adjustable Fixed Rates Rates Total ----------- ----- ----- (Dollars in Thousands) Held-to-maturity: GNMA...................... $ 3,748 $ 2,194 $ 5,942 FNMA...................... 609 1,074 1,683 FHLMC..................... 3,014 5,175 8,189 ----- ----- ----- Total..................... $ 7,371 $ 8,443 $ 15,814 ===== ===== ======
At June 30, 1996 ------------------------------------------------------ Adjustable Fixed Rates Rates Total ----------- ----- ----- (Dollars in Thousands) Held-to-maturity: GNMA...................... $ 7,317 $ -- $ 7,317 FNMA...................... 925 1,606 2,531 FHLMC..................... 3,585 6,634 10,219 ----- ----- ------ Total..................... $ 11,827 $ 8,240 $ 20,067 ====== ===== ======
52
As of June 30, 1995 ----------------------------------------------------- Adjustable Fixed Rates Rates Total ----------- ----- ----- (Dollars in Thousands) Held to maturity: GNMA...................... $ 5,830 $ -- $ 5,830 FNMA...................... 939 403 1,342 FHLMC..................... 2,635 4,048 6,683 ----- ----- ----- Total..................... $ 9,404 $ 4,451 $ 13,855 ===== ===== ======
As of June 30, 1997, all mortgage-backed securities were classified as held-to-maturity by the Bank. The following table sets forth the composition of the Bank's mortgage-backed securities portfolio, indicating the amortized cost, percent of portfolio and estimated fair value. Composition of Mortgage-Backed Securities by Cost and Fair Value
At June 30, 1997 -------------------------------------------------- Percent Estimated Amortized of Fair Cost Portfolio Value ---- --------- ----- (Dollars in Thousands) Held to maturity: GNMA.................... $ 5,942 37.58% $ 6,312 FNMA.................... 1,683 10.64 1,719 FHLMC................... 8,189 51.78 8,060 ----- ----- ----- Total................... $15,814 100.00% $ 16,091 ====== ====== =======
At June 30, 1996 -------------------------------------------------- Percent Estimated Amortized of Fair Cost Portfolio Value ---- --------- ----- (Dollars in Thousands) Held-to-maturity: GNMA.................... $ 7,317 36.47% $ 7,672 FNMA.................... 2,531 12.61 2,480 FHLMC................... 10,219 50.92 10,189 ------ ----- ------ Total................... $ 20,067 100.00% $ 20,341 ======== ====== ========
At June 30, 1995 -------------------------------------------------- Percent Estimated Amortized of Fair Cost Portfolio Value ---- --------- ----- (Dollars in Thousands) Held-to-maturity: GNMA.................... $ 5,830 42.08% $ 6,235 FNMA.................... 1,342 9.69 1,343 FHLMC................... 6,683 48.23 6,698 ----- ----- ----- Total................... $ 13,855 100.00% $ 14,276 ====== ====== ======
53 The following table sets forth the maturities of the Bank's mortgage-backed securities and the weighted yields of those securities at June 30, 1997. Maturities and Weighted Average Yields of Mortgage-Backed Securities
Contractual Maturities Due at Year Ended June 30, 1997 ------------------------------------------------------------------------------------------ One After One Year After Five Years After Year or Less to Five Years to Ten Years Ten Years Total Amount ------------------- --------------- --------------- --------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------- ------- --------- ----- ------ ------ ------- ------- ------- -------- (Dollars in Thousands) Held-to-maturity: GNMA.......... $ -- --% $ -- --% $ -- --% $ 5,942 8.70% $ 5,942 8.70% FNMA.......... -- -- -- -- -- -- 1,683 6.50 1,683 6.50 FHLMC......... -- -- 1,900 6.00 6 8.10 6,283 7.60 8,189 7.23 --- --- ----- ---- --- ---- ----- ---- ----- ---- Total $ -- --% $1,900 6.00% $ 6 8.10% $13,908 7.94% $15,814 7.70% === === ===== ==== == ==== ====== ==== ====== ====
54 The following table sets forth the Bank's mortgage-backed securities purchases, sales and principal repayments. Mortgage-Backed Securities Activity
Year Ended June 30, --------------------------------------------------------------- 1997 1996 1995 ---------------- ---------------- ------------------ (In Thousands) Beginning balance..................................... $20,067 $13,855 $14,138 Purchases............................................. -- 10,834 2,174 Sales................................................. -- -- -- Principal payments.................................... (4,300) (4,628) (2,485) Amortization and accretion, net....................... 47 6 28 ------- ------- ------- Ending balance...................................... $15,814 $20,067 $13,855 ====== ====== ======
Investment Activities The investment policy of the Bank, which is established by the Board of Directors and reviewed by the Investment Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. The policy currently provides for held-to-maturity and available-for-sale portfolios. The Bank has adopted an investment policy which strictly prohibits speculation in investment securities. The Bank does not currently engage in trading investment securities and does not anticipate doing so in the future. As of June 30, 1997, the Bank had investment securities with an estimated fair value of $11.7 million and a carrying value of $11.9 million. Of those securities $3.4 million, or 28.1%, of the Bank's investment securities portfolio were available-for-sale. The Bank has the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements, and loans on federal funds. The following table sets forth the composition of the Bank's investment securities portfolio. Composition of Investment Securities
At June 30, -------------------------------------------------- 1997 1996 1995 ------ ------ ----- (In Thousands) Investment Securities: U.S. Treasury and government agency securities.............. $ 8,586 $15,656 $20,343 Obligations of state and political subdivisions............. -- -- 1,625 Corporate notes and bonds................................... -- -- 500 Other securities(1)......................................... 3,360 2,052 1,650 ------ ------ ------ Total investment securities............................... 11,946 17,708 24,118 Interest-bearing deposits.................................... 3,400 2,373 4,186 FHLB stock................................................... 1,734 1,734 1,700 ------ ------ ------ Total investments......................................... $17,080 $21,815 $30,004 ====== ====== ======
- ------------------ (1) Consists of FHLMC stock. 55 The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Bank's investment securities portfolio at June 30, 1997. Investment Portfolio Maturities and Average Weighted Yields
As of June 30, 1997 ------------------------------------------------------------------------------------------------------------- After One to After Five to One Year or Less Five Years Ten Years After Ten Years Total Investment Securities -------------------- ------------------- ----------------- ----------------- --------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Fair Value Yield Value Yield Value Yield Value Yield Value Yield Value ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- (Dollars in Thousands) U.S. Treasury and government agencies... $ -- --% $7,003 6.02% $ -- --% $1,583 6.58% $8,586 6.13% $8,373 ----- ----- ----- ---- ----- ---- ----- ---- ----- ---- ----- Total.............. $ -- --% $7,003 6.02% $ -- --% $1,583 6.58% $8,586 6.13% $8,373 ====== ===== ===== ==== ===== ==== ===== ==== ===== ==== =====
56 Sources of Funds General. The Bank's primary sources of funds are deposits, borrowings, amortization and prepayments on loans and mortgage-backed securities. Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits principally consist of fixed-term certificates, passbook savings, money market, individual retirement accounts ("IRAs") and NOW (checking) accounts. The flow of deposits is influenced significantly by general economic conditions, the restructuring of the thrift industry, changes in money market and prevailing interest rates and competition. The Bank's deposits are typically obtained from the areas in which its offices are located. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. The Bank seeks to maintain a high level of stable core deposits by providing convenient and high quality service through its offices. The following table sets forth the distribution of the Bank's deposit accounts as of June 30, 1997. Deposit Account Types
Minimum Balance as of Percentage of Category Term Interest Rate(1) Balance Amount June 30, 1997 Total Deposits - -------- ---- ---------------- -------------- ------------- -------------- (In thousands) NOW accounts........................ None 2.05% $100 $9,386 6.21% Savings accounts.................... None 2.80 25 8,621 5.70 Money market accounts............... None 2.98 1,000 8,288 5.47 Non interest-bearing demand accounts................... None 100 2,334 1.54 ------ ------ Total.......................... 28,629 18.92 ------ ------ Certificates of Deposit: Fixed Term, Fixed Rate 1-11 Months 4.96 500 16,846 11.14 Fixed Term, Fixed Rate 12-23 Months 5.29 500 47,682 31.53 Fixed Term, Fixed Rate 24-35 Months 5.63 500 28,485 18.83 Fixed Term, Fixed Rate 36-47 Months 5.77 500 12,013 7.94 Fixed Term, Fixed Rate 48-59 Months 5.87 500 1,718 1.14 Fixed Term, Fixed Rate 60-71 Months 5.92 500 10,615 7.02 Fixed Term, Fixed Rate 72-95 Months 5.92 500 5,258 3.48 ------- ------ Total.......................... 122,617 81.08 ------- ------ Total deposits...................... $151,246 100.0% ======= =====
- --------------- (1) Current interest rate offerings as of June 30, 1997. 57 The following table presents the deposit activity of the Bank. Deposit Activity
Year Ended June 30, ---------------------------------------------- 1997 1996 1995 ---- ---- ---- (In Thousands) Beginning balance................................. $157,008 $139,595 $141,017 ------- ------- ------- Deposits.......................................... 126,919 118,097 83,991 Withdrawals....................................... (137,273) (105,689) (89,184) -------- -------- ------- Net deposits (withdrawals)........................ (10,354) 12,408 (5,193) Interest credited................................. 4,592 5,005 3,771 ------- ------- ------- Net increase (decrease) in deposits............... (5,762) 17,413 (1,422) ------- ------- ------- Ending balance.................................... $151,246 $157,008 $139,595 ======= ======= =======
The following table sets forth the time deposits in the Bank classified by interest rate as of the dates indicated. Certificates of Deposit Accounts by Rate
As of June 30, ----------------------------------------------- 1997 1996 1995 ---- ---- ---- (In Thousands) 0.00 - 3.99%......................................... $ 6 $ 50 $ 1,043 4.00 - 5.99%......................................... 108,383 106,243 68,576 6.00 - 7.99%......................................... 14,228 27,030 49,583 8.00 - 9.99%......................................... -- -- 22 -------- ------- ------- Total........................................... $ 122,617 $133,323 $119,224 ======== ======= =======
The following table sets forth the amount and maturities of time deposits at June 30, 1997. Certificate of Deposit Maturity Schedule
Balance Due in ---------------------------------------------------------------------------------------------------- Less than One to Two to Three Years Interest Rate One Year Two Years Three Years or More Total - ------------- ----------- ----------- ---------- ----------- ----------- (In Thousands) 0.00 - 3.99%......... $ 6 $ -- $ -- $ -- $ 6 4.00 - 5.99%......... 76,118 25,948 3,742 2,575 108,383 6.00 - 7.99%......... 5,356 1,177 2,601 5,094 14,228 ------ ------ ----- ----- ------ Total........... $81,480 $27,125 $6,343 $7,669 $122,617 ====== ====== ===== ===== =======
58 The following table indicates the approximate amount of the Bank's certificate accounts of $100,000 or more by time remaining until maturity as of June 30, 1997. Maturities of Certificates of Deposit of $100,000 or More Certificates of Deposits (In thousands) Maturity Period Three months or less..................... $2,592 Three through six months................. 1,101 Six through twelve months................ 2,197 Over twelve months....................... 2,106 ----- Total............................... $7,996 ===== 59 The following table presents the change in dollar amount of deposit accounts by savings type for the years ended June 30, 1997, 1996, and 1995.
At June 30, 1997 At June 30, 1996 ------------------------------------- -------------------------------------- Minimum Balance in Percentage Increase or Balance in Percentage Increase or Term Thousands of Deposits Decrease Thousands of Deposits Decrease ------ ---------- ----------- --------- ---------- ----------- --------- Savings and transaction accounts: NOW accounts............ None $ 9,386 6.21% $2,761 $6,625 4.22% $1,091 Savings accounts........ None 8,621 5.70 (1,641) 10,262 6.54 (501) Money market accounts... None 8,288 5.47 3,024 5,264 3.35 1,956 Non-interest-bearing demand accounts....... None 2,334 1.54 800 1,534 0.98 768 ------ ----- ------ ------ ----- ------- Total.......... 28,629 18.93 4,944 23,685 15.09 3,314 ------ ----- ----- ------ ----- ------- Certificate of Deposit accounts: Fixed-rate, fixed term.. 1-11 months 16,846 11.14 (16,454) 33,300 21.21 11,970 Fixed-rate, fixed term.. 12-23 months 47,682 31.53 2,983 44,699 28.47 1,363 Fixed-rate, fixed term.. 24-35 months 28,485 18.83 3,801 24,684 15.72 1,269 Fixed-rate, fixed term.. 36-47 months 12,013 7.94 (461) 12,474 7.94 (1,053) Fixed-rate, fixed term.. 48-59 months 1,718 1.14 (100) 1,818 1.16 (613) Fixed-rate, fixed term.. 60-71 months 10,615 7.02 (590) 11,205 7.14 499 Fixed-rate, fixed term.. 72-95 months 5,258 3.48 115 5,143 3.27 664 Fixed-rate, fixed term.. 96+ months -- -- -- -- -- -- -------- ------- --------- ------- --------- -------- Total.......... 122,617 81.07 (10,706) 133,323 84.91 14,099 ------- -------- ------- ------- -------- ------ Total deposits. $151,246 100.00% $ (5,762) $157,008 100.00% $17,413 ======= ======= ======= ======= ======= ======
At June 30, 1995 ----------------------------------- Minimum Balance in Percentage Increase or Term Thousands of Deposits Decrease ------ ---------- ----------- -------- Savings and transaction accounts: NOW accounts............ None $ 5,534 3.96% $(687) Savings accounts........ None 10,763 7.71 (4,468) Money market accounts... None 3,308 2.37 (1,026) Non-interest-bearing demand accounts....... None 766 0.55 500 ------ ----- ------- Total.......... 20,371 14.59 (5,681) ------ ----- ------- Certificate of Deposit accounts: Fixed-rate, fixed term.. 1-11 months 21,330 15.28 (2,764) Fixed-rate, fixed term.. 12-23 months 43,336 31.05 7,345 Fixed-rate, fixed term.. 24-35 months 23,415 16.77 (1,208) Fixed-rate, fixed term.. 36-47 months 13,527 9.69 (3,040) Fixed-rate, fixed term.. 48-59 months 2,431 1.74 (244) Fixed-rate, fixed term.. 60-71 months 10,706 7.67 1,969 Fixed-rate, fixed term.. 72-95 months 4,479 3.21 2,224 Fixed-rate, fixed term.. 96+ months -- -- (23) -------- ------- -------- Total.......... 119,224 85.41 4,259 ------- ------ ------ Total deposits. $139,595 100.00% $(1,422) ======= ====== =======
60 Borrowings Deposits are the primary source of funds for the Bank's lending activities and other general business purposes. However, during periods when supply of lendable funds cannot meet the demand for such loans, the FHLB System makes available, subject to compliance eligibility standards, a portion of the funds necessary through loans (advances) to its members. As of June 30, 1997 and 1996, there were $18.2 million and $0 outstanding advances from the FHLB, respectively. The weighted average interest rate on such advances at June 30, 1997 was 6.12%. The average balance of outstanding advances during 1997 and 1996, was $13.8 million and $690,000, respectively, and the approximate average interest rate was 6.09% and 5.65%, respectively. During 1997 and 1996 the maximum outstanding at any month end was $21.2 million and $3.0 million, respectively. Subsidiary Activity The Bank has one service corporation, Guaranty Financial Services of Springfield, Inc. The Bank had an investment of $643,000 in its service corporation as of June 30, 1997. The service corporation sells mutual funds, fixed and variable annuities, unit investment trusts, individual stocks and bonds and life insurance. Such sales are completed through an agreement with "INVEST" for providing brokerage services. In addition, the service corporation acts as a real estate broker for properties owned by the Bank. Employees As of June 30, 1997, the Bank had 56 full-time employees and 11 part time employees. None of the Bank's employees are represented by a collective bargaining group. The Bank believes that its relationship with its employees is good. Legal Proceedings The Bank, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Bank. There were no lawsuits pending or known to be contemplated against the Bank, the Mutual Holding Company or the Company at June 30, 1997 that would have had a material effect on the operations or income of the Bank or the Company. Competition The Bank experiences substantial competition both in attracting and retaining deposit accounts and in the making of mortgage and other loans. Direct competition for savings accounts comes from other savings institutions, credit unions, regional bank and thrift holding companies and commercial banks located in its primary market area. Significant competition for the Bank's other deposit products and services comes from money market mutual funds, brokerage firms and insurance companies. The primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by various financial institutions. 61 Competition for origination of real estate loans normally comes from other savings institutions, commercial banks, mortgage bankers, mortgage brokers and insurance companies. The Bank's primary competition comprises the financial institutions near each of the Bank's branch offices. In Springfield, where the Bank's main office and three branch offices are located, primary competition consists of five thrift institutions and 17 commercial banks and 12 credit unions. The Bank believes it is able to compete effectively in its primary market area by offering competitive interest rates and loan fees, and a variety of deposit products, and by emphasizing personal customer service. REGULATION Set forth below is a brief description of certain laws which relate to the Company and the Bank. The description is not complete and is qualified in its entirety by references to applicable laws and regulation. Holding Company Regulation General. The Company will be required to register and file reports with the OTS and will be subject to regulation and examination by the OTS. In addition, the OTS will have enforcement authority over the Company and any non-savings institution subsidiaries. This will permit the OTS to restrict or prohibit activities that it determines to be a serious risk to the Bank. This regulation is intended primarily for the protection of the Bank's depositors and not for the benefit of stockholders of the Company. QTL Test. Since the Company will own only one savings institution, it will be able to diversify its operations into activities not related to banking, but only so long as the Bank satisfies the qualified thrift lender (the "QTL") test. If the Company controls more than one savings institution, it would lose the ability to diversify its operations into non-banking related activities, unless such other savings institutions each also qualify as a QTL or were acquired in a supervisory acquisition. See "- Qualified Thrift Lender Test." Restrictions on Acquisitions. The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured savings institution. No person may acquire control of a federally insured savings institution without providing at least 60 days written notice to the OTS and giving the OTS an opportunity to disapprove the proposed acquisition. Savings Institution Regulation General. As a federally chartered, SAIF-insured savings institution, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal and state statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve System"). The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's board of directors on any deficiencies that the OTS finds in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent 62 by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of its mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in regulations, whether by the OTS, the FDIC or any other government agency, could have a material adverse impact on the Bank's operations. Insurance of Deposit Accounts. The deposit accounts of the Bank are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC may also prohibit an insured depository institution from engaging in any activity the FDIC determines poses a serious threat to the SAIF. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, the FDIC is authorized to increase deposit insurance rates on a semi-annual basis if it determines that such action is necessary to cause the balance in the SAIF to reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable period of time. The FDIC may impose special assessments on SAIF members to repay amounts borrowed from the U.S. Treasury or for any other reason deemed necessary by the FDIC. Prior to September 30, 1996, savings associations paid within a range of .23% to .31% of domestic deposits and the SAIF was substantially underfunded. By comparison, prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"), predominantly commercial banks, were required to pay substantially lower, or virtually no, federal deposit insurance premiums. Effective September 30, 1996, federal law was revised to mandate a one-time special assessment on SAIF members such as the Bank of approximately .657% of deposits held on March 31, 1995. The Bank recorded a $932,000 pre-tax expense for this assessment at September 30, 1996. Beginning January 1, 1997, deposit insurance assessments for SAIF members were reduced to approximately .064% of deposits on an annual basis; this rate may continue through the end of 1999. During this same period, BIF members are expected to be annually assessed approximately .013% of deposits. Thereafter, assessments for BIF and SAIF members should be the same and the SAIF and BIF may be merged. It is expected that these continuing assessments for both SAIF and BIF members will be used to repay outstanding Financing Corporation bond obligations. As a result of these changes, beginning January 1, 1997, the rate of deposit insurance assessed the Bank substantially declined. 63 Under separate proposed legislation, Congress is considering the elimination of the federal thrift charter and the separate federal regulation of thrifts. As a result, the Bank might have to convert to a different financial institution charter and be regulated under federal law as a bank, including being subject to the more restrictive activity limitations imposed on national banks. The Bank cannot predict the impact of its conversion to, or regulation as, a bank until the legislation requiring such change is enacted. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted assets. The Bank's capital ratios are set forth under "Historical and Pro Forma Capital Compliance." Tangible capital is defined as core capital less all intangible assets (including supervisory goodwill), less certain mortgage servicing rights and less certain investments. Core capital is defined as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual savings associations and qualifying supervisory goodwill, less nonqualifying intangible assets, certain mortgage servicing rights and certain investments. The risk-based capital standard for savings institutions requires the maintenance of total risk-based capital (which is defined as core capital plus supplementary capital) of 8% of risk-weighted assets. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock, and the portion of the allowance for loan losses not designated for specific loan losses. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. A savings association must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans, and other assets. The risk-based capital standards of the OTS generally require savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. An institution's interest rate risk will be measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution will be considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than two percent of the current estimated economic value of its assets. An institution with a greater than normal interest rate risk will be required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The OTS calculates the sensitivity of an institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from an institution's total capital will be based on the institution's Thrift Financial Report filed two quarters earlier. Savings institutions with less than $300 million in assets and a risk-based capital ratio above 12% are generally exempt from filing the interest rate risk schedule with their Thrift Financial 64 Reports. However, the OTS may require any exempt institution that it determines may have a high level of interest rate risk exposure to file such schedule on a quarterly basis and may be subject to an additional capital requirement based upon its level of interest rate risk as compared to its peers. Dividend and Other Capital Distribution Limitations. OTS regulations require the Bank to give the OTS 30 days advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends by the Bank to the Company. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the effect would be to reduce its regulatory capital below the amount required for the liquidation account to be established at the time of the Conversion. See "The Conversion -- Effects of Conversion to Stock Form on Depositors and Borrowers -- Liquidation Account." OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger, and other distributions charged against capital. The rule establishes three tiers of institutions based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 institution") and has not been advised by the OTS that it is in need of more than the normal supervision can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four quarter period. Any additional capital distributions require prior regulatory notice. As of June 30, 1997, the Bank qualified as a Tier 1 institution. In the event the Bank's capital falls below its fully phased-in requirement or the OTS notifies the Bank that it is in need of more than normal supervision, the Bank would become a Tier 2 or Tier 3 institution and as a result, the Bank's ability to make capital distributions could be restricted. Tier 2 institutions, which are institutions that before and after the proposed distribution meet their current minimum capital requirements, may only make capital distributions of up to 75% of net income over the most recent four quarter period. Tier 3 institutions, which are institutions that do not meet current minimum capital requirements and propose to make any capital distribution, and Tier 2 institutions that propose to make a capital distribution in excess of the noted safe harbor level, must obtain OTS approval prior to making such distribution. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. The OTS has proposed rules relaxing certain approval and notice requirements for well-capitalized institutions. A savings institution is prohibited from making a capital distribution if, after making the distribution, the savings institution would be undercapitalized (i.e., not meet any one of its minimum regulatory capital requirements). Further, a savings institution cannot distribute regulatory capital that is needed for its liquidation account. See "The Conversion and Reorganization - Liquidation Rights." Qualified Thrift Lender Test. Savings institutions must meet a qualified thrift lender ("QTL") test. If the Bank maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualified as a QTL, the Bank will continue to enjoy full borrowing privileges from the FHLB of Des Moines. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus 65 intangible assets, property used by the institution in conducting its business and liquid assets equal to 20% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings institutions may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every 12 months. As of June 30, 1997, the Bank was in compliance with its QTL requirement with approximately 99.9% of its assets invested in QTIs. Transactions With Affiliates. Generally, restrictions on transactions with affiliates require that transactions between a savings institution or its subsidiaries and its affiliates be on terms as favorable to the savings institution as comparable transactions with non-affiliates. In addition, certain of these transactions are restricted to an aggregate percentage of the savings institution's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings institution. The Bank's affiliates include the Company and any company which would be under common control with the Bank. In addition, a savings institution may not extend credit to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate that is not a subsidiary. The OTS has the discretion to treat subsidiaries of savings institutions as affiliates on a case-by-case basis. Liquidity Requirements. All savings institutions 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. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings institutions. At June 30, 1997, the Bank's required liquid asset ratio was 5.0% and the actual ratio was 8.2%. Monetary penalties may be imposed upon associations for violations of liquidity requirements. Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by savings institutions and 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. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At June 30, 1997, the Bank had $1,733,700 in FHLB stock, at cost, which was in compliance with this requirement. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member's capital and limiting total advances to a member. The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended June 30, 1997, dividends paid by the FHLB of Des Moines to the Bank totaled $122,281. Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily 66 checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy the liquidity requirements that are imposed by the OTS. At June 30, 1997, the Bank's reserve met the minimum level required by the Federal Reserve System. Savings institutions have authority to borrow from the Federal Reserve System "discount window," but Federal Reserve System policy generally requires savings institutions to exhaust all other sources before borrowing from the Federal Reserve System. The Bank had no borrowings from the Federal Reserve System at June 30, 1997. FEDERAL AND STATE TAXATION The Company and the Bank will report their income on a June 30th fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including, particularly, the Bank's reserve for bad debts discussed below. After the Conversion and Reorganization, it is expected that the Company and its subsidiaries, including the Bank, will file a consolidated federal income tax return. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which such distributions occur. However, the Company may elect not to file consolidated returns. Savings associations are subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the same general manner as other corporations. However, prior to August 1996, savings associations such as the Bank, which met certain definitional tests and other conditions prescribed by the Code could benefit from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans were separated into "qualifying real property loans," which generally are loans secured by interests in certain real property, and nonqualifying loans, which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans must be based on actual loss experience. The amount of bad debt reserve deduction with respect to qualifying real property loans could be based upon actual loss experience ("experience method") or a percentage of taxable income determined without regard to such deduction ("percentage of taxable income method"). The Bank has generally elected to use the method which has resulted in the greatest deductions for federal income tax purposes. Under the experience method, the bad debt deduction for an addition to the reserve for qualifying real estate property loans is an amount determined under a formula based generally on the bad debts actually sustained by a savings association over a period of years. Under the percentage of taxable income method, the bad debt reserve deduction for qualifying real property loans is computed as a percentage, which Congress has reduced from as much as 60% in prior years to 8% of taxable income, with certain adjustments, effective for taxable years beginning after calendar year 1986. The allowable deduction under the percentage of taxable income method ("percentage bad debt deduction") for taxable years beginning before calendar year 1987 was scaled downward in the event that less than 82% of the total dollar amount of the assets of an institution were within certain designated categories. When the percentage method bad debt deduction was lowered to 8%, the 82% qualifying assets requirement was lowered to 60%. For all taxable years, there is no deduction in the event that less than 60% of the total dollar amount of the assets of an institution falls within such categories. Moreover, in such case, the Bank could be required to recapture, generally over a period of up to four years, its 67 existing bad debt reserve. As of June 30, 1996, more than the required amount of the Bank's total assets fell within such category. The bad debt deduction under the percentage of taxable income method was subject to certain limitations. First, the amount added to the reserve for losses on qualifying real property loans could not exceed the amount necessary to increase the balance of such reserve at the close of the taxable year to 6% of such loans outstanding at the end of the taxable year. Further, the addition to the reserve for losses on qualifying real property loans could not exceed the amount which, when added to that year's addition to the bad debt reserve for losses on nonqualifying loans, equals the amount by which 12% of total deposits or withdrawable accounts of depositors at year-end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. Finally, the percentage bad debt deduction under the percentage of taxable income method was reduced by the deduction for losses on nonqualifying loans. To the extent (i) a savings association's reserve for losses on qualifying real property loans under the percentage of income method exceeded the amount that would have been allowed under the experience method, and (ii) a savings association makes distributions to stockholders (including distributions in redemption, dissolution or liquidation) that are considered to result in withdrawals from the excess bad debt reserve, then the amounts considered withdrawn would be included in the savings association's taxable income. The amount that would be deemed withdrawn from such reserves upon such distribution and which would be subject to taxation at the savings association's level at the normal corporate tax rate would have been an amount that, when reduced by taxes on such amount, would equal the amount actually distributed. Dividends paid out of a savings association's current or accumulated earnings and profits as calculated for federal income tax purposes, however, would not be considered to result in withdrawals from its bad debt reserves to the extent of such earnings and profits. Dividends in excess of a savings association's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation of a savings association would be considered to come from its loss reserve. Earnings appropriated to the Bank's bad debt reserve and claimed as a tax deduction are not available for the payment of cash dividends or for distribution to stockholders (including distributions made on dissolution or liquidation), unless the Bank includes the amount in taxable income, along with the amount deemed necessary to pay the resulting federal income tax. The Bank's bad debt deduction for the years ended June 30, 1996 and 1995 was based on the percentage of taxable income method. Prior to fiscal 1988, the Bank had used a percentage of taxable income method in determining its bad debt deduction for tax purposes. As a result of deductions under this method, net equity as of June 30, 1997 includes accumulated earnings of $5,075,000 on which federal income taxes have not been provided. If in the future this portion of net equity is used for any purposes other than to absorb losses, income taxes may be provided at the applicable tax rate. In August 1996, the Code was revised to equalize the taxation of thrifts and banks. Thrifts, such as the Bank, no longer have a choice between the percentage of taxable income method and the experience method in determining additions to bad debt reserves. Thrifts with $500 million of assets or less may still use the experience method, which is generally available to small banks currently. Larger thrifts must use the specific charge off method regarding bad debts. Any reserve amounts accumulated after 1987, which are presently included as a component of the net deferred tax liability, will be taxed over a six year period beginning in 1996; however, bad debt reserves set aside through 1987 are generally not taxed. An institution may delay recapturing into income its post-1987 bad debt reserves for an additional two years if it meets a residential-lending test. The amount of bad debt reserves and 68 related deferred tax liability that must be recaptured was $913,500 and $338,000 as of June 30, 1997, respectively. This law is not expected to have a material impact on the Bank. In addition to their regular federal income tax liability, corporations are also subject to an alternative minimum tax. The corporate alternative minimum tax rate is 20%. The tax is applied on "alternative minimum taxable income" ("AMTI") which includes: (1) 100% of the excess of a savings association's bad debt deduction over the amount allowable under the experience method; (2) 75% of the excess of the "adjusted current earnings" of the Bank over the AMTI; and (3) interest on certain tax-exempt bonds. The Revenue Reconciliation Act of 1993 added a new Section 475 to the Code. Section 475 is a new mark-to-market tax law, that is different from the accounting mark-to-market SFAS No. 115. The term "securities" in the Code includes not just traditional debt and equity securities, but mortgages as well. For tax purposes, institutions were required to identify which securities qualified for an exemption by October 31, 1993. A financial institution is subject to a mark-to-market rule if its activities bring it within the definition of a dealer in securities under Section 475(c)(1) of the Code. The Bank's federal income tax returns have not been audited during the last five years. Thrift institutions located in Missouri, 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 certain other state taxes on thrift institutions, on their property, capital or income, 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 taxes and use taxes. In addition, the Bank 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. Thrift institutions are not subject to the regular corporate income tax. MANAGEMENT OF THE COMPANY Directors and Executive Officers The Board of Directors of the Company consists of those persons who currently serve as Directors of the Bank. The Board of Directors is divided into three classes, each of which contains approximately one-third of the Board. The directors shall be elected by the stockholders of the Company for staggered three-year terms, or until their successors are elected and qualified. One class of directors, consisting of Messrs. Barham and Haseltine have terms of office expiring at the first annual meeting following the Conversion and Reorganization. A second class, consisting of Messrs. Barnes and Rogers have terms of office expiring at the annual meeting to be held one year thereafter. A third class, consisting of Messrs. Hall and Lipscomb have terms of office expiring at the annual meeting to be held two years thereafter. Following the Conversion and Reorganization, it is anticipated that the size of the Board of Directors will be increased by the addition of up to two new members. 69 The following individuals hold the executive offices in the Company set forth below opposite their names.
Name Age (1) Positions Held With the Company - ---- ------- ------------------------------- James E. Haseltine 50 President, Chief Executive Officer and Director William B. Williams 50 Executive Vice President, Chief Operating Officer Bruce Winston 49 Vice President, Chief Financial Officer
- ------------------- (1) At June 30, 1997. The executive officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. Additional information concerning the business experience and compensation of the directors and executive officers of the Company is set forth under "Management of the Bank". Proposed Future Stock Benefit Plans 1998 Stock Option Plan. The Board of Directors of the Company intends to adopt the 1998 Stock Option Plan (the "1998 Option Plan") within one year of the Conversion and Reorganization, subject to approval by the Company's stockholders at a stockholders meeting to be held no sooner than six months after the Conversion and Reorganization. The 1998 Option Plan would be in compliance with the OTS regulations currently in effect. See "- Restrictions on Benefit Plans." In accordance with OTS regulations, a number of shares equal to 10% of the aggregate shares of Conversion Stock to be sold in the Offerings (i.e., 330,000 shares based upon the sale of 3,300,000 shares at the midpoint of the Offering Range) would be reserved for issuance by the Company upon exercise of stock options to be granted to officers, directors and employees of the Company and the Bank from time to time under the 1998 Option Plan. The purpose of the 1998 Option Plan would be to provide additional performance and retention incentives to certain officers, directors and employees by facilitating their purchase of a stock interest in the Company. The 1998 Option Plan, which would become effective upon stockholder approval of such plan, would provide for a term of 10 years, after which no awards could be made, unless earlier terminated by the Board of Directors of the Company pursuant to the 1998 Option Plan. The options would vest over a five year period (i.e., 20% per year), beginning one year after the date of grant of the option. Options would be granted based upon several factors, including seniority, job duties and responsibilities, job performance, the Bank's performance and a comparison of awards given by other institutions converting from mutual to stock form. It is anticipated that the 1998 Option Plan would provide that, in the event of a change in control of the Company or the Bank, if accelerated vesting is not inconsistent with applicable OTS regulations at the time of such change in control, options not immediately exercisable on such date of a change in control would become immediately exercisable, and the optionee would, at the discretion of the option committee, be entitled to receive cash in an amount equal to the excess of the fair market value of the stock subject to the option over the option price in exchange for the surrender of the option. Applicable OTS regulations prohibit accelerated vesting except in the event of death or disability, but if OTS regulations are subsequently revised to provide for accelerated vesting upon a change in control, the 1998 Option Plan will provide for accelerated vesting upon a change in control. "Control" generally refers to the acquisition by any person or group of the ownership or power to vote more than 25% of the 70 Company's stock, the control of the election of a majority of directors or the exercise of a controlling influence over the management or policies of the Company. The Company would receive no monetary consideration for the granting of stock options under the 1998 Option Plan, however, it would receive the option price for each share issued to optionees upon the exercise of such options. The exercise of options and payment for the shares received would contribute to the equity of the Company. If the 1998 Option Plan is implemented more than one year after the Conversion and Reorganization, the 1998 Option Plan will comply with such OTS regulations and policies that are applicable at such time. 1998 Restricted Stock Plan. The Board of Directors of the Bank intends to adopt the 1998 RSP within one year of the Conversion and Reorganization, the objective of which is to enable the Bank to retain personnel and directors of experience and ability in key positions of responsibility. The Company expects to hold a stockholders' meeting no sooner than six months after the Conversion and Reorganization in order for stockholders to vote to approve the 1998 RSP. The 1998 RSP will be implemented in accordance with applicable OTS regulations currently in effect. See "- Restrictions on Benefit Plans." Awards would be granted based upon a number of factors, including seniority, job duties and responsibilities, job performance, the Bank's performance and a comparison of awards given by other institutions converting from mutual to stock form. The 1998 RSP would be managed by a committee of non-employee directors (the "RSP Trustees"). The 1998 RSP Trustees would have the responsibility to invest all funds contributed by the Bank to the trust created for the 1998 RSP (the "RSP Trust"). The Bank will contribute sufficient funds to the 1998 RSP so that the 1998 RSP Trust can purchase, in the aggregate, a number of shares equal to up to 4% of the amount of Conversion Stock that is sold in the Offerings. The shares purchased by the 1998 RSP would be authorized but unissued shares or would be purchased in the open market. In the event the market price of the Common Stock is greater than $10.00 per share, the Bank's contribution of funds will be increased. Likewise, in the event the market price is lower than $10.00 per share, the Bank's contribution will be decreased. In recognition of their prior and expected services to the Bank and the Company, as the case may be, the officers, other employees and directors responsible for implementation of the policies adopted by the Board of Directors and the profitable operation of the Bank will, without cost to them, be awarded stock under the 1998 RSP. Based upon the sale of 3,300,000 shares of Conversion Stock in the Offerings at the midpoint of the Offering Range, the 1998 RSP Trust is expected to purchase up to 132,000 shares of Conversion Stock. In accordance with applicable OTS regulations, the shares granted under the 1998 RSP will be in the form of restricted stock payable over a five year vesting period (i.e., 20% per year) beginning one year after the date of grant of the award. Compensation expense in the amount of the fair market value of the Common Stock at that time granted will be recognized pro rata over the years during which the shares are payable. It is anticipated that the 1998 RSP would provide that, in the event of a change in control of the Company or the Bank, if accelerated vesting is not inconsistent with applicable OTS regulations at the time of such change in control, restricted stock not vested on the date of a change in control would become immediately vested. Applicable OTS regulations currently prohibit accelerated vesting in the event of a change in control or imminent change in control, but if OTS regulations are subsequently revised to provide for accelerated vesting upon a change in control, the 1998 RSP will provide for such accelerated vesting. "Control" generally refers to the acquisition by any person or group 71 of the ownership or power to vote more than 25% of the Company's stock, the control of the election of a majority of directors or the exercise of a controlling influence over the management or policies of the Company. If the 1998 RSP is implemented more than one year after the Conversion and Reorganization, the 1998 RSP will comply with such OTS regulations and policies that are applicable at such time. Restrictions on Stock Benefit Plans. OTS regulations provide that in the event the Bank implements or adopts stock option or management and/or employee stock benefit plans within one year from the date of Conversion and Reorganization, such plans must comply with the following restrictions: (1) the plans must be fully disclosed in the Prospectus, (2) for stock option plans, the total number of shares for which options may be granted may not exceed 10% of the shares sold in the Offerings, (3) for restricted stock plans, the shares may not exceed 3% of the shares sold in the Offerings (4% for institutions with 10% or greater tangible capital), (4) the aggregate amount of stock purchased by the ESOP in the Offerings may not exceed 10% (8% for well-capitalized institutions utilizing a 4% restricted stock plan), (5) no individual employee may receive more than 25% of the available awards under any plan, (6) directors who are not employees may not receive more than 5% individually or 30% in the aggregate of the awards under any plan, (7) all plans must be approved by a majority of the total votes eligible to be cast at any duly called meeting of the Company's stockholders held no earlier than six months following the Conversion and Reorganization, (8) for stock option plans, the exercise price must be at least equal to the market price of the stock at the time of grant, (9) for restricted stock plans, no stock issued in a conversion may be used to fund the plan, (10) neither stock option awards nor restricted stock awards may vest earlier than 20% as of one year after the date of stockholder approval and 20% per year thereafter, and vesting may be accelerated only in the case of disability or death (or with OTS approval in the event of a change in control), (11) the proxy material must clearly state that the OTS in no way endorses or approves of the plans, and (12) prior to implementing the plans, all plans must be submitted to the Regional Director of the OTS within five days after stockholder approval with a certification that the plans approved by the stockholders are the same plans that were filed with and disclosed in the proxy materials relating to the meeting at which stockholder approval was received. Plans adopted and implemented more than one year after the Conversion and Reorganization would not necessarily be subject to these limitations. MANAGEMENT OF THE BANK Directors and Executive Officers The Board of Directors of the Bank is composed of six members each of whom serves for a term of three years. The Bank's stock charter and bylaws require that directors be divided into three classes, as nearly equal in number as possible, each class to serve for a three-year period, with approximately one-third of the directors elected each year. Executive officers are elected annually by the Board of Directors and serve at the Board's discretion. Following the Conversion and Reorganization, it is anticipated that the size of the Board of Directors will be increased by the addition of up to two new members. 72 The following table sets forth information with respect to the directors and executive officers of the Bank, all of whom will continue to serve in the same capacities after the Conversion and Reorganization.
Position with Director Current Name Age(1) Bank Since Term Expires - ---- ------ ---- ----- ------------ Jack L. Barham 64 Chairman 1983 1998 James E. Haseltine 50 President, CEO, Director 1990 1998 Wayne V. Barnes 65 Director 1976 1999 George L. Hall 89 Director 1987 2000 Ivy L. Rogers 78 Director 1990 1999 Gary Lipscomb 67 Director 1991 2000 Executive Officers Who Are Not Directors William B. Williams 50 Executive Vice President, COO Bruce Winston 49 Vice President, CFO Carla Green 37 Vice President Jerry Graham 60 Vice President Larry Cruzan 64 Vice President Kevin M. Bell 46 Vice President Dana A. Elwell 44 Vice President E. Lorene Thomas 63 Secretary
- -------------------- (1) As of June 30, 1997. Biographical Information The principal occupation during the past five years of each executive officer and director of Guaranty Federal is set forth below. All such persons have held their present positions for five years unless otherwise stated. Jack L. Barham worked at the Bank for 24 years and retired in 1995. He served in various positions of responsibility and was a realtor and appraiser. In 1983 he was elected to the Board of Directors and in 1990 was elected Vice President and Chairman of the Board. He served in the US Navy, is a deacon at Ridgecrest Baptist Church and has been a member of various civic organizations. James E. Haseltine joined the Bank in 1983, and has served as Director, President and Chief Executive Officer since 1990. After graduating Drury College in 1968, he entered military service with the US Army and served in the Republic of Vietnam. He has served as a founding member and Chairman of the Affordable Housing Action Board of Springfield, Inc., an organization serving low to moderate income families. He is a licensed real estate broker. 73 He is a past president of the Rotary Club of Springfield, serves as director of the Springfield Business and Development Corporation and the Springfield Finance and Development Corporation (not for profit community organizations), and is a member of First and Calvary Presbyterian Church. Wayne V. Barnes is President of Sunnyland Stages Inc. and Sunnyland Tours, Inc., Springfield, Missouri. Mr. Barnes attended the University of Missouri and Drury College, and served in the US Navy. He is active in many civic organizations. George L. Hall is a retired owner and manager of the Ed. V. Williams Clothing Company in Springfield. He is active in many civic and religious organizations. Ivy L. Rogers retired from the US Department of Justice Bureau of Prisons. He held position as chief Construction Representative working out of Washington, DC and other parts of the country. Now self-employed as a consultant for construction projects he recently completed a contract with Greene County, Missouri to supervise construction of a new judicial building. Mr. Rogers served in the US Navy Construction Battalion during World War II. Gary Lipscomb, CPA, practiced as a Certified Public Accountant for over 25 years in Springfield, Missouri retiring from his firm, Lipscomb, Kirkpatrick and Company, CPA's in August of 1988 to devote full time to the operation of Lipscomb Ford-Chrysler, Inc. in Branson, Missouri. He sold his Branson operation in December of 1993 and since that time has owned and operated, with his wife Betty, Lipscomb Mitsubishi in Springfield, Missouri. Mr. Lipscomb has been and is active in many social, fraternal, and religious activities. Mr. Lipscomb owns various real estate investments in Springfield and Branson, including a partnership interest in the Galleria in Springfield, Missouri. William B. Williams joined the Bank in 1995 as Executive Vice President and Chief Operating Officer. Prior to joining the Bank, Mr. Williams worked as a consultant to Midland Loan Services, L.P., a commercial mortgage banker in Kansas City, Missouri. From 1987 to 1994, Mr. Williams worked for North American Savings Bank in Grandview, Missouri, most recently as Executive Vice President and Chief Financial Officer. Mr. Williams received a BSBA degree from the University of Arkansas in 1969 and after serving as an officer in the US Navy, he received a MBA degree from Tulane University in 1974. He is a CPA. E. Lorene Thomas joined the Bank in 1983. She is presently Corporate Secretary. Mrs. Thomas was employed by Public Finance in Joplin, Missouri for six years, prior to being employed by Joplin Federal Savings & Loan, Joplin, Missouri. She also worked for American Savings and Loan, and First Federal Savings and Loan in Springfield, Illinois. She has worked 28 years in the savings and loan business, having experience in every department. Mrs. Thomas has taken accounting courses and many Institute of Financial Education courses. She has been an active member in the United Methodist Church. Bruce Winston is Vice President and Chief Financial Officer of the Bank. He joined the Bank in 1992. Prior to joining the Bank, he served in various other capacities with two other financial institutions over a period of 20 years. He is a graduate of Southwest Missouri State University, and is a member of First Presbyterian Church, where he has served as an Elder and Treasurer. Carla J. Green has been with the Bank since 1983. She is the Vice President in charge of branch operations. Mrs. Green has attended both Drury College and Southwest Missouri State University. Mrs. Green is a member of Harmony Baptist Church and various business and civic clubs, including Springfield Southeast Rotary. Mrs. Green came to the Bank with an extensive background in financial institutions. 74 Jerry F. Graham joined the Bank in 1978. He is the Vice President responsible for construction lending. Prior to joining the Bank, he served as a branch manager at another financial institution for a 14 year period. He served eight years in the Navy Reserve. Mr. Graham attended Drury College. Mr. Graham is a director of the Springfield Area Credit Association and is a classroom instructor for the Institute of Financial Education. He is active in various civic and religious organizations and is a past chairman of the Finance Committee and Past President of the Springfield Area Council of Churches. He has been a member of St. John's United Church of Christ of or over 50 years, serving as Sunday School Teacher, choir member, Secretary, Vice President and President of the Church Council. Larry Cruzan joined the Bank in 1989 and currently serves as Vice President and Loan Officer. He has been active in Real Estate lending with banks, savings associations and mortgage banks for over 39 years, with the past 34 years in Springfield. Mr. Cruzan holds a BS Degree in Business Administration from Pittsburgh State University, served as an officer in the US Army, is a licensed Real Estate Broker and Insurance Agent, a past president of Springfield Host Lions club, and Springfield Chapter of Pittsburgh State Alumni Association, and as an Elder at First and Calvary Presbyterian Church. He currently serves as Vice President of the Board of Directors of The Springfield Association for the Blind. Kevin Bell joined the Bank in 1996. He is the Vice President responsible for consumer lending. Mr. Bell spent five years previously with Union Planters Bank in Springfield, and five years with United Savings & Loan. He began his banking career with Union National Bank in 1972. He attended Hanover College and Drury College, and attends St. Elizabeth Ann Seaton Catholic Church. He has been active in various civic organizations including the Springfield Chamber of Commerce and Kiwanis Club. Dana Elwell joined the Bank in July 1996. He is the Vice President responsible for permanent mortgage lending. Previously, he was in charge of real estate lending at First City National Bank for one year. Previous to that, Mr. Elwell worked in the real estate department at Boatmen's National Bank for over 10 years. He is a graduate of Central Missouri State University with a BS degree in finance. He is a founding member and past president of the Affordable Housing Action Board of Springfield, Inc. ("AHAB"), an organization serving low to moderate income families. He is currently on the Executive Committee of AHAB. Dana is also chairman of the Housing Committee of Vision 20/20, an organization developed by the city of Springfield and Greene County to work on the city/county comprehensive plan. He also serves as Vice President of the Nixa Community Foundation, which grants money to not-for-profit organizations for worthy projects in the Nixa area. Meetings and Committees of the Board of Directors The business of the Bank is conducted at regular and special meetings of the full Board of Directors and its standing committees. The standing committees consist of the Executive, Audit, Investment, Nominating, Option and RRP Committees. During fiscal 1997 the Board of Directors met at 12 regular meetings called in accordance with the bylaws. No special meetings were held during fiscal 1997. No Director attended less than 75% of the regular meetings and the meetings held by those committees of the Board of Directors on which he/she served. The audit committee consists of Messrs. Lipscomb, Barnes, Hall, Rogers, and Barham. This standing committee regularly meets on a quarterly basis with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the 75 audit committee meets with the independent certified public accountants to review the results of the annual audit and other related matters. The audit committee met three times during the fiscal year ended June 30, 1997. The nominating committee, a non-standing committee, meets once a year and is composed of those Directors whose terms are not expiring that year. Compensation Committee Interlocks and Insider Participation For the fiscal year ended June 30, 1997, the compensation committee consisted of the board of directors of the Bank. This standing committee reviews performance, industry salary surveys and the recommendations of management concerning compensation. Mr. James E. Haseltine is the President and Chief Executive Officer of the Bank, the Mutual Holding Company and the Company. Mr. Haseltine does not participate in compensation committee matters involving his compensation. The Bank holds a loan originated in March 1987 that is secured by a mortgage on the residence of Mr. Haseltine. Mr. Haseltine paid reduced origination and application fees for the loan, a Bank policy applicable at that time to all employees and directors. During the 1997 fiscal year, the largest balance on this loan was $67,041 and the interest rate was 8.0%. Mr. Jack L. Barham is the Chairman of the Board of Directors of the Bank, the Mutual Holding Company and the Company and had been, for many years until his retirement in 1995 an officer of the Bank. Directors' Compensation The members of the Board of Directors each received a yearly fee of $9,000, payable monthly. Directors do not receive fees for attendance at committee meetings. During the year ended June 30, 1996, Directors Barham, Barnes, Hall, Rogers and Lipscomb each received 1,945 stock awards under the RRP. Mr. Haseltine's compensation is reported in the following section. Executive Compensation Summary Compensation Table. The following table sets forth the cash and non-cash compensation awarded to or earned by the Chief Executive Officer of the Bank. No other executive officers of the Bank had salaries and bonuses earned during the year ended June 30, 1997, which exceeded $100,000 for services rendered in all capacities to the Bank.
Annual Compensation Long Term Compensation ---------------------------------------------------------------------------------------------------------- Awards Payouts ----------------------------------------------- Fiscal Year Restricted Securities Name and Ended Other Annual Stock Underlying All Other Principal Position June 30, Salary Bonus Compensation(1) Award(s)(2) Options(3) Compensation(4) - -------------------------- -------- ------ ----- --------------- ----------- ---------- --------------- James E. Haseltine 1997 $96,250 $6,510 $11,329 0 0 $11,380 President & CEO 1996 87,228 7,681 11,159 $34,859 9,561 12,963 1995 73,300 7,205 12,074 0 0 10,817
- ------------------------- (1) Includes Directors' fees of $9,000 for the year ended June 30, 1997, and $8,000 for the year ended June 30, 1996, and $7,000 for the year ended June 30, 1995, in addition to an automobile allowance. 76 (2) Pursuant to the RRP, the Bank granted Mr. Haseltine 3,169 restricted shares of Common Stock. As of the date awarded, the shares were valued at $11.00. Such shares vest at a rate of 20% per year with the first installment vested on October 18, 1996. Dividends are paid on restricted stock after awards vest. Based on the closing price of $16.75 on June 30, 1997, the 2,535 restricted shares held by Mr. Haseltine had a value of $42,461. (3) Pursuant to the Stock Option Plan, the Bank granted Mr. Haseltine options to purchase shares of Common Stock. Such options vest at a rate of 20% per year with the first installment having vested on December 15, 1996. (4) Represents the Bank's accruals pursuant to the pension plan. Recognition and Retention Plan. The Bank established the 1994 Recognition and Retention Plan (the "RRP") as a method of providing directors, officers and other employees of the Bank with a proprietary interest in the Bank in a manner designed to encourage such persons to remain with the Bank. The Bank contributed funds to the RRP Trust, and the Trust purchased 38,895 shares of Bank Common Stock. A committee of all the directors administers the RRP and may make awards to officers and employees, however, awards to outside directors are fixed under the RRP. Under the RRP, awards are granted to directors and officers in the form of shares of Bank Common Stock to be held in trust under the RRP. Awards are nontransferable and nonassignable. Awards vest on a five-year schedule at a rate of 20% per year beginning one year after the effective date of the award. Awards will be 100% vested upon termination of employment due to death or disability. In the event that an employee terminates employment or a director ceases to serve with the Bank for any reason other than death or disability, the employee's or director's nonvested awards will be forfeited. When shares become vested in accordance with the RRP, the participants will recognize income equal to the fair market value of the Common Stock at that time. The amount of income recognized by the participants will be a deductible expense for the tax purposes of the Bank. Prior to vesting, recipients of awards may direct the voting of the shares allocated to them. Unallocated shares will be voted by the RRP trustees. Earned shares are distributed to recipients as soon as practicable following the day on which they are earned. Pension Plan. The Bank participates in a multiemployer defined benefit plan ("Pension Plan"). Employees who have one year of service and who have reached age 21 are eligible to participate in the Pension Plan. They are 100% vested after five years of service. Employees are entitled to a normal retirement benefit at age 65 equal to 2% times years of benefit service times the average annual salary (as defined) for the five consecutive years of highest salary during benefit service, with annual 1% adjustments for retirees who attain age 66 and older. The Pension Plan also provides for early retirement benefits (commencing as early as age 45), disability retirement benefits and death benefits. Contributions are actuarially determined. The Bank makes all contributions to the Pension Plan. Benefits received pursuant to the Pension Plan are not subject to any deduction for social security or other offset amounts. Due to changes enacted under the Tax Reform Act of 1986, qualified pension plans require benefit accruals for any active employee working beyond age 65 with respect to service completed on or after July 1, 1988. Internal Revenue Service interpretations require retroactive credit for the period between age 65 and July 1, 1988. As a result, the Bank has accrued an unfunded liability of $87,005, $139,843 and $192,681 as of June 30, 1997, 1996 and 1995, respectively, to provide for prior service credit to its eligible employees. Pension expense was $128,785, $156,013, and $173,889, for the years ended June 30, 1997, 1996 and 1995, respectively. The Bank expects that the pension plan will be terminated as of December 31, 1997. The following table illustrates annual pension benefits at age 65 under the Pension Plan at various levels of compensation and years of service, assuming 100% vesting of benefits. All retirement benefits illustrated in the table below are without regard to any Social Security benefits to which a participant might be entitled. Mr. Haseltine has 13 years of service under the plan. 77
Year of Service ----------------------------------------------------------------------------------------------------- 5 Year Average Salary 5 10 15 20 25 30 35 - --------------- ------------- ------------ ------------ ------------ ------------ ------------ ----------- $20,000 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 40,000 4,000 8,000 12,000 16,000 20,000 24,000 28,000 60,000 6,000 12,000 18,000 24,000 30,000 36,000 42,000 80,000 8,000 16,000 24,000 32,000 40,000 48,000 56,000 100,000 10,000 20,000 30,000 40,000 50,000 60,000 70,000 125,000 12,500 25,000 37,500 50,000 62,500 75,000 87,500
Stock Option Plan. The Bank's Board of Directors adopted the 1994 stock option plan ("1994 Option Plan"). Pursuant to the Option Plan, 97,237 shares, 10% of the Bank Common Stock issued to the public in the formation of the Mutual Holding Company, are reserved for future issuance by the Bank upon exercise of stock options to be granted to directors and employees of the Bank from time to time under the 1994 Option Plan. The purpose of the 1994 Option Plan is to provide additional incentive to certain directors, officers and employees by facilitating their purchase of a stock interest in the Bank. Options have been granted at the Bank Common Stock's fair market price on the date of the grant. All options are exercisable in five equal annual installments commencing one year after the effective date of the Option Grant, provided that all options will be 100% exercisable in the event the optionee terminates his or her employment due to death or disability. The Option Plan provides for a term of ten years, after which no awards may be made, unless earlier terminated by the Board of Directors pursuant to the Option Plan. The Option Plan is administered by a committee of at least three non-employee directors of the Bank, who are appointed by the Bank's Board of Directors (the "Option Committee"). An optionee will not be deemed to have received taxable income upon grant or exercise of any incentive stock option, provided that such shares are not disposed of by the optionee for at least one year after the date of exercise and two years after the date of grant. No compensation deduction may be taken by the Bank as a result of the grant or exercise of incentive stock options.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE Aggregated Option/SAR Exercises in Last Fiscal Year, and FY-End Option/SAR Values --------------------------------------------------------------------------------- Number of Securities Underlying Value of Unexercised Unexercised Options In-The-Money Options at FY-End (#) at FY-End ($)(1) Shares Acquired Name on Exercise (#) Value Realized($)(1) Exercisable/Unexercisable Exercisable/Unexercisable - ---- --------------- -------------------- ------------------------- ------------------------- James E. Haseltine -- -- 1,912 / 7,649 9,809 / 39,239
- ------------------ (1) Market value of the underlying securities based upon a June 30, 1997 closing stock price of $16.75, minus the exercise price of $11.62 per share. 78 Employment Agreements The Bank intends to enter into employment agreements with James E. Haseltine, President and Chief Executive Officer and other executive officers of the Bank. Mr. Haseltine's salary under the employment agreement will be based on his then current salary. Mr. Haseltine's employment agreement will be for a term of three years. The agreements will be terminable by the Bank for "just cause" as defined in the agreements. If the Bank terminates the employee without just cause, the employee will be entitled to a continuation of the employee's salary from the date of termination through the remaining term of the agreement. Mr. Haseltine's employment agreement will contain a provision stating that in the event of the termination of employment in connection with any future change in control of the Bank, as defined in the agreement, Mr. Haseltine will be paid in a lump sum an amount equal to 2.99 times Mr. Haseltine's five year average annual taxable compensation. In addition, the Bank intends to enter into employment agreements with eight other officers, which will provide a severance payment upon termination without just cause in the event of a change in control, as defined in the agreements. The agreements may be renewed annually by the Board of Directors upon a determination of satisfactory performance within the Board's sole discretion. Employee Stock Ownership Plan. The Bank has established an employee stock ownership plan (the "ESOP") for the exclusive benefit of its participating employees, to be implemented upon the completion of the conversion. Participating employees are employees who have completed one year of service with the Bank or its subsidiary and have attained the age of 21. An application for a letter of determination as to the tax-qualified status of the ESOP will be submitted to the IRS. Although no assurances can be given, it is expected that the ESOP will receive a favorable letter of determination from the IRS. The ESOP is to be funded by contributions made by the Bank in cash or common stock. Benefits may be paid either in shares of the common stock or in cash. In accordance with the Plan, the ESOP may borrow funds with which to acquire up to 8% of the Conversion Stock to be issued in the Offerings (excluding exchanged shares). The ESOP intends to borrow funds from the Company. The loan is expected to be for a term of ten years at an annual interest rate equal to the prime rate as published in The Wall Street Journal. Presently it is anticipated that the ESOP will purchase up to 8% of the Conversion Stock to be issued in the Offerings (i.e., $2,640,000, based on the midpoint of the Offering Range). The loan will be secured by the shares purchased and earnings of ESOP assets. Shares purchased with such loan proceeds will be held in a suspense account for allocation among participants as the loan is repaid. The Company anticipates contributing approximately $264,000 annually (based on a $2,640,000 purchase) to the ESOP to meet principal obligations under the ESOP loan, as proposed. It is anticipated that all such contributions will be tax-deductible. This loan is expected to be fully repaid in approximately 10 years. Shares sold above the maximum of the Offering Range (i.e., more than 3,795,000 shares) may be sold to the ESOP before satisfying remaining unfilled orders of Eligible Account Holders to fill the ESOP's subscription, the ESOP may purchase some or all of the shares covered by its subscription after the conversion in the market or may be issued previously authorized but unissued shares. Contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of total compensation. All participants must be employed at least 1,000 hours in a plan year, or have terminated employment following death, disability or retirement, in order to receive an allocation. Participant benefits become 100% vested in plan allocations after completion of five years of service. Employment prior to the adoption of the ESOP shall be credited for the purposes of vesting. Vesting will be accelerated upon retirement, death, disability, change in control of the 79 Company, or termination of the ESOP. Forfeitures will be reallocated to participants on the same basis as other contributions in the plan year. Benefits may be payable in the form of a lump sum upon retirement, death, disability or separation from service. Contributions by the Bank to the ESOP are discretionary and may cause a reduction in other forms of compensation. Therefore, benefits payable under the ESOP cannot be estimated. The board of directors has appointed non-employee directors to the ESOP Committee to administer the ESOP and to serve as the initial ESOP Trustees. The board of directors or the ESOP Committee may instruct the ESOP Trustees regarding investments of funds contributed to the ESOP. The ESOP Trustees must vote all allocated shares held in the ESOP in accordance with the instructions of the participating employees. Unallocated shares and allocated shares for which no timely direction is received will be voted by the ESOP Trustees as directed by the board of directors or the ESOP Committee, subject to the Trustees' fiduciary duties. Transactions with Certain Related Persons Loans made to a director or executive officer in excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank provides loans to its officers, directors, and employees to purchase or refinance personal residences, as well as consumer loans. Loans made to officers, directors and executive officers are made in the ordinary course of business on the same terms and conditions as would be made to any other customer in the ordinary course of business. Prior to August 1989, all employees, officers and directors were eligible for accommodations as to origination and application fees. This practice was eliminated in 1989, as to directors and executive officers. Set forth below is certain information as of June 30, 1997, as to loans in excess of $60,000 made by the Bank to each of its directors and executive officers and affiliates of directors and executive officers.
Original Largest Name of Officer Date Loan Balance at Balance Since Interest Loan or Director Originated Amount June 30, 1997 July 1, 1996 Rate Type - -------------------- ---------------- ------------- -------------------- ------------------ ------------ -------------- James E. Haseltine March, 1987 $90,000 $64,935 $67,041 8.000% Real Estate Jerry F. Graham May, 1993 71,600 66,450 67,487 7.500 Real Estate Kevin M. Bell August, 1992 84,000 78,974 79,945 8.375 Real Estate
The Bank intends that all transactions between the Bank and its executive officers, directors, holders of 10% or more of the shares of any class of its Common Stock and affiliates thereof, will contain terms no less favorable to the Bank than could have been obtained by it in arm's-length negotiations with unaffiliated persons and will be approved by a majority of independent outside directors of the Bank not having any interest in the transaction. 80 Beneficial Ownership of Bank Common Stock The following table includes, as of June 30, 1997, certain information as to Bank Common Stock beneficially owned by (i) the only persons or entities, including any "group" as that term is used in Section 13(d)(3) of the Exchange Act, who or which was known to the Bank to be the beneficial owner of more than 5% of the issued and outstanding Bank Common Stock, (ii) the directors of the Bank and (iii) all directors and executive officers of the Bank as a group. For the anticipated ownership of the Common Stock by directors and executive officers of the Company and the Bank upon consummation of the Conversion and Reorganization, see "- Proposed Subscriptions by Directors and Executive Officers."
Amount and Nature of Percent of Name of Beneficial Owner or Beneficial Ownership as of Bank Common Number of Persons in Group June 30, 1997 (1)(2) Stock -------------------------- -------------------- ----- Guaranty Federal Bancshares, M.H.C. 2,152,635 (3) 68.9% Jack L. Barham 6,935 (5) 0.2 James E. Haseltine 22,843 (4)(5) 0.7 Wayne V. Barnes 21,945 (5) 0.7 George L. Hall 3,445 (5) 0.1 Ivy L. Rogers 3,945 (5) 0.1 Gary Lipscomb 14,445 (5) 0.5 All directors and executive officers as a group (14 persons) 97,306 (6) 3.1%
81 - --------------- (1) For purposes of this table, pursuant to rules promulgated under the Exchange Act, an individual is considered to beneficially own shares of Bank Common Stock if he or she directly or indirectly has or shares (1) voting power, which includes the power to vote or to direct the voting of the shares; or (2) investment power, which includes the power to dispose or direct the disposition of the shares. Unless otherwise indicated, a director has sole voting power and sole investment power with respect to the indicated shares. Shares which are subject to stock options which are exercisable within 60 days of June 30, 1997, are deemed to be outstanding for the purpose of computing the percentages of common stock beneficially owned by the respective individuals and group. (2) Includes shares of Bank Common Stock which have been awarded to the individual under the 1994 RRP which are subject to forfeiture. (3) Guaranty Federal Bancshares, M.H.C. is the mutual holding company of Guaranty Federal. The shares of Bank Common Stock held by the MHC are to be canceled in connection with the Conversion and Reorganization. (4) Includes 1,912 shares that Mr. Haseltine has the right to acquire within 60 days through the exercise of options. (5) Includes all shares granted to the individual under the RRP regardless of whether such shares have vested for that individual as a grant recipient is entitled to vote shares granted to that recipient. Excludes shares of Common Stock held by the RRP that have not been granted to the individual who serves as a trustee of the RRP. Such individual disclaims beneficial ownership with respect to such shares held in a fiduciary capacity. The trustees vote all shares granted but not voted in the same proportion as unvested shares that have been awarded and voted by grant recipients. (6) Includes in the case of all directors and executive officers of Guaranty Federal as a group, options to purchase 8,814 shares that are exercisable within 60 days. Also includes, in the case of all directors and executive officers of Guaranty Federal as a group, shares held in the 1994 RRP which may be voted by the officer or director pending distribution to that officer or director. Proposed Subscriptions by Directors and Executive Officers The following table sets forth, for each of the Bank's directors and executive officers and for all of the directors and executive officers as a group, (1) the number of Exchange Shares to be held upon consummation of the Conversion and Reorganization, based upon their beneficial ownership of Bank Common Stock as of June 30, 1997; (assuming an Exchange Ratio of 1.4443); (2) the proposed purchases of Conversion Stock; and (3) the total amount of Common Stock to be held upon consummation of the Conversion and Reorganization, in each case assuming that 3,300,000 shares of Conversion Stock are sold, which is the midpoint of the Offering Range. 82
Proposed Purchases of Total Common Conversion Stock Stock to be Held --------------------------- -------------------------------- Number of Exchange Shares to be Number of Number of Percentage Name Held (1) Amount Shares Shares(2) of Total - -------------------------------------- ------------ ------ ------ ---------------- ----------- Jack L. Barham........................ 7,769 $150,000 15,000 22,769 0.5% James E. Haseltine (2)................ 26,569 50,000 5,000 31,569 0.7 Wayne V. Barnes....................... 29,447 10,000 1,000 30,447 0.6 George L. Hall........................ 2,728 10,000 1,000 3,728 -- (3) Ivy L. Rogers......................... 3,450 30,000 3,000 6,450 0.1 Gary Lipscomb......................... 18,615 75,000 7,500 26,115 0.6 William B. Williams................... 315 100,000 10,000 10,315 0.2 Bruce Winston......................... 7,734 130,000 13,000 20,734 0.4 Carla J. Green........................ 1,516 -- -- 1,516 -- (3) Jerry F. Graham....................... 1,296 5,000 500 1,796 -- (3) Larry Cruzan.......................... 1,181 5,000 500 1,681 -- (3) Kevin M. Bell......................... -- 10,000 1,000 1,000 -- (3) Dana A. Elwell........................ -- 20,000 2,000 2,000 -- (3) E. Lorene Thomas...................... 841 5,000 500 1,341 -- (3) --------- -------- ------- -------- ---- All Directors and Executive Officers as a Group (14 Persons) 101,461 $600,000 60,000 161,461 3.4% ======= ======= ====== ======= ====
- ---------------------- (1) Assumes that no outstanding options have been exercised prior to the Exchange. The Company is not aware of any director or executive officer who intends to exercise outstanding options prior to the Exchange. For purposes of the calculation, the Exchange Ratio used does not reflect the exercise of any options. If options were to be exercised prior to the Exchange, the actual exchange ratio would be slightly lower and the number of exchange shares would be slightly higher. (2) Depending on the actual Exchange Ratio, an individual will be unable to purchase any shares in the Offerings if those purchases would result in ownership that exceeds the purchase limitations. See "The Conversion and Reorganization - Limitations on Common Stock Purchases and Ownership." Individuals unable to purchase shares in the Offerings may purchase shares in the open market upon completion of the Conversion and Reorganization. (3) Less than 0.1%. 83 THE CONVERSION AND REORGANIZATION The Boards of Directors of the Mutual Holding Company, the Bank and the Company have approved the Plan of Conversion, as has the OTS, subject to approval by the members of the Mutual Holding Company and the stockholders of the Bank entitled to vote on the matter and the satisfaction of certain other conditions. Such OTS approval, however, does not constitute a recommendation or endorsement of the Plan by such agency. General The Boards of Directors of the Mutual Holding Company and the Bank adopted the Plan as of May 20, 1997. The Plan has been approved by the OTS, subject to, among other things, approval of the Plan by the Members of the Mutual Holding Company and the Public Stockholders of the Bank. The Members' Meeting and the Stockholders' Meeting have been called for this purpose on __________ ___, 1997. The following is a brief summary of pertinent aspects of the Plan and the Conversion and Reorganization. The summary is qualified in its entirety by reference to the provisions of the Plan, which is available for inspection at each branch office of the Bank and at certain offices of the OTS. The Plan also is filed as an exhibit to the Registration Statement of which this Prospectus is a part, copies of which may be obtained from the SEC. See "Additional Information." Purposes of the Conversion and Reorganization The Mutual Holding Company, as a federally chartered mutual holding company, does not have stockholders and has no authority to issue capital stock. As a result of the Conversion and Reorganization, the Company will be structured in the form used by holding companies of commercial banks, many business entities and a growing number of savings institutions. An important distinction between the mutual holding company form of organization and the fully public form is that, by regulation, a mutual holding company must always own over 50% of the common stock of its savings institution subsidiary. Only a minority of the subsidiary's outstanding stock can be sold to investors. If Guaranty Federal had undertaken a full conversion to public ownership in 1995, a much greater amount of Bank Common Stock would have been offered, resulting in more stock offering proceeds than management believes could have been effectively deployed at the time. Through the Conversion and Reorganization, the Company and the Bank will complete the transition to full public ownership. The stock holding company form of organization will provide the Company with the ability to diversify the Company's and the Bank's business activities through acquisition of or mergers with both stock savings institutions and commercial banks, as well as other companies. Although there are no current arrangements, understanding or agreements regarding any such opportunities, the Company will be in a position after the Conversion and Reorganization, subject to regulatory limitations and the Company's financial position, to take advantage of any such opportunities that may arise. The Conversion and Reorganization will be important to the future growth and performance of the organization by providing a larger capital base to support the operations of the Bank and the Company and by enhancing their future access to capital markets, ability to diversify into other financial services related activities, and ability to provide services to the public. The Conversion and Reorganization will result in increased funds being available for lending purposes, greater resources for expansion of services, and better opportunities for attracting and retaining qualified personnel. Although the Bank currently has 84 the ability to raise additional capital through the sale of additional shares of Bank Common Stock, that ability is limited by the mutual holding company structure which, among other things, requires that the Mutual Holding Company hold a majority of the outstanding shares of Bank Common Stock. The Conversion and Reorganization also will result in an increase in the number of outstanding shares of Common Stock following the Conversion and Reorganization, as compared to the number of outstanding shares of Public Bank Shares prior to the Conversion and Reorganization, which will increase the likelihood of the development of an active and liquid trading market for the Common Stock. See "Market for Common Stock." An additional benefit of the Conversion and Reorganization will be an increase in the accumulated earnings and profits of the Bank for federal income tax purposes. When the Bank in its mutual form transferred substantially all of its assets and liabilities to the Bank in connection with the MHC Reorganization, its accumulated earnings and profits tax attribute was not able to be transferred to the Bank. Accordingly, this tax attribute was retained by the Bank in its mutual form when it converted its charter to that of a mutual holding company, even though the underlying retained earnings were transferred to the Bank. The Conversion and Reorganization has been structured to re-unite the accumulated earnings and profits tax attribute retained by the Mutual Holding Company in the MHC Reorganization with the retained earnings of the Bank by merging the Mutual Holding Company with and into the Bank in a tax-free reorganization. This transaction will increase the Bank's ability to pay dividends to the Company in the future. At the same time, the issues regarding a mutual holding company's ability to waive dividends and the effect of any waiver that may occur will be removed as a result of the elimination of the mutual holding company structure. See "Dividend Policy." In light of the foregoing, the Boards of Directors of the Bank and the Mutual Holding Company believe that the Conversion and Reorganization is in the best interests of such companies and their respective stockholders and members. Description of the Conversion and Reorganization On May 20, 1997, the Boards of Directors of the Bank and the Mutual Holding Company adopted the Plan and in September 1997 the Bank incorporated the Company under Delaware law as a first-tier wholly owned subsidiary of the Bank. Pursuant to the Plan, (i) the Mutual Holding Company will convert to an interim Federal stock savings bank and simultaneously will merge with and into the Bank, pursuant to which the Mutual Holding Company will cease to exist and the shares of Bank Common Stock held by the Mutual Holding Company will be canceled, and (ii) a second interim savings institution ("Interim") formed by the Company solely for such purpose will then merge with and into the Bank. As a result of the merger of Interim with and into the Bank, the Bank will become a wholly owned subsidiary of the Company and the Public Bank Shares will be converted into the Exchange Shares pursuant to the Exchange Ratio, which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Common Stock to be outstanding upon the completion of the Conversion and Reorganization (i.e., the Common Stock and the Exchange Shares) as the percentage of Bank Common Stock owned by them in the aggregate immediately prior to consummation of the Conversion and Reorganization, adjusted downward pursuant to OTS policy requiring the Exchange Ratio to reflect the market value of assets held by the Mutual Holding Company, but before giving effect to (a) the payment of cash in lieu of issuing fractional Exchange Shares and (b) any shares of Common Stock purchased by the Bank's Public Stockholders in the Offerings or the ESOP thereafter. Pursuant to OTS regulations, consummation of the Conversion and Reorganization (including the offering of Conversion Stock in the Offerings, as described below) is conditioned upon the approval of 85 the Plan by (1) the OTS, (2) at least a majority of the total number of votes eligible to be cast by Members of the Mutual Holding Company at the Members' Meeting, and (3) holders of at least two-thirds of the shares of the outstanding Bank Common Stock at the Stockholders' Meeting. In addition, the Primary Parties have conditioned the consummation of the Conversion and Reorganization on the approval of the Plan by at least a majority of the votes cast, in person or by proxy, by the Public Stockholders at the Stockholders' Meeting. Effects of the Conversion and Reorganization General. Prior to the Conversion and Reorganization, each depositor in the Bank has both a deposit account in the institution and a pro rata ownership interest in the net worth of the Mutual Holding Company based upon the balance in his account, which interest may only be realized in the event of a liquidation of the Mutual Holding Company. However, this ownership interest is tied to the depositor's account and has no tangible market value separate from such deposit account. A depositor who reduces or closes his account receives a portion or all of the balance in the account but nothing for his ownership interest in the net worth of the Mutual Holding Company, which is lost to the extent that the balance in the account is reduced. Consequently, the depositors of the Bank normally have no way to realize the value of their ownership interest in the Mutual Holding Company, which has realizable value only in the unlikely event that the Mutual Holding Company is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of the Mutual Holding Company after other claims are paid. Upon consummation of the Conversion and Reorganization, permanent nonwithdrawable capital stock will be created to represent the ownership of the net worth of the Company. The Common Stock of the Company is separate and apart from deposit accounts and cannot be and is not insured by the FDIC or any other governmental agency. Certificates are issued to evidence ownership of the permanent stock. The stock certificates are transferable, and therefore, the stock may be sold or traded if a purchaser is available with no effect on any account the seller may hold in the Bank. Continuity. While the Conversion and Reorganization is being accomplished, the normal business of the Bank of accepting deposits and making loans will continue without interruption. The Bank will continue to be subject to regulation by the OTS and the FDIC. After the Conversion and Reorganization, the Bank will continue to provide services for depositors and borrowers under current policies by its present management and staff. The directors and officers of the Bank at the time of the Conversion and Reorganization will continue to serve as directors and officers of the Bank after the Conversion and Reorganization. The directors and executive officers of the Company consist of individuals currently serving as directors and executive officers of the Mutual Holding Company and the Bank, and they generally will retain their positions in the Company after the Conversion and Reorganization. Effect on Public Bank Shares. Upon consummation of the Conversion and Reorganization, the Public Bank Shares shall be converted into Common Stock based upon the Exchange Ratio without any further action on the part of the holder thereof. Upon surrender of the Public Bank Shares, Common Stock will be issued in exchange for such shares. See "- Delivery and Exchange of Certificates." Upon consummation of the Conversion and Reorganization, the Public Stockholders of the Bank, a federally chartered savings bank, will become stockholders of the Company, a Delaware-chartered 86 corporation. For a description of certain changes in the rights of stockholders as a result of the Conversion and Reorganization, see "Comparison of Stockholders' Rights." Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at the time of the Conversion and Reorganization will automatically continue as a depositor after the Conversion and Reorganization, and each such deposit account will remain the same with respect to deposit balance, interest rate and other terms, except to the extent that funds in the account are withdrawn to purchase Conversion Stock to be issued in the Offerings. Each such account will continue to be insured by the FDIC to the same extent as before the Conversion and Reorganization. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts. Effects on Loans. No loan outstanding from the Bank will be affected by the Conversion and Reorganization, and the amount, interest rate, maturity and security for each loan will remain as they were contractually fixed prior to the Conversion and Reorganization. Effect on Voting Rights of Members. At present, all depositors and certain borrowers of the Bank are members of, and have voting rights in, the Mutual Holding Company as to all matters requiring membership action. Upon completion of the Conversion and Reorganization, depositors and borrowers will cease to be members and will no longer be entitled to vote at meetings of the Mutual Holding Company. Upon completion of the Conversion and Reorganization, all voting rights in the Bank will be vested in the Company as the sole stockholder of the Bank. Exclusive voting rights with respect to the Company will be vested in the holders of Common Stock. Depositors of and borrowers from the Bank will not have voting rights in the Company after the Conversion and Reorganization, except to the extent that they become stockholders of the Company. Tax Effects. Consummation of the Conversion and Reorganization is conditioned on prior receipt by the Primary Parties of rulings or opinions with regard to federal and Missouri income taxation which indicate that the adoption and implementation of the Plan of Conversion set forth herein will not be taxable for federal or Missouri income tax purposes to the Primary Parties or the Bank's Eligible Account Holders, Supplemental Eligible Account Holders or Other Members, except as discussed below. See "- Tax Aspects" below and "Risk Factors." Effect on Liquidation Rights. If the Mutual Holding Company were to liquidate, all claims of the Mutual Holding Company's creditors would be paid first. Thereafter, if there were any assets remaining, members of the Mutual Holding Company would receive such remaining assets, pro rata, based upon the deposit balances in their deposit accounts at the Bank immediately prior to liquidation. In the unlikely event that the Bank were to liquidate after the Conversion and Reorganization, all claims of creditors (including those of depositors, to the extent of the deposit balances) also would be paid first, followed by distribution of the "liquidation account" to certain depositors (see "- Liquidation Rights" below), with any assets remaining thereafter distributed to the Company as the holder of the Bank's capital stock. Pursuant to the rules and regulations of the OTS, a merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation for this purpose and, in such a transaction, the liquidation account would be required to be assumed by the surviving institution. Effect on Existing Compensation Plans. Under the Plan, the 1994 Option Plan and the 1994 RRP will become benefit plans of the Company and shares of Common Stock will be issued (or reserved for issuance) pursuant to such benefit plans instead of shares of Bank Common Stock. As of June 30, 1997, 80.8% of the options available for grant under the 1994 Option Plan had been granted but options for 78,556 shares had not yet been exercised. As of June 30, 1997, 88.6% of the shares of Bank Common 87 Stock purchased by the 1994 RRP had been allocated. See "Management of the Bank - - Certain Benefits - 1994 Stock Option Plan" and "- 1994 Recognition and Retention Plan." The Offerings Subscription Offering. In accordance with the Plan of Conversion, rights to subscribe for the purchase of Conversion Stock have been granted under the Plan of Conversion to the following persons in the following order of descending priority: (1) Eligible Account Holders; (2) the ESOP; (3) Supplemental Eligible Account Holders; and (4) Other Members. All subscriptions received will be subject to the availability of Conversion Stock after satisfaction of all subscriptions of all persons having prior rights in the Subscription Offering and to the maximum and minimum purchase limitations set forth in the Plan of Conversion and as described below under "- Limitations on Common Stock Purchases and Ownership." Eligible Account Holders (First Priority). Each Eligible Account Holder will receive, without payment therefor, first priority, nontransferable subscription rights to subscribe for in the Subscription Offering up to the greater of (i) the maximum purchase limitation established for the Community Offering and/or Syndicated Community Offering, (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, or (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock offered in the Subscription Offering by a fraction, of which the numerator is the amount of the Qualifying Deposits of the Eligible Account Holder and the denominator is the total amount of all Qualifying Deposits of all Eligible Account Holders, subject to the overall purchase limitations and the overall ownership limitation. See "- Limitations on Common Stock Purchases and Ownership." If there are not sufficient shares available to satisfy all subscriptions, shares first will be allocated so as to permit each subscribing Eligible Account Holder to purchase a number of shares sufficient to make such person's total allocation equal to the lesser of the number of shares subscribed for or 100 shares. Thereafter, unallocated shares will be allocated to subscribing Eligible Account Holders whose subscriptions remain unfilled in the proportion that the amounts of their respective eligible deposits bear to the total amount of eligible deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled, provided that no fractional shares shall be issued. The subscription rights of Eligible Account Holders who are also directors or officers of the Mutual Holding Company or the Bank and their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits in the year preceding December 31, 1995. ESOP (Second Priority). The ESOP will receive, without payment therefore, second priority, nontransferable subscription rights to purchase, in the aggregate, up to 8% of the Conversion Stock within the Offering Range, including any increase in the number of shares of Conversion Stock after the date hereof as a result of an increase of up to 15% in the maximum of the Offering Range. The ESOP currently intends to purchase 8% of the shares of Conversion Stock, or 264,000 shares based on the midpoint of the Offering Range. Subscriptions by the ESOP will not be aggregated with shares of Conversion Stock purchased directly by or which are otherwise attributable to any other participants in the Offerings, including subscriptions of any of the Bank's directors, officers, employees or associates thereof. See "Management of the Bank - Certain Benefits - Employee Stock Ownership Plan." The right of the ESOP to subscribe for Conversion Stock is subordinate to the rights of Eligible Account Holders. However, solely in the event the Offerings result in the sale of Conversion Stock in an amount greater than the maximum of the Offering Range (up to 15% greater), the ESOP has a 88 priority, higher than that of Eligible Account Holders, to satisfy its subscription from the amount of Conversion Stock issued that exceeds the maximum of the Offering Range. In the event that there are insufficient shares for the ESOP to purchase 8% of the Conversion Stock within the Offering Range, the Company may issue additional shares of Conversion Stock directly to the ESOP at the Purchase Price to satisfy the ESOP's order to purchase such amount of Conversion Stock in the Offerings and/or the ESOP may purchase shares of Conversion Stock in the open market. Purchases of additional shares of Common Stock from the Company would dilute the interests of other stockholders. See "- Limitations on Conversion Stock Purchases and Ownership" and "Risk Factors Possible Dilutive Effect of Issuance of Additional Shares." Supplemental Eligible Account Holders (Third Priority). Each Supplemental Eligible Account Holder will receive, without payment therefor, third priority, nontransferable subscription rights to subscribe for in the Subscription Offering up to the greater of (i) the maximum purchase limitation established for the Community Offering and/or Syndicated Community Offering, (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, or (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock offered in the Subscription Offering by a fraction, of which the numerator is the amount of the Qualifying Deposits of the Supplemental Eligible Account Holder and the denominator is the total amount of all Qualifying Deposits of all Supplemental Eligible Account Holders, subject to the overall purchase limitation, the overall ownership limitations, and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders and the ESOP. See "- Limitations on Conversion Stock Purchases and Ownership." If there are not sufficient shares available to satisfy all subscriptions, shares first will be allocated so as to permit each subscribing Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his total allocation equal to the lesser of the number of shares subscribed for or 100 shares. Thereafter, unallocated shares may be allocated to subscribing preferred Supplemental Eligible Account Holders whose subscriptions remain unfilled in the proportion that the amounts of their respective eligible deposits bear to the total amount of eligible deposits of all such subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled, provided that no fractional shares shall be issued. Other Members (Fourth Priority). To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders, each Other Member will receive, without payment therefor, fourth priority, nontransferable subscription rights to subscribe for Conversion Stock in the Subscription Offering up to the greater of (i) the maximum purchase limitation established for the Community Offering and/or Syndicated Community Offering) or (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, in each case subject to the overall purchase limitation, the overall ownership limitation, and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders, the ESOP, and Supplemental Eligible Account Holders. See "- Limitations on Common Stock Purchases and Ownership." In the event the Other Members subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders, is in excess of the total number of shares of Conversion Stock offered in the Subscription Offering, shares first may be allocated so as to permit each subscribing Other Member to purchase a number of shares sufficient to make his total equal to the lesser of the number of shares subscribed for or 100 shares. Thereafter, any remaining shares may be allocated among subscribing Other Members 89 on a pro rata basis in the proportion that each such Other Member's subscription bears to the total subscriptions of all subscribing Other Members, provided that no fractional shares shall be issued. Expiration Date for the Subscription Offering. The Subscription Offering will expire at 12:00 p.m.., Missouri Time, on ______________ _____, 1997, unless extended for up to 45 days or such additional periods by the Primary Parties with the approval of the OTS. Such extensions may not be extended by _____________ _____, 199_. Subscription rights that have not been exercised prior to the Expiration Date will become void. The Primary Parties will not execute orders until at least the minimum number of shares of Common Stock (3,998,709 shares) have been subscribed for or otherwise sold. If all shares have not been subscribed for or sold within 45 days after the Expiration Date, unless such period is extended with the consent of the OTS, all funds delivered to the Bank pursuant to the Subscription Offering will be returned promptly to the subscribers with interest and all withdrawal authorizations will be canceled. If an extension beyond the 45-day period following the Expiration Date is granted, the Primary Parties will notify subscribers of the extension of time and of any rights of subscribers to modify or rescind their subscriptions. Public Stockholders Offering. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, each Public Stockholder as of the Stockholder Voting Record Date, __________ ___, 199_____, may submit orders for Conversion Stock in the Offerings up to the maximum purchase limitation established for the Community Offering and/or Syndicated Community Offering, subject to the overall purchase and ownership limitations and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders. See "- Limitations on Conversion Stock Purchases and Ownership." In the event the Public Stockholders as of the Stockholder Voting Record Date submit orders for a number of shares which, when added to the shares subscribed for by Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, Other Members and directors, officers and employees of the Mutual Holding Company and the Bank, is in excess of the total number of shares of Conversion Stock offered in the Offerings, available shares will be allocated among Public Stockholders as of the Stockholder Voting Record Date whose orders are accepted on a pro rata basis in the same proportion as each Public Stockholder's order bears to the total orders of all Public Stockholders, provided that no fractional shares shall be issued. The opportunity to submit orders for shares of Conversion Stock in the Public Stockholders Offering category is subject to the right of the Primary Parties, in their sole discretion, to accept or reject any such orders in whole or in part for any reason either at the time of receipt of an order or as soon as practicable following the completion of the Public Stockholders Offering. It should be noted that Public Stockholders do not have subscription rights with respect to the Conversion and Reorganization. Community Offering. To the extent that shares remain available for purchase after satisfaction of all subscriptions Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, and Other Members and orders of Public Stockholders, the Primary Parties have determined to offer shares pursuant to the Plan to certain members of the general public, with preference given to the natural persons residing in the Local Community (such natural persons referred to as "Preferred Subscribers"). Such persons, together with any associate or group of persons acting in concert, may purchase $250,000 90 of Common Stock, subject to the overall purchase and ownership limitations. See "- Limitations on Common Stock Purchases and Ownership." This amount may be increased at the sole discretion of the Primary Parties. The opportunity to submit orders for shares of Conversion Stock in the Community Offering category is subject to the right of the Primary Parties, in their sole discretion, to accept or reject any such orders in whole or in part for any reason either at the time of receipt of an order or as soon as practicable following the completion of the Community Offering. If there are not sufficient shares available to fill the orders of Preferred Subscribers, available shares of stock will be allocated first to each Preferred Subscriber whose order is accepted by the Primary Parties, in an amount equal to the lesser of 100 shares or the number of shares ordered by each such Preferred Subscriber, if possible. Thereafter, unallocated shares will be allocated among the Preferred Subscribers whose orders remain unsatisfied in the same proportion that the unfilled order of each bears to the total unfilled orders of all Preferred Subscribers whose order remains unsatisfied. If the orders of Preferred Subscribers are filled, and there are shares remaining, shares will be allocated to other members of the general public who submit orders in the Community Offering applying the same allocation described above for Preferred Subscribers. Syndicated Community Offering. The Plan provides that, if feasible, all shares of Conversion Stock not purchased in the Subscription, Public Stockholders and Community Offerings may be offered for sale to the general public in a Syndicated Community Offering through a syndicate of registered broker-dealers to be formed or through an underwritten public offering. No person will be permitted to subscribe in the Syndicated Community Offering for more than $250,000 of Common Stock, subject to the overall purchase and ownership limitations discussed below in "Limitations on Common Stock Purchases and Ownership." The Primary Parties have the right to reject orders in whole or part in their sole discretion in the Syndicated Community Offering. Neither the Selling Agent nor any registered broker-dealer shall have any obligation to take or purchase any shares of Common Stock in the Syndicated Offering; however, the Selling Agent has agreed to use its best efforts in the sale of shares in the Syndicated Community Offering. In the event a Syndicated Community Offering is utilized, broker-dealers will enter into selected dealers' agreements with the Selling Agent and will be entitled to commissions that will have previously been negotiated in an amount of up to approximately 4.5% of the aggregate Purchase Price of the Common Stock. In addition to the foregoing, if a syndicate of broker-dealers ("selected dealers") is formed to assist in the Syndicated Community Offering, the selected dealers' agreement provides that a purchaser may pay for his shares with funds held by or deposit with a selected dealer. If an order form is executed and forwarded to the selected dealer or if the selected dealer is authorized to execute the order form on behalf of a purchaser, the selected dealer is required to forward the order form and funds on behalf of a purchaser to the Bank for deposit in a segregate account on or before noon of the business day following receipt of the order form or execution of the order form by the selected dealer. Alternatively, selected dealers may solicit indications of interest from their customers to place orders for shares. Such selected dealers shall subsequently contact their customers who indicated an interest and seek their confirmation as to their intent to purchase. The selected dealer will acknowledge receipt of the order to its customer in writing on the following business day and will debit such customer's account on the third business day after the customer has confirmed his intent to purchase (the "debit date") and on or before noon of the next business day following the debit date will send funds to the Bank for deposit in a segregate account. If such alternative procedure is employed, purchasers' funds are not required to be in their accounts with selected dealers until the debit date. The Syndicated Community Offering will terminate no more that 45 days following the Expiration Date, unless extended by the Primary Parties with the approval of the OTS. See "- Stock Pricing and 91 Number of Shares to be Issued" below for a discussion of rights of subscribers, if any, in the event an extension is granted. Limitations on Common Stock Purchases and Ownership The Plan includes the following limitations on the number of shares of Common Stock that may be purchased: (1) No less than 25 shares of Conversion Stock may be purchased, to the extent such shares are available; (2) The number of shares of Conversion Stock which may be purchased by any person (or persons through a single account) in the Subscription Offering shall not exceed such number of shares of Conversion Stock that shall equal $250,000 divided by the $10 purchase price in the Subscription Offering, except for the ESOP, which in the aggregate may subscribe for up to 8% of the Conversion Stock. (3) The number of shares of Conversion Stock which may be purchased by any person, together with any associate or group of persons acting in concert, in the Public Stockholders, the Community or Syndicated Community Offerings combined shall not exceed such number of shares of Conversion Stock that shall equal $250,000 divided by the $10 purchase price in the Offerings. (4) Except for Tax-Qualified Employee Stock Benefit Plans, the maximum amount of Conversion Stock that may be purchased in all categories in the Conversion and Reorganization by any person (or persons through a single account) together with any associate or group of persons acting in concert shall not exceed such number of shares that when combined with Exchange Shares shall equal $250,000 divided by the $10 purchase price in the Offerings. (5) No more than 31.7% of the total number of shares sold in the Offerings may be purchased by directors and officers of the Mutual Holding Company and the Bank and their associates in the aggregate, excluding purchases by the ESOP. Subject to any required regulatory approval and the requirements of applicable laws and regulations, but without further approval of the Members of the Mutual Holding Company or the Stockholders of the Bank, the limitations in (2) and (3) above may be decreased, or increased up to a maximum of 5% of the total shares of Conversion Stock to be issued in the Offerings at the sole discretion of the Primary Parties. If such amounts are increased, subscribers for the maximum amount will be, and certain other large subscribers in the sole discretion of the Primary Parties may be, given the opportunity to increase their subscriptions up to the then applicable limit. In the event of an increase in the total number of shares of Conversion Stock offered in the Conversion and Reorganization due to an increase in the maximum of the Offering Range of up to 15% (the "Adjusted Maximum"), the new total number of shares will be allocated in the following order of priority in accordance with the Plan: (i) to fill the ESOP's order of up to a total of 8% of the Adjusted Maximum number of shares; (ii) in the event that there is an oversubscription by Eligible Account Holders, to fill their unfulfilled subscriptions; (iii) in the event that there is an oversubscription by Supplemental Eligible Account holders, to fill their unfulfilled subscriptions; (iv) in the event that there is an oversubscription by Other Members, to fill unfulfilled subscriptions; (v) in the event that there is an oversubscription by Public Stockholders, to fill their unfulfilled subscriptions; (vi) in the event of 92 oversubscription by Preferred Subscribers in the Community Offering, to fill their unfulfilled subscriptions; and (vii) to fill unfulfilled subscriptions in the Community Offering other than Preferred Subscribers. The term "associate", when used to indicate a relationship with any person, is defined to mean (i) a corporation or organization (other than the Mutual Holding Company, the Bank, a majority-owned subsidiary of the Bank or the Company) of which such person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, provided, however, that such term shall not include any tax-qualified employee stock benefit plan of the Company or the Bank in which such person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the Company or the Bank or any of the subsidiaries of the foregoing. The term "resident" as used herein means any person who, on the date designated for that category of subscriber in the Plan, maintained a bona fide residence within the Local Community and has manifested an intent to remain within the Local Community for a period of time. The designated dates for Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are December 31, 1995, September 30, 1997 and __________ ___, 1997, respectively. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall be within the Local Community. To the extent the person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, the circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is a bona fide resident of the Local Community. Subscribers in the Community Offering who are natural persons also will have a purchase preference if they are residents of the Local Community. In all cases, however, such determination shall be in the sole discretion of the Bank and shall be determined on a case-by-case basis without regard to prior determinations. Stock Pricing and Number of Shares to be Issued The Plan of Conversion requires that the aggregate purchase price of the Common Stock must be based on the appraised pro forma market value of the Mutual Holding Company and the Bank on a consolidated basis, as determined on the basis of an independent valuation. The Primary Parties have retained RP Financial to make such a valuation. For its services in making such an appraisal and any expenses incurred in connection therewith, RP Financial will receive $27,500 plus out of pocket expenses of up to $7,500. RP Financial will also receive a fee of $7,500 for its assistance in the preparation of the business plan. The Primary Parties have agreed to indemnify RP Financial and its employees and affiliates against certain losses (including any losses in connection with claims under the federal securities laws) arising out of its services as appraiser, except where RP Financial liability results from its negligence or bad faith. The Independent Valuation has been prepared by RP Financial in reliance upon the information contained in this Prospectus, including the financial statements. RP Financial also considered the following factors, among others: the present and projected operating results and financial condition of the Primary Parties and the economic and demographic conditions in the Bank's existing market area: certain historical, financial and other information relating to the Bank; a comparative evaluation of the operating and financial statistics of the Bank with those of other similarly situated publicly traded companies located in Missouri and other regions of the United States; the aggregate size of the offering 93 of the Common Stock; the impact of the Conversion and Reorganization on the Bank's net worth and earnings potential; the proposed dividend policy of the Company and the Bank; and the trading market for the Bank Common Stock and securities of comparable companies and general conditions in the market for such securities. On the basis of the foregoing, RP Financial has advised the Primary Parties in its opinion the estimated pro forma market value of the Bank and the Mutual Holding Company on a combined basis was $47,043,645 as of September 5, 1997. In accordance with OTS regulations, the minimum and maximum of the valuation were set at 15% below and above the valuation, respectively, resulting in a range of $39,987,098 to $54,100,192 (the "Total Valuation Range"). Because the holders of the Public Bank Shares are to hold the same aggregate percentage ownership interest in the Company as they held in the Bank just prior to consummation of the Conversion and Reorganization, adjusted downward pursuant to OTS policy requiring the Exchange Ratio to reflect the market value of assets held by the Mutual Holding Company (before giving effect to the payment of cash in lieu of issuing fractional Exchange Shares and any shares of Conversion Stock purchased the Bank's stockholders in the Offerings or issued to the ESOP thereafter), the Appraisal was multiplied by 70.15%, which is the Mutual Holding Company's percentage interest in the Bank, as adjusted upward pursuant to OTS policy requiring the Exchange Ratio to reflect the market value of assets held by the Mutual Holding Company. The resulting amount ($33,000,000) is the midpoint of the dollar amount of the Conversion Stock to be offered in the Offerings. In accordance with OTS regulations, the minimum and maximum of the offering were set at 15% below and above the midpoint, respectively, resulting in a range of $28,050,000 to $37,950,000 (the "Offering Range). The Boards of Directors of the Primary Parties determined that the Conversion Stock would be sold at $10.00 per share, resulting in a range of 2,805,000 to 3,795,000 shares of Conversion Stock being offered. Upon consummation of the Conversion and Reorganization, the Conversion Stock and the Exchange Shares will represent approximately 70.15% and 29.85% , respectively, of the Company's total outstanding shares of Common Stock. Based upon the above factors, the Public Stockholders will experience a dilution of approximately 4.1% in their ownership interest in the Company as compared to their current ownership interest in the Bank. There can be no assurances as to the impact such dilution will have on the trading price of the Bank Conversion Stock prior to the Conversion and Reorganization or the Common Stock following completion of the Conversion and Reorganization. The Boards of Directors of the Primary Parties reviewed RP Financial's appraisal report, including the methodology and the assumptions used by RP Financial and determined that the Offering Range was reasonable and adequate. However, the Boards of Directors of the Primary Parties are relying upon the expertise, experience and independence of RP Financial and are not qualified to determine the appropriateness of the assumptions or the methodology. The MHC Regulations provide that in a conversion of the Mutual Holding Company to stock form, the Public Stockholders will be entitled to exchange their Public Bank Shares for Exchange Shares, provided the Bank and the Mutual Holding Company demonstrate to the satisfaction of the OTS that the basis for the exchange is fair and reasonable. The Boards of Directors of the Bank and the Company have determined that each Public Bank Share will on the Effective Date be converted into and become the right to receive a number of Exchange Shares determined pursuant to the Exchange Ratio that ensures that after the Conversion and Reorganization, Public Stockholders will own the same aggregate percentage of Common Stock as they currently own of the Bank Common Stock, subject to an adjustment to reflect the market value of assets held by the Mutual Holding Company (before giving effect to the payment of cash in lieu of issuing fractional Exchange Shares and any shares of Common Stock purchased the Bank's stockholders in the Offerings or issued to the ESOP thereafter). Based upon such formula and the Offering Range, the Exchange Ratio ranged from a minimum of 1.2276 to a maximum of 1.6609 Exchange Shares for each Public Bank Share, with a midpoint of 1.4443. Based upon these Exchange 94 Ratios, the Company expects to issue between 1,193,709 and 1,615,019 Exchange Shares to Public Stockholders. The Offering Range and the Exchange Ratio may be amended with the approval of the OTS, if required, or if necessitated by subsequent developments in the financial condition of any of the Primary Parties or market conditions generally. In the event the Appraisal is updated to below $39,987,098 (the minimum of the Total Valuation Range) or above $62,215,221 (the maximum, as adjusted, of the Total Valuation Range), such Appraisal will be filed with the SEC by post-effective amendment. Based upon current market and financial conditions and recent practices and policies of the OTS, in the event the Company receives orders for Common Stock in excess of $37,950,000 (the maximum of the Offering Range) and up to $43,642,500 (the maximum of the Offering Range, as adjusted by 15%), the Company may be required by the OTS to accept all such orders. No assurance, however, can be made that the Company will receive orders for Common Stock in excess of the maximum of the Offering Range or that, if such orders are received, that all such orders will be accepted because the Company's final valuation and number of shares to be issued are subject to the receipt of an updated Appraisal from RP Financial which reflects such an increase in the valuation and the approval of such increase by the OTS. There is no obligation or understanding on the part of management to take and/or pay for any shares of Common Stock in order to complete the Offerings. RP Financial's valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing such shares. RP Financial did not independently verify the financial statements and other information provided by the Bank and the Mutual Holding Company, nor did RP Financial value independently the assets or liabilities of the Bank. The valuation considers the Bank and the Mutual Holding Company as going concerns and should not be considered as indication of the liquidation value of the Bank and the Mutual Holding Company. Moreover, because such valuation is necessarily based upon the estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing Conversion Stock or receiving Exchange Shares in the Conversion and Reorganization will thereafter be able to sell such shares at prices at or above the purchase price per share in the Offerings. No sale of shares of Conversion Stock or issuance of Exchange Shares may be consummated unless, prior to such consummation, RP Financial confirms that nothing of a material nature has occurred which, taking into account all relevant factors, would cause it to conclude that the aggregate Purchase Price is materially incompatible with the estimate of the pro forma market value the Mutual Holding Company and the Bank on combined basis. If such is not the case, a new Offering Range may be set, a new Exchange Ratio may be determined based upon the new Offering Range, a new Subscription, Public Stockholders, Community and/or Syndicated Community Offering may be held or such other action may be taken as the Primary Parties shall determine and the OTS may permit or require. Depending upon market or financial conditions following the commencement of the Subscription Offering, the total number of shares of Common Stock to be sold in the Offerings may be increased or decreased without a resolicitation of subscribers, provided that the product of the total number of shares times the $10.00 purchase price is not below the minimum or more than 15% above the maximum of the Offering Range (exclusive of a number of shares equal to up to an additional 8% of the Conversion Stock that may be issued to the ESOP out of authorized but unissued shares of Conversion Stock to the extent such shares are not purchased in the Offerings due to an oversubscription). In the event market or financial conditions change so as to cause the aggregate purchase price of the shares to be below the minimum of the Offering Range or more than 15% above the maximum of such range (exclusive of additional shares that may be issued to the ESOP), purchasers will be resolicited (i.e., permitted to 95 continue their orders, in which case they will need to affirmatively reconfirm their subscriptions prior to the expiration of the resolicitation offering or their subscription funds will be promptly refunded with interest at the Bank's passbook rate of interest, or be permitted to modify or rescind their subscriptions). An increase in the number of shares of Common Stock, either as a result of an increase in the Total Valuation Range or Offering Range or due to the purchase by the ESOP of authorized but unissued shares (see "The Offerings - Subscription Offering - ESOP (Second Priority)"), would decrease a subscriber's ownership interest and the Company's pro forma net income and stockholders' equity on a per share basis while increasing pro forma net income and stockholders' equity on an aggregate basis. A decrease in the number of shares of Common Stock would increase both a subscriber's ownership interest and the Company's pro forma net income and stockholders' equity on a per share basis while decreasing pro forma net income and stockholders' equity on an aggregate basis. See "Risk Factors Possible Dilutive Effect of Issuance of Additional Shares" and "Pro Forma Data." The Appraisal has been filed as an exhibit to this Registration Statement and Application for Conversion of which this Prospectus is a part and is available for inspection in the manner set forth under "Additional Information." The Exchange The Boards of Directors of the Bank and the Company have determined that each Public Bank Share will, upon consummation of the Conversion and Reorganization, be automatically converted into and become the right to receive a number of shares of Common Stock determined pursuant to a the Exchange Ratio that ensures that after the Conversion and Reorganization and before giving effect to Public Stockholders' purchases in the Offerings and receipt of cash in lieu of fractional shares or issuances to the ESOP, Public Stockholders will own an aggregate percentage of the Company's Common Stock that reflects an adjustment to the Public Stockholders' current ownership of the Bank Common Stock. The adjustment reflects the market value of assets held by the Mutual Holding Company. The adjustment in the Exchange Ratio described above would decrease the Public Stockholder's ownership interest to 29.85% from 31.12% based on the following calculation: (Pro Forma Market Value of Bank) - (Market Value of MHC Assets) --------------------------------------------------------------- Pro Forma Market Value of Bank To determine the Exchange Ratio, the adjusted Public Stockholder's ownership interest was multiplied by the number of shares to be issued in the Conversion and Reorganization, and the result was divided by the number of Public Bank Shares outstanding (972,365 shares, as adjusted as of June 30, 1997). Immediately prior to consummation of the Conversion and Reorganization, the Bank will recalculate the dilution to be experienced by Public Stockholders pursuant to the above formula, which will take into effect changes in stockholders' equity and percentage ownership through such date. The following table sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, the following: (i) the total number of shares of Common Stock and Exchange Shares to be issued in the Conversion and Reorganization, (ii) the percentage of the total Common Stock represented by the Common Stock and the Exchange Shares, and (iii) the Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing fractional Exchange Shares. 96
Conversion Stock to Exchange Shares to be Issued(1) be Issued(1) Total Shares of ------------ ------------ Common Stock Exchange Amount Percent Amount Percent to be Outstanding(1) Ratio(1) ------ ------- ------ ------- -------------------- ----------- Minimum................. 2,805,000 70.15% 1,193,709 29.85% 3,998,709 1.2276 Midpoint................ 3,300,000 70.15 1,404,364 29.85 4,704,364 1.4443 Maximum................. 3,795,000 70.15 1,615,019 29.85 5,410,019 1.6609 15% above maximum....... 4,364,250 70.15 1,857,272 29.85 6,221,522 1.9101
- -------------------- (1) Assumes that exercisable options to purchase 14,383 shares of Bank Common Stock at June 30, 1997 are not exercised prior to consummation of the Conversion and Reorganization. Assuming that all of such options are exercised prior to such consummation, the percentages represented by the Conversion Stock and the Exchange Shares would amount to 69.84% and 30.16%, respectively, and the Exchange Ratio would amount to 1.2222, 1.4379, 1.6536, and 1.9016, at the minimum, midpoint, maximum and 15% above the maximum of the Offering Range, respectively. The final Exchange Ratio will be determined based upon the number of shares issued in the Offerings and the number of shares of Bank Common Stock held by Public Stockholders just prior to consummation of the Conversion and Reorganization (adjusted downward to take into account the market value of assets held by the Mutual Holding Company) and it will not be based upon the market value of the Public Bank Shares. At the minimum, midpoint and maximum of the Offering Range, one Public Bank Share will be exchanged for 1.2276, 1.4443 and 1.6609 shares of Common Stock, respectively (which have a calculated equivalent estimated value of $12.28, $14.44 and $16.61 based on the Purchase Price of Conversion Stock in the Offerings and the aforementioned Exchange Ratios). However, there can be no assurance as to the actual market value of a share of Common Stock after the Conversion and Reorganization or that such shares can be sold at or above the $10.00 per share Purchase Price. Any increase or decrease in the number of shares of Common Stock will result in a corresponding change in the number of Exchange Shares, so that upon consummation of the Conversion and Reorganization the Conversion Stock and the Exchange Shares will represent approximately 70.15% and 29.85%, respectively, of the Company's total outstanding shares of Common Stock. Persons in Nonqualified States or Foreign Countries The Primary Parties will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for the Conversion Stock pursuant to the Plan reside. However, no person will be offered or allowed to purchase any Conversion Stock under the Plan if such person resides in a foreign country or in a state of the United States with respect to which any of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares under the Plan reside in such state or foreign country; and either (ii) the granting of subscription rights or offering or selling shares of Conversion Stock to such persons would require the Bank, the Company or its employees to register, under the securities laws of such state or foreign country, as a broker or dealer or to register or otherwise qualify its securities for sale in such state or foreign country; or (iii) such registration or qualification would be impracticable for reasons of cost or otherwise. No payments will be made in lieu of the granting of subscription rights to any such person. 97 Marketing Arrangements The Primary Parties have engaged FBR as a financial advisor and marketing agent in connection with the Offerings, and FBR has agreed to use its best efforts to solicit subscriptions and purchase orders for shares of Conversion Stock in the Offerings. FBR is a member of National Association of Securities Dealers, Inc. (the "NASD") and a broker-dealer which is registered with the SEC. FBR will provide various services including, but not limited to, (1) training and educating the Bank's employees who will be performing certain ministerial functions in the Offerings regarding the mechanics and regulatory requirements of the stock sales process; (2) coordinating the Company's sales efforts, (3) soliciting orders for Conversion Stock and (4) assisting in the solicitation of proxies of Members and Stockholders for use at the Members' Meeting and the Stockholders' Meeting, respectively. Based upon negotiations between the Primary Parties and FBR, FBR will receive a fee of $150,000. FBR also will be reimbursed for its reasonable out-of-pocket expenses (including legal fees and expenses) up to $50,000. The Primary Parties have agreed to indemnify FBR for reasonable costs and expenses (including legal fees) incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering material for the Conversion Stock, including certain liabilities under the Securities Act. Directors and executive officers of the Primary Parties may participate in the solicitation of offers to purchase Conversion Stock. Other employees of the Bank may participate in the Offerings in ministerial capacities or providing clerical work in effecting a sales transaction. Such other employees have been instructed not to solicit offers to purchase Conversion Stock or provide advice regarding the purchase of Conversion Stock. Questions of prospective purchasers will be directed to executive officers or registered representatives. The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Conversion Stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of Conversion Stock. No officer, director or employee of the Primary Parties will be compensated in connection with such person's solicitations or other participation in the Offerings or the Exchange by the payment of commissions or other remuneration based either directly or indirectly on transactions in the Conversion Stock and Exchange Shares, respectively. Restrictions on Transfer of Subscription Rights and Shares Pursuant to the rules and regulations of the OTS, no person with subscription rights may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Conversion Stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are granted and only for such person's account. Each person exercising such subscription rights will be required to certify that such person is purchasing shares solely for such person's own account and that such person has no agreement or understanding regarding the sale or transfer of such shares. Federal regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase such subscription rights or shares of Conversion Stock prior to the completion of the Conversion. The Primary Parties will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. 98 Liquidation Rights In the unlikely event of a complete liquidation of the Mutual Holding Company in its present mutual form, each depositor of the Bank would receive his pro rata share of any assets of the Mutual Holding Company remaining after payment of claims of all creditors. Each depositor's pro rata share of such remaining assets would be in the same proportion as the value of his deposit account was to the total value of all deposit accounts in the Bank at the time of liquidation. After the Conversion and Reorganization, each depositor, in the event of a complete liquidation of the Bank, would have a claim as a creditor of the same general priority as the claims of all other general creditors of the Bank. However, except as described below, this claim would be solely in the amount of the balance in the deposit account plus accrued interest. A depositor would not have an interest in the value or assets of the Bank or the Company above that amount. The Plan provides for the establishment, upon the completion of the Conversion and Reorganization, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the amount of any dividends waived by the Mutual Holding Company (of which there were none) plus the greater of (1) 100% of the Bank's retained earnings of $17.85 million at December 31, 1994, the date of the latest balance sheet contained in the final offering circular utilized in the Bank's initial public offering in the MHC Reorganization, or (2) 70.15% of the Bank's total stockholders' equity as reflected in its latest balance sheet contained in the final Prospectus utilized in the Offerings. As of the date of this Prospectus, the initial balance of the liquidation account would be $_____ million. Each Eligible Account Holder and Supplemental Eligible Account Holder, if such person were to continue to maintain such person's deposit account at the Bank, would be entitled, upon a complete liquidation of the Bank after the Conversion and Reorganization, to an interest in the liquidation account prior to any payment to the Company as the sole stockholder of the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in the Bank at the close of business on December 31, 1995 or September 30, 1997, as the case may be. Each Eligible Account Holder and Supplemental Eligible Account Holder will have a pro rata interest in the total liquidation account for each of such person's deposit accounts based on the proportion that the balance of each such deposit account on the December 31, 1995 eligibility record date (or the September 30, 1997 supplemental eligibility record date, as the case may be) bore to the balance of all deposit accounts in the Bank on such date. If, however, on any June 30 annual closing date of the Bank, commencing June 30, 1996 for Eligible Account Holders and June 30, 1998 for Supplemental Eligible Account Holders, the amount in any deposit account is less than the amount in such deposit account on December 31, 1995 or September 30, 1997, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to the Company as the sole stockholder of the Bank. Tax Aspects Consummation of the Conversion and Reorganization is expressly conditioned upon prior receipt of either a ruling from the IRS or an opinion of counsel with respect to federal tax effects of the transaction, and either a ruling or an opinion with respect to Missouri tax laws, to the effect that 99 consummation of the transactions contemplated hereby will not result in a taxable reorganization under the provisions of the applicable codes or otherwise result in any material adverse tax consequences to the Mutual Holding Company, the Bank, the Company or to account holders receiving subscription rights, except to the extent, if any, that subscription rights are deemed to have fair market value on the date such rights are issued. This condition may not be waived by the Primary Parties. Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C., has issued an opinion to the Company and the Bank to the effect that for federal income tax purposes: (1) the conversion of the Mutual Holding Company from mutual to stock form and the simultaneous merger of the Mutual Holding Company with and into the Bank, with the Bank being the surviving institution, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, (2) no gain or loss will be recognized by the Mutual Holding Company upon the transfer of assets to the Bank, pursuant to the Conversion and Reorganization, (3) no gain or loss will be recognized by the Bank upon the receipt of the assets of the converted Mutual Holding Company in such merger, (4) the merger of Interim with and into the Bank, with the Bank being the surviving institution, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, (5) no gain or loss will be recognized by Interim upon the transfer of its assets to the Bank pursuant to its merger with the Bank, (6) no gain or loss will be recognized by the Bank upon the receipt of the assets of Interim in such merger, (7) no gain or loss will be recognized by the Company upon the receipt of Bank Common Stock solely in exchange for Common Stock, (8) no gain or loss will be recognized by the Public Stockholders upon the receipt of Common Stock solely in exchange for their Public Bank Shares, (9) the basis of the Common Stock to be received by the Public Stockholders will be the same as the basis of the Public Bank Shares surrendered in exchange therefor, before giving effect to any payment of cash in lieu of fractional shares, (10) the holding period of the Common Stock to be received by the Public Stockholders will include the holding period of the Public Bank Shares, provided that the Public Bank Shares were held as a capital asset on the date of the exchange, and (11) the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will recognize gain upon the issuance to them of nontransferable subscription rights to purchase Common Stock, but only to the extent of the value, if any, of the subscription rights. Furthermore, Carnahan, Evans, Cantwell & Brown, P.C. has issued an opinion to the Company and the Bank to the effect that the income tax consequences of the Conversion and Reorganization are substantially the same under Missouri law as they are under the Code. In the opinion of RP Financial, which opinion is not binding on the IRS, the subscription rights do not have any value, based on the fact that such rights are acquired by the recipients without cost, are nontransferable and of short duration, and afford the recipients the right only to purchase the Common Stock at a price equal to its estimated fair market value, which will be the same price as the Purchase Price for the unsubscribed shares of Common Stock. If the subscription rights granted to eligible subscribers are deemed to have an ascertainable value, receipt of such rights likely would be taxable only to those eligible subscribers who exercise the subscription rights (either as a capital gain or ordinary income) in an amount equal to such value, and the Primary Parties could recognize gain on such distribution. Eligible subscribers are encouraged to consult with their own tax advisor as to the tax consequences in the event that such subscription rights are deemed to have an ascertainable value. Unlike private rulings, an opinion is not binding on the IRS and the IRS could disagree with the conclusions reached therein. In the event of such disagreement, there can be no assurance that the IRS would not prevail in a judicial or administrative proceeding. If the IRS determines that the tax effects of the transaction are to be treated differently from that presented in the tax opinion, the Mutual Holding Company and the Bank may be subject to adverse tax consequences as a result of the Conversion and Reorganization. 100 Delivery and Exchange of Certificates Common Stock. Certificates representing Common Stock issued in connection with the Offerings will be mailed by the Company's transfer agent for the Common Stock to the persons entitled thereto at the addresses of such persons appearing on the stock order form for Common Stock as soon as practicable following consummation of the Conversion and Reorganization. Any certificates returned as undeliverable will be held by the Company until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law. Until certificates for Common Stock are available and delivered to subscribers, subscribers may not be able to sell such shares. Exchange Shares. After consummation of the Conversion and Reorganization, each holder of a certificate or certificates theretofore evidencing issued and outstanding shares of Bank Common Stock (other than the Mutual Holding Company), upon surrender of the same to an agent, duly appointed by the Company, which is anticipated to be the transfer agent for the Common Stock (the "Exchange Agent"), shall be entitled to receive in exchange therefore a certificate or certificates representing the number of full shares of Common Stock for which the shares of Bank Common Stock theretofore represented by the certificate or certificates so surrendered shall have been converted based on the Exchange Ratio. The Exchange Agent shall promptly mail to each such holder of record of an outstanding certificate which immediately prior to the consummation of the Conversion and Reorganization evidenced shares of Bank Common Stock, and which is to be exchanged for Common Stock based on the Exchange Ratio as provided in the Plan, a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the Exchange Agent) advising such holder of the terms of the exchange effected by the Conversion and Reorganization and of the procedure for surrendering to the Exchange Agent such certificate in exchange for a certificate or certificates evidencing Common Stock. The Bank's stockholders should not forward Bank Common Stock certificates to the Bank or the Exchange Agent until they have received the transmittal letter. No holder of a certificate theretofore representing shares of Bank Common Stock shall be entitled to receive any dividends in respect of the Common Stock into which such shares shall have been converted by virtue of the Conversion and Reorganization until the certificate representing such shares of Bank Common Stock is surrendered in exchange for certificates representing shares of Common Stock. In the event that dividends are declared and paid by the Company in respect of Common Stock after the consummation of the Conversion and Reorganization but prior to surrender of certificates representing shares of Bank Common Stock, dividends payable in respect of shares of Common Stock not then issued shall accrue (without interest). Any such dividends shall be paid (without interest) upon surrender of the certificates representing such shares of Bank Common Stock. The Company shall be entitled, after the consummation of the Conversion and Reorganization, to treat certificates representing shares of Bank Common Stock as evidencing ownership of the number of full shares of Common Stock into which the shares of Bank Common Stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates. The Company shall not be obligated to deliver a certificate or certificates representing shares of Common Stock to which a holder of Bank Common Stock would otherwise be entitled as a result of the Conversion and Reorganization until such holder surrenders the certificate or certifies representing the shares of Bank Common Stock for exchange as provided above, or, in default thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond as may be required in each case by the Company. If any certificate evidencing shares of Common Stock is to be issued in a name other than that in which the certificate evidencing Bank Common Stock surrendered in exchange therefore is registered, it shall be a condition of the issuance thereof that the certificate so surrendered shall be 101 properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange pay to the Exchange Agent any transfer or other tax required by reason of the issuance of a certificate for shares of Common Stock in any name other than that of the registered holder of the certificate surrendered or otherwise establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. Required Approvals Various approvals of the OTS are required in order to consummate the Conversion and Reorganization. The OTS has approved the Plan of Conversion, subject to approval by the Mutual Holding Company's Members and the Bank's Stockholders. In addition, consummation of the Conversion and Reorganization is subject to OTS approval of the Company's application to acquire all of the to-be-outstanding Bank Common Stock and the applications with respect to the merger of the Mutual Holding Company (following its conversion to an interim Federal stock savings bank) into the Bank and the merger of Interim into the Bank, with the Bank being the surviving entity in both mergers. Applications for these approvals have been filed and are currently pending. There can be no assurances that the requisite OTS approvals will be received in a timely manner, in which event the consummation of the Conversion and Reorganization may be delayed beyond the expiration of the Offerings. Pursuant to OTS regulations, the Plan of Conversion also must be approved by (1) at least a majority of the total number of votes eligible to be cast by Members of the Mutual Holding Company at the Members' Meeting, and (2) holders of at least two-thirds of the outstanding Bank Common Stock at the Stockholders' Meeting. In addition, the Primary Parties have conditioned the consummation of the Conversion and Reorganization on the approval of the Plan by at least a majority of the votes cast, in person or by proxy, by the Public Stockholders at the Stockholders' Meeting. Interpretation and Amendment of the Plan To the extent permitted by law, all interpretations of the Plan by the Primary Parties will be final; however, such interpretations shall have no binding effect on the OTS. The Plan provides that, if deemed necessary or desirable by the Board of Directors, the Plan may be substantively amended by the Board of Directors as a result of comments from the OTS or otherwise, prior to the solicitation of proxies from the members of the Mutual Holding Company and at any time thereafter with the concurrence of the OTS, except that in the event that the regulations under which the Plan was adopted are liberalized subsequent to the approval of the Plan by the OTS and the members of the Mutual Holding Company at the special meeting of members, the Board of Directors may amend the Plan to conform to the regulations without further approval of the OTS or the members, to the extent permitted by law. An amendment to the Plan that would result in a material adverse change in the terms of the Conversion and Reorganization would require a resolicitation. In the event of a resolicitation, subscriptions for which a confirmation or modification was not received would be rescinded. Any amendment to the Plan regarding preferences to the Local Community will not be deemed to be a material change. Certain Restrictions on Purchase or Transfer of Shares After the Conversion and Reorganization All shares of Conversion Stock purchased in connection with the Conversion and Reorganization by a director or an executive officer of the Primary Parties will be subject to a restriction that the shares may not be sold for a period of one year following the Conversion and Reorganization, except in the event of the death of such director or executive officer or pursuant to a merger or similar transaction approved by the OTS. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and appropriate stop-transfer instructions will be issued to the Company's transfer 102 agent. Any shares of Common Stock issued within this one-year period as a stock dividend, stock split or otherwise with respect to such restricted stock will be subject to the same restrictions. The directors and executive officers of the Company will also be subject to the insider trading rules promulgated pursuant to the Exchange Act. Purchases of Common Stock of the Company by directors, executive officers and their associates during the three-year period following completion of the Conversion and Reorganization may be made only through a broker or dealer registered with the SEC, except with the prior written approval of the OTS. This restriction does not apply, however, to negotiated transactions involving more than 1% of the Company's outstanding Common Stock or to the purchase of Common Stock pursuant to any tax-qualified employee stock benefit plan, such as the ESOP, or by any non-tax-qualified employee stock benefit plan. Pursuant to OTS regulations, the Company will generally be prohibited from repurchasing any shares of Common Stock within one year following consummation of the Conversion and Reorganization. During the second and third years following consummation of the Conversion and Reorganization, the Company may not repurchase any shares of its Common Stock other than pursuant to (i) an offer to all stockholders on a pro rata basis that is approved by the OTS; (ii) the repurchase of qualifying shares of a director, if any; (iii) purchases in the open market by a tax-qualified or non-tax-qualified employee stock benefit plan in an amount reasonable and appropriate to fund the plan; or (iv) purchases that are part of an open-market program not involving more than 5% of its outstanding capital stock during a 12- month period, if the repurchases do not cause the Bank to become undercapitalized and the Bank provides to the Regional Director of the OTS no later than 10 days prior to the commencement of a repurchase program written notice containing a full description of the program to be undertaken and such program is not disapproved by the Regional Director. However, the Regional Director has authority to permit repurchases during the first year following consummation of the Conversion and Reorganization and to permit repurchases in excess of 5% during the second and third years upon the establishment of exceptional circumstances, as determined by the Regional Director. COMPARISON OF STOCKHOLDERS' RIGHTS General. As a result of the Conversion and Reorganization, holders of the Bank Common Stock will become, subject to the Exchange Ratio, stockholders of the Company, a Delaware corporation. There are certain differences in stockholder rights arising from distinctions between the Bank's current federal stock charter ("Charter") and bylaws ("Bank Bylaws") and the Certificate of Incorporation ("Certificate") and bylaws of the Company ("Company Bylaws") and from distinctions between laws with respect to federally chartered savings associations and Delaware law. The discussion herein is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes the more significant differences and certain important similarities. The discussion herein is qualified in its entirety by reference to the Charter and Bank Bylaws, the Certificate and Company Bylaws, the Code of Federal Regulations, and the Delaware General Corporation Law ("DGCL"). Authorized Capital Stock. The Company's authorized capital stock consists of 10,000,000 shares of common stock, $0.10 par value per share, and 2,000,000 shares of preferred stock, $0.01 par value per share ("Preferred Stock"), whereas the Bank's authorized capital stock consists of 3,000,000 shares of common stock and 2,000,000 shares of preferred stock. The shares of Common Stock and Preferred Stock were authorized in an amount greater than that to be issued in the Conversion and Reorganization 103 to provide the Company's Board of Directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the Company. The Board of Directors also has sole authority to determine the terms of any one or more series of Preferred Stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of Preferred Stock, the Board has the power, to the extent consistent with its fiduciary duty, to issue a series of Preferred Stock to persons friendly to management in order to attempt to block a post-tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. The Company's Board currently has no plan for the issuance of additional shares, other than the issuance of additional shares pursuant to stock benefit plans. See "Management of the Company - Proposed Future Stock Benefit Plans" and "Management of the Bank - Certain Benefits." Restrictions on Capital Stock Ownership. Pursuant to applicable laws and regulations, the Mutual Holding Company is required to own not less than a majority of the outstanding Bank Common Stock. There will be no such restriction applicable to the Company following consummation of the Conversion and Reorganization. Voting Rights. Stockholders of the Bank currently may not cumulate votes in elections of directors. The Certificate also prohibits cumulative voting rights. Elimination of cumulative voting helps to ensure the continuity and stability of both the Company's and the Bank's Boards of Directors, and the policies adopted by each, by possibly delaying, deterring or discouraging proxy contests. The Charter does not contain any specification of or limitation on the circumstances under which separate class voting rights may be provided to a particular class or series of Bank Preferred Stock. The Certificate provides that there will be, in addition to the affirmative vote required for certain business combinations, a class vote of the holders of any class or series of stock as otherwise required by law, the Certificate, a resolution of the board of directors providing for the issuance of a class or series of stock, or any agreement between the Company and a national securities exchange or national securities quotation system. Further, the DGCL requires a class vote in addition to the vote of all shareholders for an amendment to the Certificate if the amendment would increase or decrease the aggregate number of authorized shares, effect an exchange, reclassification or cancellation of all or part of the shares of a class, create a new class of shares or influence distributions to shareholders by increasing the rights, preferences or number of shares of an existing class. Delaware law also requires separate voting by voting groups for plans involving mergers and share exchanges, if such plans contain a provision that, if contained in an amendment to the Certificate, would require the action of one or more voting groups as described above. For additional information relating to voting rights, see "- Limitations on Acquisitions of Voting Stock and Voting Rights" below. Payments of Dividends. The ability of the Bank to pay dividends on its capital stock is restricted by OTS regulations and by tax considerations related to savings and loan associations such as the Bank. See "Regulation - Regulation of the Bank - Dividend and Other Capital Distribution Limitations" and "Federal and State Taxation." Although the Company is not subject to these restrictions as a Delaware corporation, such restrictions will indirectly affect the Company because dividends from the Bank will be a primary source of funds of the Company for the payment of dividends to stockholders of the Company. 104 The DGCL generally provides that, subject to any restrictions in the certificate of incorporation, a corporation may make distributions to its stockholders, provided that no distribution may be made if, after giving it effect, the corporation would not be able to pay its debts as they become due in the ordinary course of business. Board of Directors. The Bank Bylaws require the Board of Directors of the Bank to be divided into three classes as nearly equal in number as possible and that the members of each class shall be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually. The Certificate also requires that the Board of Directors of the Company be divided into three classes. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Under the Bank Bylaws, any vacancies in the Board of Directors of the Bank may be filled by the affirmative vote of a majority of the remaining directors even if less than a quorum of the Board of Directors remains. The Certificate requires that any vacancies on the Board of Directors of the Company be filled by a vote of two-thirds of the directors then in office, whether or not a quorum. Persons elected by the directors of the Bank to fill vacancies may only serve until the next annual meeting of stockholders whereas persons elected to vacancies on the Company's Board of Directors may serve until the annual meeting of stockholders at which the term of the class, to which the absent director had been elected, expires. Under the Bank Bylaws, any director may be removed for cause by the holders of a majority of the outstanding voting shares, provided that if less than the entire Board is to be removed, none of the directors may be removed if the votes cast against the removal would be sufficient to elect a director if then cumulatively voted at an election of the class of directors of which such director is a member. The Certificate provides that any director of the Company may be removed only for cause at a duly constituted meeting of stockholders called expressly for that purpose upon the vote of the holders of at least 80% of the total votes eligible to be cast by stockholders. Limitations on Liability. The Certificate provides that directors of the Company shall have no liability to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision will not eliminate liability of a director (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not made in good faith or which involve intentional misconduct or a knowing violation of law, (iii) acts specified in the DGCL pertaining to unlawful distributions, or (iv) for any transaction from which a director derived an improper personal benefit. The provision limiting the personal liability of the Company's directors for monetary damages for breach of fiduciary duty does not eliminate or alter the duty of the Company's directors; it merely limits personal liability for monetary damages to the extent permitted by the DGCL. Moreover, it applies only to claims against a director arising out of the director's role as a director, it currently does not apply to claims arising out of a director's role as an officer (if such director is also an officer) or arising out of any other capacity in which a director serves because the DGCL does not authorize such a limitation of liability. The SEC takes the position that similar provisions limiting the liability of directors under state laws would not protect those corporations' directors from liability for violations of the federal securities laws. Federal banking regulators also may take the same position with respect to violations of federal banking laws and regulations. 105 Currently, federal law does not permit federally chartered savings banks such as Guaranty Federal to limit the personal liability of directors in the manner provided by the DGCL and the laws of many other states. Indemnification of Directors, Officer, Employees, Fiduciaries and Agents. The Charter and Bank Bylaws do not contain any provision relating to indemnification of directors and officers of the Bank. Under present OTS regulations, however, the Bank must indemnify its directors, officers and employees for any costs incurred in connection with any litigation involving any such person's activities as a director, officer or employee if such person obtains a final judgement on the merits in his or her favor. In addition, indemnification is permitted in the case of a settlement, a final judgement against such person or final judgement other than on the merits, if a majority of the disinterested directors determine that such person was acting in good faith within the scope of his or her employment as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interest of the Bank or its stockholders. The Bank also is permitted to pay ongoing expenses incurred by a director, officer or employee if a majority of the disinterested directors concludes that such person may ultimately be entitled to indemnification. Before making any indemnification payment, the Bank is required to notify the OTS of its intention and such payment cannot be made if the OTS objects thereto. The Certificate provides that the Company must indemnify any Company director, officer, or employee and any person who serves or served at the Company's request at another corporation or other enterprise who was or is a party or is threatened to be made a party to any threatened, pending, or completed suit, including actions by or in the right of the Company, whether civil, criminal, administrative, or investigative, if that person is successful on the merits or otherwise; or that the person acted in good faith in the transaction which is the subject of the suit or action, and in a manner the person reasonably believed to be in, or not opposed to, the best interest of the Company. Indemnification results in the payment to the person of expenses (including attorneys' fees) actually and reasonably incurred by that person in connection with the defense or settlement of the action or suit. If these provisions were to be declared invalid, the Company would seek to indemnify each director, officer, employee, and agent of the Company as to costs, charges, and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Company to the fullest extent permitted by applicable law. If Delaware law is amended to permit further indemnification of the directors, officers, employees and agents of the Corporation, then the Company will indemnify such persons to the fullest extent permitted by Delaware law, as so amended. Special Meeting of Stockholders. The Charter provides that special meetings of the stockholders of the Bank may be called only upon the direction of the Board of Directors. The Certificate contains a provision pursuant to which special meetings of stockholders of the Company may be called only by the board of the directors of the Company, or by a committee of the Board of Directors whose powers include the power and authority to call special meetings. Shareholders are prohibited from calling special meetings except as required by Delaware law. Stockholder Nominations and Proposals. The Bank Bylaws generally provide that stockholders may submit nominations for election at an annual meeting of stockholders and any new business to be taken up at such a meeting by filing such in writing with the Bank at least five days before the date of any such meeting. 106 The Certificate provides that all nominations for election to the Board of Directors of the Company and proposals for any new business, other than those made by the Board or a committee thereof, can only be made by a stockholder who has complied with detailed requirements concerning timing and information that must be provided as enumerated in the Certificate. The procedures regarding stockholder proposals and nominations are intended to provide the Board of Directors of the Company with the information deemed necessary to evaluate a stockholder proposal or nomination and other relevant information, such as existing stockholder support, as well as the time necessary to consider and evaluate such information in advance of the applicable meeting. The proposed procedures, however, will give incumbent directors advance notice of a business proposal or nomination. This may make it easier for the incumbent directors to defeat a stockholder proposal or nomination, even when certain stockholders view such proposal or nomination as in the best interests of the Company or its stockholders. Stockholder Action Without a Meeting. The Bank Bylaws provide that any action to be taken or which may be taken at any annual or special meeting of stockholders may be taken if a consent in writing, setting forth the actions so taken, is given by the holders of all outstanding shares entitled to vote. The Certificate prohibits the taking of action without a meeting. Stockholder's Right to Examine Books and Records. A federal regulation which is applicable to the Bank provides that stockholders may inspect and copy specified books and records of a federally chartered savings association after proper written notice for a proper purpose. The DGCL provides that any stockholder may inspect books and records for any reasonable and proper purpose upon written demand stating the purpose of the inspection. Each Delaware corporation must provide shareholders access to certain books and records upon five days written notice. Limitations on Acquisitions of Voting Stock and Voting Rights. The Certificate provides that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of Common Stock (the "Limit") be entitled or permitted to any vote in respect of the shares held in excess of the Limit. In addition, for a period of five years from April 1995, no person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the Company. A beneficial holder submitting a proxy or proxies totalling more than 10% of the then outstanding shares of Common Stock will be able to vote in the following manner: the number of votes which may be cast by such a beneficial owner shall be a number equal to the total number of votes that a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned and owned of record by such beneficial owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such beneficial owner. The impact of these provisions on the submission of a proxy on behalf of a beneficial holder of more than 10% of the Common Stock is to (1) require divestiture of the amount of stock held in excess of 10% (if within five years of the Conversion and Reorganization more than 10% of the Common Stock is beneficially owned by a person) and (2) at any time, limit the vote on Common Stock held by the beneficial owner to 10% or possibly reduce the amount that may be voted below the 10% level. Unless the grantor of a revocable proxy is an affiliate or an associate of such a 10% holder or there is an arrangement, agreement or understanding with such a 10% holder, these provisions would not restrict the ability of such a 10% holder of revocable proxies to exercise revocable proxies for which the 10% holder is neither a beneficial nor record owner. A person is a beneficial owner of a security if such person has the power to vote or direct the voting of all or part of the voting rights of the security, or has the power to dispose of or direct 107 the disposition of the security. The Certificate further provides that this provision limiting voting rights may only be amended upon the vote of 80% of the outstanding shares of voting stock. The foregoing restrictions do not apply to any tax-qualified defined benefit plan or defined contribution plan of the Company or its subsidiaries or to the acquisition of more than 10% of any class of equity security of the Company if such acquisition has been approved by a majority of the Continuing Directors, as defined in the Certificate. The Charter also contains a provision which imposes a restriction with respect to any offer to acquire or acquisition of more than 10% of the Bank Common Stock for five years from the effective date of the Charter. In the event shares are acquired in violation of this section, the shares in excess of 10% will not be counted as shares entitled to vote. There is no provision in the Charter which would reduce a beneficial owner's voting position to less than 10%, and the protection in the Charter is limited to five years from April 1995. Mergers, Consolidations and Sales of Assets. A federal regulation requires the approval of the Board of Directors of the Bank and the holders of two-thirds of the outstanding stock of the Bank entitled to vote thereon for mergers, consolidations and sales of all or substantially all of the Bank's assets. Such regulation permits the Bank to merge with another corporation without obtaining the approval of its stockholders if: (i) it does not involve an interim savings association; (ii) the Charter is not changed; (iii) each share of the Bank Common Stock outstanding immediately prior to the effective date of the transaction is to be an identical outstanding share or a treasury share of the Bank after such effective date; and (iv) either: (A) no shares of voting stock of the Bank and no securities convertible into such stock are to be issued or delivered under the plan of combination or (B) the authorized unissued shares or the treasury shares of voting stock of the Bank to be issued or delivered under the plan of combination, plus those initially issuable upon conversion of any securities to be issued or delivered under such plan, do not exceed 15% of the total shares of voting stock of the Bank outstanding immediately prior to the effective date of the transaction. The DGCL requires that the Board of Directors of the Company must adopt a plan of merger or share exchange or approve any sale, lease, exchange or other disposition of all or substantially all of the Company's property. The Board may also condition the effectiveness of the plan or disposition of assets on any basis, including requiring a supermajority vote. Separate voting by voting groups is required under the DGCL for certain plans. See "Comparison of Stockholder's Rights - Voting Rights." In addition to the provisions of Delaware law, the Certificate requires the approval of the holders of at least 80% of the Company's outstanding shares of voting stock, and a majority of such shares not including shares deemed beneficially owned by a "Principal Shareholder" to approve certain "Business Combinations." The term "Principal Shareholder" is defined to include any person and the affiliates and associates of the person (other than the Company or its subsidiary) who beneficially owns, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Company. The Certificate requires the approval of the stockholders in accordance with the increased voting requirements in connection with any such transactions except in cases where the proposed transaction had been approved in advance by at least two-thirds of the Company's "Continuing Directors" (generally, those members of the Company's Board of Directors who are not affiliated with the Principal Shareholder and were directors before the Principal Shareholder became a Principal Shareholder). These provisions of the Certificate apply to a "Business Combination" which generally is defined to include (i) any merger or consolidation of the Company with or into a Principal Shareholder; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or a substantial part of the assets of the Company or of a subsidiary to a Principal Shareholder (the term "substantial part" is defined to include more than 108 25% of the Company's total assets); (iii) any merger or consolidation of a Principal Shareholder with or into the Company or a subsidiary; (iv) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or any substantial part of the assets of a Principal Shareholder to the Company or a subsidiary; (v) the issuance of any securities of the Company or a subsidiary to a Principal Shareholder; (vii) any reclassification of the Common Stock, or any recapitalization involving the Common Stock; and (viii) an agreement, contract or other arrangement providing for any of the foregoing transactions. Neither the Charter and Bank Bylaws nor federal laws and regulations contain a provision which restricts business combinations between the Bank and Principal Shareholders in the manner set forth in the Certificate. Dissenters' Rights of Appraisal. A federal regulation which is applicable to the Bank generally provides that a stockholder of a federally chartered savings association which engages in a merger, consolidation or sale of all or substantially all of its assets shall have the right to demand from such association payment of the fair or appraised value of his or her stock in the association, subject to specified procedural requirements. This regulation also provides, however, that the stockholders of a federally chartered savings association with stock which is listed on a national securities exchange or quoted on The Nasdaq Stock Market are not entitled to dissenters' rights in connection with a merger involving such savings association if the stockholder is required to accept only "qualified consideration" for his or her stock, which is defined to include cash, shares of stock of any association or corporation which at the effective date of the merger will be listed on a national securities exchange or quoted on The Nasdaq Stock Market or any combination of such shares of stock and cash. After the Conversion and Reorganization, the right of appraisal of dissenting stockholders of the Company will be governed by the DGCL. Pursuant thereto, a stockholder of a Delaware corporation generally has the right to dissent from any merger or consolidation involving the corporation or sale of all or substantially all of the corporation's assets, subject to specified procedural requirements. However, no such appraisal rights are available for the shares of any class or series of a corporation's capital stock if as of the record date fixed to determine the stockholders entitled to receive notice to and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, such shares were either listed on a national securities exchange or traded on the Nasdaq National Market or a similar market. Amendment of Governing Instruments. No amendment of the Charter may be made unless it is first proposed by the Board of Directors of the Bank, then preliminarily approved by the OTS, and thereafter approved by the holders of a majority of the total votes eligible to be cast at a legal meeting. Article XX of the Certificate generally provides that the Certificate may be amended as permitted by Delaware law, except that any amendment to certain sections must be approved by the affirmative vote of the holders of not less than 80% of the voting power of the Company entitled to vote thereon. The Bank Bylaws may be amended by a majority vote of the full Board of Directors of the Bank or by a majority vote of the votes cast by the stockholders of the Bank at any legal meeting. The Company Bylaws may only be amended by a vote of a majority of the Board of Directors or by the vote of not less than 80% of the outstanding shares of capital stock entitled to vote generally in the election of directors cast at a meeting of the stockholders called for that purpose. CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY Although the Boards of Directors of the Bank and the Company are not aware of any effort that might be made to obtain control of the Company after the Conversion and Reorganization, the Boards of Directors, as discussed below, believe it is appropriate to include certain provisions in the Certificate 109 to protect the interests of the Company and its stockholders from takeovers that the Board of Directors of the Company might conclude are not in the best interests of the Bank, the Company, or the Company's stockholders. Provisions of the Certificate of Incorporation and the Bylaws of the Company The following discussion is a summary of certain material provisions of the Certificate and Company Bylaws and certain other agreements and regulatory provisions, which may be deemed to have an "anti-takeover" effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in the Certificate and Company Bylaws and the Bank's proposed stock charter and bylaws, reference should be made in each case to the document in question, each of which is part of the Bank's application to the OTS or the Company's Registration Statement filed with the SEC. See "Additional Information." Limitations on Voting Rights. The Certificate provides that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of Common Stock (the "Limit") be entitled or permitted to any vote in respect of the shares held in excess of the Limit. In addition, for a period of five years from April 1995, no person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the Company. The Certificate further provides that the Limit may be amended upon the vote of 80% of the outstanding shares of voting stock. See also "- Comparison of Stockholder Rights - Limitations on Acquisitions of Voting Stock and Voting Rights." Election of Directors. Certain provisions of the Certificate and Company Bylaws will impede changes in majority control of the Board of Directors. The Certificate provides that the Board of Directors of the Company will be divided into three classes, with directors in each class elected for three-year staggered terms except for the initial directors. Thus, it would take two annual elections to replace a majority of the Company's Board. The Certificate and Company Bylaws also provide that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term by a majority vote of the directors then in office. Furthermore, the Company Bylaws impose certain notice and information requirements in connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. See "Comparison of Stockholders' Rights - Board of Directors." The Certificate provides that a director may only be removed for cause by the affirmative vote of not less than 80% of the outstanding shares eligible to vote. Restriction on Call of Special Meetings. The Certificate provides that a special meeting of stockholders may be called only pursuant to a resolution adopted by a majority of the Board of Directors, or a Committee of the Board or other person so empowered by the Company Bylaws. The Certificate also provide that any action required or permitted to be taken by the stockholders of the Company may be taken at an annual or special meeting. Stockholder action by written consent in lieu of a meeting is prohibited. Absence of Cumulative Voting. The Certificate provides that there shall be no cumulative voting rights in the election of directors. 110 Authorized Shares. The Certificate authorizes the issuance of 10,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. The shares of Common Stock and Preferred Stock were authorized in an amount greater than that to be issued in the Conversion and Reorganization to provide the Company's Board of Directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the Company. The Board of Directors also has sole authority to determine the terms of any one or more series of Preferred Stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of Preferred Stock, the Board has the power, to the extent consistent with its fiduciary duty, to issue a series of Preferred Stock to persons friendly to management in order to attempt to block a post-tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. The Company's Board currently has no plans for the issuance of additional shares, other than the issuance of additional shares upon exercise of stock options. Procedures for Certain Business Combinations. The Certificate prohibits the Company from engaging in or entering into certain Business Combinations with any Principal Shareholder or any affiliates of the Principal Shareholder unless the proposed transaction has been approved in advance by the Company's Continuing Directors. See "Comparison of Stockholders' Rights - Mergers, Consolidations and Sales of Assets." Amendment to Certificate and Company Bylaws. Amendments to the Certificate must be approved by a majority vote of the Company's Board of Directors and also by a majority of the outstanding shares of the Company's voting stock, provided, however, that approval by at least 80% of the outstanding voting stock is generally required for certain provisions (i.e., provisions relating to restrictions on the acquisition and voting of greater than 10% of the Common Stock; number, classification, election and removal of directors; amendment of the Bylaws; call of special stockholder meetings; director liability; certain business combinations; power of indemnification; and amendments to provisions relating to the foregoing) in the Certificate. The Company Bylaws may be amended by a majority vote of the Board of Directors or the affirmative vote of the holders of a majority of the shares of the voting stock of the Company, provided, however, that at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders is required to amend or repeal provisions relating to election and removal of directors, director liability, certain business combinations and amendments to provisions relating to the foregoing in the Company Bylaws. Purpose and Takeover Defensive Effects of the Certificate and Company Bylaws. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Although a tender offer or other takeover attempt may be made at a price substantially above the current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining stockholders. The Boards of Directors of Guaranty Federal and the Company believe that the provisions described above are prudent and will reduce the Company's vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by its Board of Directors. These provisions will also assist the Bank in the orderly deployment of the proceeds of the Offerings into 111 productive assets during the initial period after the Conversion and Reorganization. The Boards of Directors believe these provisions are in the best interests of the Bank, the Company, and the stockholders. In the judgment of the Boards of Directors, the Company's Board will be in the best position to determine the true value of the Company and to negotiate effectively for what may be in the best interests of its stockholders. Accordingly, the Boards of Directors of Guaranty Federal and the Company believe that it is in the best interests of the Company and its stockholders to encourage potential acquirors to negotiate directly with the Board of Directors of the Company and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of the Boards of Directors that these provisions should not discourage persons from proposing a merger or other transaction at prices reflective of the true value of the Company and which is in the best interests of all stockholders. Attempts to acquire financial institutions and their holding companies have become increasingly common. Takeover attempts that have not been negotiated with and approved by the Board of Directors of the Company present to stockholders the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by the Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for the Company and its stockholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of the Company's assets. Despite the belief of the Bank and the Company as to the benefits to stockholders of these provisions of the Certificate and Company Bylaws, these provisions may also have the effect of discouraging a future takeover attempt that would not be approved by the Company's Board, but pursuant to which stockholders may receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also render the removal of the Company's Board of Directors and management more difficult. The Boards of Directors of the Bank and the Company, however, believe that the potential benefits outweigh the possible disadvantages. Other Restrictions on Acquisitions of Stock Federal Regulation. A federal regulation prohibits any person prior to the completion of a mutual-to-stock conversion from transferring, or entering into any agreement or understanding to transfer, the legal or beneficial ownership of the subscription rights issued under a plan of conversion or the stock to be issued upon their exercise. This regulation also prohibits any person prior to the completion of a mutual-to-stock conversion from offering, or making an announcement of an offer or intent to make an offer, to purchase such subscription rights or stock. For three years following the mutual-to-stock conversion, OTS regulations prohibit any person, without the prior approval of the OTS, from acquiring or making an offer to acquire more than 10% of the stock of any converted entity if such person is, or after consummation of such acquisition would be, the beneficial owner of more than 10% of such stock. In the event that any person, directly or indirectly, violates this regulation, the securities beneficially owned by such person in excess of 10% shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matter submitted to a vote of stockholders. Federal law provides that no company, "directly or indirectly or acting in concert with one or more persons, or through one or more subsidiaries, or through one or more transactions," may acquire "control" of a savings association at any time without the prior approval of the OTS. In addition, any company that acquires such control becomes a "savings and loan holding company" subject to 112 registration, examination and regulation as a savings and loan holding company. Control in this context means ownership of, control of, or holding proxies representing more than 25% of the voting shares of a savings association or the power to control in any manner the election of a majority of the directors of such institution. Federal law also provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings association unless at least 60 days prior written notice has been given to the OTS and the OTS has not objected to the proposed acquisition. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of a savings association or to vote more than 25% of any class of voting securities of a savings association. Under federal law (as well as the regulations referred to below) the term "savings association" includes state-chartered and federally chartered SAIF-insured institutions, federally chartered savings and loans and savings banks whose accounts are insured by the FDIC and holding companies thereof. Federal regulations require that, prior to obtaining control of an insured institution or its holding company, a person, other than a company, must give 60 days notice to the OTS and have received no OTS objection to such acquisition of control, and a company must apply for and receive OTS approval of the acquisition. Control, as defined under federal law, involves a 25% voting stock test, control in any manner of the election of a majority of the institution's directors, or a determination by the OTS that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of an institution's voting stock, if the acquiror also is subject to any one of either "control factors," constitutes a rebuttable determination of control under the regulations. The determination of control may be rebutted by submission to the OTS, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances that would support a finding that no control relationship will exist and containing certain undertakings. The regulations provide that persons or companies that acquire beneficial ownership exceeding 10% or more of any class of a savings association's stock after the effective date of the regulations must file with the OTS a certification that the holder is not in control of such institution, is not subject to a rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the OTS, as applicable. Effect of Employment Agreements and Stock Benefit Plans. The Bank intends to enter into an employment agreement with President James E. Haseltine that provides for payments in the event of termination of employment following a change in control, as defined in the agreement, of 2.99 times the five year average compensation paid to Mr. Haseltine. In addition, the Bank intends to enter into employment agreements with eight other officers that provide for payments in the event of termination of employment following a change in control, as defined in the agreements. At June 30, 1997, such payments, in the aggregate, would have totaled approximately $1.2 million, rendering an acquisition, followed by termination of their employment, more expensive to a possible acquiror as a result of these agreements. See "Management of the Bank - Executive Compensation - Employment Agreements." Furthermore, upon completion of the Conversion and Reorganization, the Company intends to adopt stock benefit plans which provide that all awards will vest upon such change-in-control provided OTS regulations in effect at that time permit such accelerated vesting. See "Management of the Company Proposed Future Stock Benefit Plans." 113 DESCRIPTION OF CAPITAL STOCK OF THE COMPANY The Company is authorized to issue 10,000,000 shares of the common stock, $0.10 par value per share, and 2,000,000 shares of preferred stock, $0.01 par value per share. The Company currently expects to issue up to 5,410,019 shares of Common Stock in the Conversion and Reorganization. The Company does not intend to issue any shares of preferred stock in the Offerings, nor are there any present plans to issue such preferred stock following the Conversion and Reorganization. The aggregate par value of the issued shares will constitute the capital account of the Company. The balance of the aggregate Purchase Price will be recorded for accounting purposes as additional paid-in capital. See "Capitalization." The Common Stock will represent nonwithdrawable capital and will not be insured by the Company, the Bank, the FDIC, or any other government agency. Common Stock Voting Rights. Each share of the Common Stock will have the same relative rights and will be identical in all respects with every other share of the Common Stock. The holders of the Common Stock will possess exclusive voting rights in the Company, except to the extent that shares of Preferred Stock issued in the future may have voting rights, if any. Except as discussed in "Comparison of Stockholders' Rights - Limitations on Acquisitions of Voting Stock and Voting Rights," each holder of the Common Stock will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of the Common Stock. Stockholders will not be permitted to cumulate their votes in the election of the Company's directors. Liquidation. In the unlikely event of the complete liquidation or dissolution of the Company, the holders of the Common Stock will be entitled to receive all assets of the Company available for distribution in cash or in kind, after payment or provision for payment of (i) all debts and liabilities of the Company (including all deposits in Guaranty Federal and accrued interest thereon); (ii) any accrued dividend claims; (iii) liquidation preferences of any Preferred Stock which may be issued in the future; and (iv) any interests in the liquidation account established upon the Conversion and Reorganization for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue their deposits at the Bank. Restrictions on Acquisition of the Common Stock. See "Certain Restrictions on Acquisition of the Company" for a discussion of the limitations on acquisition of shares of the Common Stock. Other Characteristics. Holders of the Common Stock will not have preemptive rights with respect to any additional shares of the Common Stock that may be issued. Therefore, the Board of Directors may sell shares of capital stock of the Company without first offering such shares to existing stockholders of the Company. The Common Stock is not subject to a call for redemption, and the outstanding shares of Common Stock when issued and upon receipt by the Company of the Purchase Price therefor will be fully paid and non-assessable. Transfer Agent and Registrar. Registrar and Transfer Co. is expected to act as the transfer agent and registrar for the Common Stock of the Company. Issuance of Additional Shares. Except in the Offerings and possibly pursuant to the 1998 RSP or 1994 Option Plan or the 1998 Option Plan, the Company has no present plans, proposals, arrangements or understandings to issue additional authorized shares of the Common Stock. In the future, the authorized but unissued and unreserved shares of the Common Stock will be available for general corporate purposes, including, but not limited to, possible issuance as stock dividends, in 114 connection with mergers or acquisitions, under a cash dividend reinvestment or stock purchase plan, in a public or private offering, or under employee benefit plans. See "Pro Forma Data." Normally no stockholder approval would be required for the issuance of these shares, except as described herein or as otherwise required to approve a transaction in which additional authorized shares of the Common Stock are to be issued. For additional information, see "Dividend Policy," "Regulation" and "Federal and State Taxation" with respect to restrictions on the payment of cash dividends; "The Conversion and Reorganization Certain Restrictions on Purchase or Transfer After the Conversion and Reorganization" relating to certain restrictions on the transferability of shares purchased by directors and officers; and "Certain Restrictions on Acquisition of the Company" for information regarding restrictions on acquiring Common Stock of the Company. Preferred Stock None of the 2,000,000 authorized shares of preferred stock of the Company will be issued in the Conversion and Reorganization. After the Conversion and Reorganization are completed, the Board of Directors of the Company will be authorized to issue preferred stock and to fix and state voting powers, designations, preferences or other special rights of such shares and the qualifications, limitations and restrictions thereof, but without stockholder approval. If and when issued, the preferred stock is likely to rank prior to the Common Stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. The Board of Directors, without stockholder approval, can issue preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of the Common Stock. The Board of Directors has no present intention to issue any shares of preferred stock. LEGAL OPINIONS The legality of the Common Stock has been passed upon for Guaranty Federal and the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for Friedman, Billings, Ramsey & Co., Inc. may be passed upon by Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C. TAX OPINIONS The federal income tax consequences of the Conversion and Reorganization have been opined upon for Guaranty Federal and the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. The Missouri income tax consequences of the Conversion have been opined upon for Guaranty Federal and the Company by Carnahan, Evans, Cantwell & Brown, P.C. EXPERTS The consolidated financial statements of the Bank and subsidiaries as of June 30, 1997 and 1996 and for each of the years in the three-year period ended June 30, 1997 have been included herein and elsewhere in the registration statement and in the Application for Conversion filed with the OTS in reliance upon the report of Baird, Kurtz & Dobson, independent certified public accountants, appearing elsewhere herein, such report given upon the authority of said firm as experts in accounting and auditing. RP Financial has consented to the publication herein of a summary of its letter to the Bank setting forth its opinions as to the estimated pro forma market value of the Common Stock to be issued upon the 115 completion of the Conversion and Reorganization and the absence of value of subscription rights and to the use of its name and statements with respect to it appearing herein. REGISTRATION REQUIREMENTS The Common Stock of the Company will be registered pursuant to Section 12(g) of the Exchange Act prior to completion of the Conversion and Reorganization. The Company will be subject to the information, proxy solicitation, insider trading restrictions, tender offer rules, periodic reporting and other requirements of the SEC under the Exchange Act. The Company is not expected to deregister the Common Stock under the Exchange Act for a period of at least three years following the Conversion and Reorganization. ADDITIONAL INFORMATION The Company has filed with the SEC a registration statement under the Securities Act with respect to the Common Stock and Exchange Shares offered hereby. As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information set forth in the registration statement. Such information can be examined without charge at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can be obtained from the SEC at prescribed rates. The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically. The statements contained herein as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each such statement is qualified by reference to such contract or document. The Mutual Holding Company has filed an Application for Conversion with the OTS with respect to the Conversion and Reorganization. Pursuant to the rules and regulations of the OTS, this Prospectus omits certain information contained in that Application. The Application may be examined at the principal office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Midwest Regional Office of the OTS, 122 W. John Carpenter Freeway, Suite 600, Irving, Texas 75039, without charge. Copies of the Certificate of Incorporation and Bylaws of the Company are available without charge from the Bank. 116 GUARANTY FEDERAL SAVINGS BANK AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Accountants' Report F-2 Consolidated Balance Sheets as of June 30, 1997 and 1996 F-3 Consolidated Statements of Income for the Years Ended June 30, 1997, 1996 and 1995 28 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-7 All schedules are omitted because they are not required or applicable or the required information is shown in the financial statements or the notes thereto. Financial statements of the Company have not been provided because the Company has not conducted any operations to date. F-1 [Baird Kurtz & Dobson Letterhead] Independent Accountants' Report Board of Directors Guaranty Federal Savings Bank Springfield, Missouri We have audited the accompanying consolidated balance sheets of GUARANTY FEDERAL SAVINGS BANK (a 69%-Owned Subsidiary of Guaranty Federal Bancshares, M.H.C.) as of June 30, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Bank'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 financial statements referred to above present fairly, in all material respects, the financial position of GUARANTY FEDERAL SAVINGS BANK as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/Baird, Kurtz & Dobson July 31, 1997 Springfield, Missouri F-2 Guaranty Federal Savings Bank Consolidated Balance Sheets June 30, 1997 and 1996
ASSETS ------ 1997 1996 ---- ---- Cash $ 417,485 301,911 Interest-bearing deposits in other financial institutions 3,399,866 2,372,646 ------------ ------------ Cash and cash equivalents 3,817,351 2,674,557 Available-for-sale securities 3,360,000 7,842,380 Held-to-maturity securities 8,585,753 9,865,719 Mortgage-backed securities, held-to-maturity 15,813,890 20,067,249 Mortgage loans held for sale 5,903,002 3,416,576 Loans receivable, net 152,232,295 131,612,835 Accrued interest receivable Loans 996,014 885,596 Investments 165,949 311,238 Mortgage-backed securities 149,598 184,175 Prepaid expenses and other assets 1,963,875 1,913,512 Foreclosed assets held for sale 210,155 1,527 Premises and equipment 6,267,157 6,391,743 ------------ ------------ $199,465,039 185,167,107 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES Deposits $151,246,482 157,007,890 Federal Home Loan Bank advances 18,150,844 -- Advances from borrowers for taxes and insurance 674,618 575,486 Accrued expenses and other liabilities 666,427 496,567 Accrued interest payable 131,245 17,873 Income taxes payable 289,268 158,127 Deferred income taxes 816,000 325,000 ------------ ------------ 171,974,884 158,580,943 ------------ ------------ STOCKHOLDERS' EQUITY Capital Stock Common stock, $1 par value; authorized 8,000,000 shares; issued and outstanding 3,125,000 shares 3,125,000 3,125,000 Additional paid-in capital 3,687,356 3,555,814 Retained earnings, substantially restricted 18,620,219 18,645,939 ------------ ------------ 25,432,575 25,326,753 Unrealized appreciation on available-for-sale securities, net of income taxes 1997 - $1,208,000, 1996 - $740,000 2,057,580 1,259,411 ------------ ------------ 27,490,155 26,586,164 ------------ ------------ $199,465,039 185,167,107 ============ ============
See Notes to Consolidated Financial Statements F-3 Guaranty Federal Savings Bank Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 1997 and 1996
Unrealized Additional Appreciation on Common Paid-In Retained Available-for-Sale Stock Capital Earnings Securities, Net Total ----- ------- -------- --------------- ----- BALANCE, JULY 1, 1994 $ -- -- 16,562,542 -- 16,562,542 Adoption of FAS 115, net of income taxes of $558,000 -- -- -- 950,390 950,390 Net income -- -- 1,329,985 -- 1,329,985 Stock issued 3,125,000 3,899,532 -- -- 7,024,532 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $104,000 -- -- -- 176,489 176,489 ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30, 1995 3,125,000 3,899,532 17,892,527 1,126,879 26,043,938 Net income -- -- 1,753,412 -- 1,753,412 Dividends on common stock, ($.32 per share) -- -- (1,000,000) -- (1,000,000) Recognition and Retention Plan (RRP) expense -- 120,925 -- -- 120,925 Contributions to RRP Trust -- (464,643) -- -- (464,643) Change in unrealized appreciation on available-for-sale securities, net of income taxes of $78,000 -- -- -- 132,532 132,532 ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30, 1996 3,125,000 3,555,814 18,645,939 1,259,411 26,586,164 Net income -- -- 1,161,780 -- 1,161,780 Dividends on common stock, ($.38 per share) -- -- (1,187,500) -- (1,187,500) Dividends received on RRP stock -- 11,987 -- -- 11,987 Recognition and Retention Plan (RRP) expense -- 106,197 -- -- 106,197 Reduction of shares in RRP Trust -- 13,358 -- -- 13,358 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $468,000 -- -- -- 798,169 798,169 ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30, 1997 $ 3,125,000 3,687,356 18,620,219 2,057,580 27,490,155 =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements F-4 Guaranty Federal Savings Bank Consolidated Statements of Cash Flows Years Ended June 30, 1997 and 1996
1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,161,780 1,753,412 1,329,985 Items not requiring (providing) cash: Deferred income taxes 22,000 128,000 71,000 Depreciation 441,367 384,988 132,964 Provision (credit) for loan losses -- (1,211,502) 16,350 (Gain) loss on loans, available-for-sale investment securities and mortgage-backed securities (61,468) (43,065) 103,473 (Gain) loss on sale of premises and equipment (5,169) 79,218 -- Gain on sale of foreclosed assets (9,921) -- -- FHLB stock dividends received -- (34,200) -- Amortization of deferred income, premiums and discounts (220,135) (102,016) (124,184) Origination of loans held for sale (6,626,148) (6,364,845) (1,575,680) Proceeds from sale of loans held for sale 4,134,389 5,361,589 -- RRP expense 106,197 120,925 -- Changes in: Accrued interest receivable 69,448 (107,366) (150,093) Prepaid expenses and other assets (11,357) (76,843) 272,420 Accrued expenses and other liabilities 283,466 102,140 (92,449) Income taxes payable 131,141 51,567 (60,105) ----------- ----------- ----------- Net cash provided by (used in) operating activities (584,410) 42,002 (76,319) ----------- ----------- -----------
See Notes to Consolidated Financial Statements F-5 Guaranty Federal Savings Bank Consolidated Statements of Cash Flows (Continued) Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans $(20,918,542) (12,266,153) (12,925,498) Principal payments on mortgage-backed securities, held-to-maturity 4,300,576 4,627,722 2,484,927 Purchases of mortgage-backed securities, held-to-maturity -- (10,833,592) (2,173,785) Purchase of premises and equipment (337,112) (2,132,191) (2,745,099) Proceeds from sale of premises and equipment 25,500 262,941 -- Proceeds from sales of available-for-sale securities 5,318,175 2,348,454 8,860,215 Proceeds from maturities of available-for-sale securities -- 1,000,000 -- Purchase of available-for-sale securities -- (248,638) (5,259,671) Proceeds from maturities of held-to-maturity securities 1,739,461 5,607,624 2,870,149 Purchases of held-to-maturity securities -- (2,002,500) -- Refund of restricted cash deposit -- -- 34,301 Proceeds from sale of foreclosed assets 362,900 -- -- Capitalized costs on foreclosed assets (90,167) 2,227 148,927 ------------ ------------ ------------ Net cash used in investing activities (9,599,209) (13,634,106) (8,705,534) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid (1,187,500) (1,000,000) -- Cash dividends received on RRP Stock 11,987 -- -- Net increase (decrease) in demand deposits, NOW accounts and savings accounts 4,944,356 3,314,286 (5,681,201) Net increase (decrease) in certificates of deposit (10,705,764) 14,098,895 4,258,871 Advances from borrowers for taxes and insurance 99,132 (32,101) (5,243) Proceeds from FHLB advances 31,163,750 -- 4,000,000 Repayments of FHLB advances (13,012,906) (4,000,000) -- Proceeds from sale of common stock -- -- 7,024,532 Contributions to RRP Trust -- (464,643) -- Reduction of shares in RRP Trust 13,358 -- -- ------------ ------------ ------------ Net cash provided by financing activities 11,326,413 11,916,437 9,596,959 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,142,794 (1,675,667) 815,106 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,674,557 4,350,224 3,535,118 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,817,351 2,674,557 4,350,224 ============ ============ ============ See Notes to Consolidated Financial Statements F-6
Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - ------------ In April 1995, Guaranty Federal Savings & Loan Association reorganized from a federally chartered mutual savings and loan association into a mutual holding company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank was chartered. The Bank issued 3,125,000 shares of common stock in connection with the reorganization, the majority of which are owned by the MHC (see Note 17). Nature of Operations - -------------------- The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in southwest Missouri. It also provides other services, such as insurance and annuities. The Bank is subject to competition from other financial institutions. The Bank also is subject to the regulation of certain federal agencies and undergoes periodic examinations by those regulatory authorities. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiary, Guaranty Financial Services of Springfield, Inc. All significant intercompany profits, transactions and balances have been eliminated in consolidation. 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. 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 Bank's allowances for losses on loans and valuation of foreclosed assets held for sale. Such agencies may require the Bank to recognize additional losses based on their judgments of information available to them at the time of their examination. Cash and Investments in Debt and Equity Securities - -------------------------------------------------- Regulations require the Bank to maintain an amount equal to 5.0% of savings deposits (net of loans on savings deposits) plus short-term borrowings in cash and US government and other approved securities. Available-for-sale securities, which include any security for which the Bank 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. F-7 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and Investments in Debt and Equity Securities (Continued) - --------------------------------------------------------------- Held-to-maturity securities, which include any security for which the Bank 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. 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 sometimes 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 plus the value of retained servicing rights for loans originated after the adoption of SFAS 122 on July 1, 1996, 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. 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. Loan Servicing - -------------- The cost of originated mortgage-servicing rights is amortized over the shorter of the actual or contractual loan life. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market rate. For purposes of measuring impairment, the rights are stratified based on the prepayment risk characteristics of the underlying loan. The predominant characteristic currently used for stratification is type of loan. The amount of impairments recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. Allowance for Loan Losses - ------------------------- The allowance for loan losses is increased by provisions charged to expense and reduced by provisions credited to expense and loans charged off, net of recoveries. The allowance is maintained at a level considered adequate to provide for potential loan losses, based on the Bank's evaluation of the loan portfolio, as 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. A loan is considered impaired when it is probable that the Bank will not receive all amounts due according to the contractual terms of the loan. This includes loans that are delinquent ninety 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 ninety days. Interest is recognized for nonaccrual loans only upon receipt. F-8 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 noninterest expense. Premises and Equipment - ---------------------- Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the 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 over the term of the loan using the level-yield method. Loan servicing income represents fees earned for servicing real estate mortgage loans owned by various investors. Income Taxes - ------------ Deferred tax liabilities and assets 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. Cash Equivalents - ---------------- The Bank considers all highly liquid interest-bearing deposits in other financial institutions with an initial maturity of three months or less to be cash equivalents. Regulatory Matters - ------------------ The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the 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 adjusted tangible assets (as defined). Management believes, as of June 30, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 1997, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. F-9 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Bank's actual capital amounts and ratios are also presented in the table. No amount was deducted from capital for interest-rate risk. Dollar amounts are expressed in thousands.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of June 30, 1997: Stockholders equity, and ratio to total assets ........ $ 27,490 13.8 Unrealized appreciation on available-for-sale securities .... (2,058) --------- Tangible capital, and ratio to adjusted total assets $ 25,432 13.0% $ 2,943 1.5% ========= ==== ======= === Tier 1 (core) capital, and ratio to adjusted total assets $ 25,432 13.0% $ 5,886 3.0% $ 9,810 5.0% ========= ==== ======= === ========= === Tier 1 (core) capital, and ratio to risk-weighted assets $ 25,432 22.1% $ 6,914 6.0% ========= Allowance for loan losses - Tier 2 capital ................... 1,440 ----- Total risk-based capital, and ratio to risk-weighted assets $ 26,872 23.3 $ 9,218 8.0% $ 11,523 10.0% ========= ==== ======= === ========= ==== Total assets ............................. $ 199,465 ========= Adjusted total assets .................... $ 196,199 ========= Risk-weighted assets ..................... $ 115,231 =========
The amount of dividends that the Bank may pay is subject to various regulatory limitations. At June 30, 1997, approximately $9,077,000 was available from the Bank's retained earnings, without regulatory approval, for distribution as dividends. Earnings Per Share - ------------------ Earnings per common share for 1997, 1996 and 1995, since the conversion, are based on net income divided by the weighted average number of common shares outstanding. 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. Weighted Average Shares Number of Common Shares Issuable ----------------------- -------- 1997 3,149,062 24,062 1996 3,125,933 933 1995 (post conversion) 3,125,000 -- Reclassifications - ----------------- Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 financial statements presentation. These reclassifications had no effect on net income. F-10 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of Future Accounting Pronouncements - ------------------------------------------ The FASB recently adopted SFAS 128, "Earnings Per Share." This statement replaces the presentation of primary earnings per share with a presentation of basic earnings per share. The statement also requires dual presentation of basic and diluted earnings per share by entities with complex capital structures and requires a reconciliation of the numerators and denominators between the two calculations. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Management has not estimated the impact, if any, of adopting SFAS 128 on the Bank's financial statements. NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES The amortized cost and approximate fair values of available-for-sale securities are as follows:
June 30, 1997 ---------------------------------------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- Equity Securities: FHLMC stock $ 94,000 3,266,000 -- 3,360,000 -------------- --------- ----------- --------- $ 94,000 3,266,000 -- 3,360,000 ============== ========= =========== =========
June 30, 1996 ---------------------------------------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- Debt Securities: US Treasury $ 5,248,308 35,822 -- 5,284,130 US government agencies 501,006 5,244 -- 506,250 -------------- --------- ----------- --------- 5,749,314 41,066 -- 5,790,380 Equity Securities: FHLMC stock 94,000 1,958,000 -- 2,052,000 -------------- --------- ----------- --------- $ 5,843,314 1,999,066 -- 7,842,380 ============== ========= =========== =========
The amortized cost and approximate fair values of held-to-maturity securities are as follows:
June 30, 1997 ---------------------------------------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- Debt Securities: US government agencies $ 8,585,753 5,143 (217,896) 8,373,000 ================ ===== ======== =========
F-11 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (Continued)
June 30, 1996 ------------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value Debt Securities: US government agencies ......................................... $ 9,865,719 -- (169,719) 9,696,000 =========== ======== ======== =========
Maturities of held-to-maturity debt securities at June 30, 1997:
Amortized Approximate Cost Fair Value ---- ---------- Due in one through five years .................................. $ 7,002,471 6,785,000 Due after ten years ............................................ 1,583,282 1,588,000 ----------- --------- $ 8,585,753 8,373,000 =========== =========
Proceeds from sales of available-for-sale securities were $5,318,175 for the year ended June 30, 1997, with resultant gross gains of $27,897 and gross losses of $102. Proceeds from sales of available-for-sale securities were $2,348,454 for the year ended June 30, 1996, with resultant gross gains of $106,677 and gross losses of $21,484. Proceeds from sales of available-for-sale securities were $8,860,215 for the year ended June 30, 1995, with resultant gross gains of $16,796 and gross losses of $120,269. There were no sales of debt securities from the "held-to-maturity" portfolio for the years ended June 30, 1997, 1996 or 1995. NOTE 3: MORTGAGE-BACKED SECURITIES The amortized cost and approximate fair values of held-to-maturity mortgage-backed securities are as follows:
June 30, 1997 ------------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- Certificates: GNMA ................................................. $ 5,941,453 370,547 -- 6,312,000 FHLMC ................................................ 8,189,400 105,212 (234,612) 8,060,000 FNMA ................................................. 1,683,037 35,963 -- 1,719,000 ----------- ------- ------- ---------- $15,813,890 511,722 (234,612) 16,091,000 =========== ======= ======== ==========
June 30, 1996 ------------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- Certificates: GNMA ................................................. $ 7,316,456 355,544 -- 7,672,000 FHLMC ................................................ 10,219,383 -- (30,383) 10,198,000 FNMA ................................................. 2,531,410 410 (51,820) 2,480,000 ----------- ------- ------- ---------- $20,067,249 355,954 (82,203) 20,341,000 =========== ======= ======= ==========
There were no sales of mortgage-backed securities for the years ending June 30, 1997, 1996 and 1995. F-12 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES Categories of loans at June 30, 1997 and 1996, include:
1997 1996 ---- ---- Real estate - residential mortgage One to four family units $ 110,537,731 95,501,514 Multi-family 15,456,727 13,701,131 Real estate - construction 25,148,543 21,729,463 Real estate - commercial 8,323,579 8,738,522 Commercial loans 383,116 254,909 Installment loans 4,492,833 1,053,049 Loans on savings accounts 719,657 529,952 ------------- ----------- 165,062,186 141,508,540 Undisbursed portion of loans-in-process (10,475,789) (7,572,330) Allowance for loan losses (2,177,009) (2,108,059) Unearned discounts (216,141) (237,520) Deferred loan costs, net 39,048 22,204 ------------- ----------- $ 152,232,295 131,612,835 ============= ===========
Transactions in the allowance for loan losses were as follows:
1997 1996 1995 ---- ---- ---- Balance, beginning of year $ 2,108,059 1,718,316 1,703,435 Provision (credit) charged to operations -- (1,211,502) 16,350 Loans charged off (62,768) (4,648) (5,511) Recoveries 131,718 1,406,860 4,042 Allowances reclassified to loans which were previously classified as in- substance foreclosures (Note 5) -- 199,033 -- ----------- --------- --------- Balance, end of year $ 2,177,009 2,108,059 1,718,316 =========== ========= =========
The weighted average interest rate on loans at June 30, 1997 and 1996, was 8.43% and 8.19%, respectively. The Bank serviced mortgage loans for others amounting to $14,165,126, $11,290,426 and $7,315,988 at June 30, 1997, 1996 and 1995 respectively. Impaired loans totaled $1,257,352 at June 30, 1997, and $393,398 at June 30, 1996 with a related allowance for loan losses of $206,897 and $147,302, respectively. At June 30, 1997 and 1996, respectively, impaired loans of $75,956 and $0 had no related allowance for loan losses. Interest of $66,676 and $995 was recognized on average impaired loans of $1,342,217 and $157,574 for 1997 and 1996 respectively. No interest was recognized on impaired loans on a cash basis during 1997 and 1996. NOTE 5: FORECLOSED ASSETS HELD FOR SALE Foreclosed assets held for sale consist of the following: 1997 1996 ---- ---- Foreclosed real estate $210,155 1,527 Valuation allowance -- -- -------- ----- $210,155 1,527 ======== ===== F-13 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 5: FORECLOSED ASSETS HELD FOR SALE (Continued) Changes in the valuation allowance on foreclosed assets were as follows: 1997 1996 1995 ---- ---- ---- Balance, beginning of year $ -- 45,637 45,637 Valuation allowance related to in-substance foreclosures -- (45,637) -- ------ ------- ------ Balance, end of year $ -- -- 45,637 ====== ======= ====== As of July 1, 1995, the Bank implemented Statement of Financial Accounting Standard No. 114. While implementation had no material effect on net income, in accordance with the new pronouncement, loans totaling $851,818, net of the valuation allowance, which were previously classified as in-substance foreclosures and reported as part of foreclosed assets held-for-sale have been reclassified to loans along with $199,033 of related allowances for collectability. NOTE 6: PREMISES AND EQUIPMENT Major classifications of premises and equipment, stated at cost, are as follows: 1997 1996 ---- ---- Land $ 993,445 993,445 Buildings and improvements 5,244,129 5,002,248 Furniture, fixtures and equipment 1,330,275 1,278,811 Automobiles 20,243 36,706 ----------- --------- 7,588,092 7,311,210 Accumulated depreciation (1,320,935) (919,467) ----------- --------- $ 6,267,157 6,391,743 =========== ========= Depreciation expense was $441,367, $384,988 and $132,964 for the years ended June 30, 1997, 1996 and 1995, respectively. NOTE 7: DEPOSITS
June 30, 1997 June 30, 1996 ------------------------------------- --------------------------------------- Weighted Percentage Weighted Percentage Average of Average of Rate Balance Deposits Rate Balance Deposits ---- ------- -------- ---- ------- -------- Core Deposits: Demand 0.00% $ 2,334,159 1.5% 0.00% $ 1,534,264 1.0% NOW 2.34 9,385,517 6.2 2.36 6,624,905 4.2 Money market 3.62 8,288,164 5.5 3.16 5,263,386 3.3 Passbook savings 2.76 8,621,308 5.7 3.06 10,262,237 6.5 ----------- ---- ----------- ---- 2.64 28,629,148 18.9 2.69 23,684,792 15.0 ----------- ---- ----------- ---- Certificates: 0% - 3.99% 2.75 5,928 0.0 3.00 49,859 0.1 4.00% - 5.99% 5.47 108,383,612 71.7 5.34 106,243,545 67.7 6.00% - 7.99% 6.40 14,227,794 9.4 6.44 27,029,694 17.2 ----------- ---- ----------- ---- 5.58 122,617,334 81.1 5.56 133,323,098 85.0 ----------- ---- ----------- ---- Total Deposits 5.02 $151,246,482 100.0% 5.13 $157,007,890 100.0% ============ ===== ============ =====
The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $8,000,000 and $8,780,000 at June 30, 1997 and 1996, respectively. F-14 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 7: DEPOSITS (Continued) A summary of savings certificates by maturity at June 30, 1997, is as follows: Fiscal year ending: June 30, 1998 $ 81,479,645 June 30, 1999 27,125,222 June 30, 2000 6,342,552 June 30, 2001 4,034,303 June 30, 2002 3,130,335 Thereafter 505,277 ------------- $ 122,617,334 ============= A summary of interest expense on deposits is as follows: 1997 1996 1995 ---- ---- ---- NOW and Money Market accounts $ 406,025 276,460 244,705 Savings accounts 258,143 314,557 462,655 Certificate accounts 6,823,212 7,633,893 5,766,502 Early withdrawal penalties (16,287) (24,884) (30,266) ----------- --------- --------- $ 7,471,093 8,200,026 6,443,596 =========== ========= ========= NOTE 8: FEDERAL HOME LOAN BANK ADVANCES At June 30, 1997, Federal Home Loan Bank advances consisted of the following: Weighted Average Maturity Date Rate Amount ------------- ---- ------ 1998 5.90% $ 5,000,000 1999 6.22 3,000,000 2000 6.11 7,528,750 2001 -- -- 2002 6.21 1,635,000 Thereafter 6.84 987,094 ---- ----------- 6.12 $18,150,844 ==== =========== The FHLB requires the Bank to maintain FHLB stock, investment securities and first mortgage loans free of other pledges, liens and encumbrances in an amount equal to at least 150% of outstanding advances as collateral for such borrowings. NOTE 9: INCOME TAXES In computing federal income taxes for taxable years prior to July 1, 1996, the Bank has been allowed an 8% deduction from otherwise taxable income as a statutory bad debt deduction, subject to limitations based on aggregate loans and savings balances. 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 year period. The amount of the deferred tax liability which must be recaptured is $338,000 as of June 30, 1997. F-15 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 9: INCOME TAXES (Continued) As of June 30, 1997 and 1996, retained earnings includes approximately $5,075,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for 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 $1,878,000 at June 30, 1997 and 1996. The provision for income taxes consists of: 1997 1996 1995 ---- ---- ---- Taxes currently payable $ 642,500 898,000 619,000 Deferred income taxes 22,000 128,000 71,000 ---------- --------- ------- $ 664,500 1,026,000 690,000 ========== ========= ======= The tax effects of temporary differences related to deferred taxes shown on the June 30, 1997 and 1996, balance sheets are:
1997 1996 ---- ---- Deferred tax assets: Allowance for loan and foreclosed asset losses $ 778,000 779,000 Accrued compensated absences 19,000 17,000 Accrued retirement plan costs 33,000 52,000 Unrealized loss on loans held for sale 80,000 88,000 RRP expense 57,000 45,000 ----------- -------- 967,000 981,000 ----------- -------- Deferred tax liabilities: FHLB stock dividends 207,000 207,000 Deferred loan fees/costs 15,000 9,000 Tax bad debt reserves in excess of base year 338,000 350,000 Mortgage servicing rights 15,000 -- Unrealized appreciation on available-for-sale securities 1,208,000 740,000 ----------- -------- 1,783,000 1,306,000 ----------- -------- Net deferred tax liability $ (816,000) (325,000) =========== ========
A reconciliation of income tax expense at the statutory rate to income tax expense at the Bank's effective rate is shown below: 1997 1996 1995 ---- ---- ---- Computed at statutory rate 34.0% 34.0% 34.0% Increase (reduction) in taxes resulting from: State financial institution tax 3.3 4.5 3.6 Tax-exempt interest -- (.5) (1.7) Change in deferred tax valuation allowance -- -- (.1) Other (.9) (1.1) (1.6) ---- ---- ---- Actual tax provision 36.4% 36.9% 34.2% ==== ==== ==== State legislation provides that savings and loan associations will be taxed based on an annual privilege tax of 7% of net income. The privilege tax is included in provision for income taxes. Deferred income taxes related to the change in unrealized appreciation on available-for-sale securities, shown in stockholders' equity, were approximately $468,000 and $78,000 for 1997 and 1996, respectively. F-16 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 10: 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 - ------------------------- The carrying amounts reported in the balance sheets for cash and cash equivalents approximate those assets' fair value. Available-For-Sale and Held-To-Maturity Securities and Mortgage-Backed Securities - -------------------------------------------------------------------------------- Fair values for investment and mortgage-backed securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. The carrying amount of accrued interest approximates its fair value. Mortgage Loans Held for Sale - ---------------------------- For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. 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 remaining maturities. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value. Deposits - -------- The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value of fixed-maturity certificates of deposit 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 Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing advances. 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 is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The following table presents estimated fair values of the Bank'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 Bank 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. F-17 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
June 30, 1997 June 30, 1996 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash and cash equivalents $ 3,817,351 3,871,351 2,674,557 2,674,557 Available-for-sale securities 3,360,000 3,360,000 7,842,380 7,842,380 Held-to-maturity securities 8,585,753 8,373,000 9,865,719 9,696,000 Mortgage-backed securities 15,813,890 16,091,000 20,067,249 20,341,000 Mortgage loans held for sale 5,903,002 5,903,002 3,416,576 3,416,576 Loans, net of allowance for loan losses 152,232,295 155,505,000 131,612,835 137,373,000 Interest receivable 1,311,561 1,311,561 1,381,009 1,381,009 Financial liabilities: Deposits 151,246,482 150,926,000 157,007,890 157,084,000 Federal Home Loan Bank advances 18,150,844 18,180,000 -- -- Unrecognized financial instruments (net of contractual value): Commitments to extend credit -- -- -- -- Unused lines of credit -- -- -- --
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. NOTE 12: ADDITIONAL CASH FLOW INFORMATION
1997 1996 1995 ---- ---- ---- Noncash Investing and Financing Activities Transfer of insubstance foreclosed assets to loans $ -- 652,785 -- Assets held-for-sale transferred to investment securities and mortgage-backed securities -- -- 14,602,295 Loans held for sale transferred to loans receivable portfolio -- 708,700 -- Loans receivable transferred to loans held for sale -- -- 1,588,468 Loans receivable transferred to foreclosed assets held for sale 471,440 -- -- Additional Cash Payment Information Interest paid 8,198,629 8,266,794 6,572,589 Income taxes paid 582,319 845,682 697,739
NOTE 13: EMPLOYEE BENEFIT PLANS The Bank participates in a multiemployer pension plan covering all employees who have met minimum service requirements. As a member of a multiemployer pension plan, disclosures of plan assets and liabilities for individual employers are not required or practicable. Due to changes enacted under the Tax Reform Act of 1986, qualified pension plans require benefit accruals for any active employee working beyond age 65 with respect to service completed on or after July 1, 1988. Internal Revenue Service interpretations require retroactive credit for the period between age 65 and July 1, 1988. F-18 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 13: EMPLOYEE BENEFIT PLANS (Continued) As a result, the Bank has accrued an unfunded liability of $87,005 and $139,843 at June 30, 1997 and 1996, respectively, to provide for prior service credit to its eligible employees. Pension plan expense was $128,785, $156,013 and $173,889 for the years ended June 30, 1997, 1996 and 1995 respectively. The Bank has established a Recognition and Retention Plan (RRP) for the benefit of directors, officers and employees of the Bank and its subsidiary. The RRP was voted on and approved by the Bank's stockholders at the October 18, 1995, annual stockholders' meeting. The RRP provides directors, officers and employees of the Bank with a proprietary interest in the Bank in a manner designed to encourage these individuals to remain with the Bank. The Plan is administered by a Committee consisting of members of the Bank's Board of Directors. Under the Plan, the Committee can award up to 38,895 shares of the Bank's common stock to selected directors, officers and employees. As of June 30, 1997, all shares have been awarded. A total of 5,629 shares had been forfeited as of June 30, 1997. The awards vest at the rate of 20% per year over a five-year period. Compensation expense is recognized based on the Bank's stock price on the date the Plan was ratified by stockholders, which was $11.00 per share. The Bank recognized $106,197 and $120,925 of expense under the RRP in 1997 and 1996, respectively. Shares to be issued under the RRP are purchased on the open market by a separate RRP Trust. The Bank contributed $464,643 to the Trust for stock purchases during the year ended June 30, 1996. These contributions have been accounted for as a reduction of stockholders' equity. In addition to the RRP, the Bank has established the 1994 Stock Option and Incentive Plan for the benefit of certain directors, officers and employees of the Bank and its subsidiary. The Plan was voted on and approved by stockholders at the October18, 1995, annual stockholders' meeting. The Plan is administered by the Bank Option Committee. Under the Plan, the Option Committee may grant stock options or awards of up to 97,237 shares of the Bank's common stock. 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 Bank or its subsidiary. The option price must not be less than the market value of the Bank 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 June 30, 1997 and 1996, and changes during the years then ended is presented below:
June 30, 1997 June 30, 1996 ------------------------------ -------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------ ----------------- ------ ---------------- Outstanding, Beginning of Year 84,375 $ 11.62 97,237 $ 11.62 Granted 6,640 11.55 -- -- Exercised -- -- -- -- Forfeited (12,459) 11.62 (12,862) -- ------ ------- ------ ------- End of Year 78,556 $ 11.61 84,375 $ 11.62 ====== ======= ====== ======= Options Exercisable, End of Year 14,383 -- ====== ======
F-19 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 13: EMPLOYEE BENEFIT PLANS (Continued) 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:
June 30, 1997 June 30, 1996 ------------- ------------- Dividends per share $0.33 0.32 Risk-Free Interest Rate 6.36% 5.54 Expected Life of Options 5 years 5 years Weighted-Average Fair Value of Options Granted During Year $2.51 2.46
The following table summarizes information about stock options under the Plan outstanding at June 30, 1997: Options Outstanding Options Exercisable ------------------------------- --------------------- Range of Number Remaining Number Exercise Exercise Prices Outstanding Contractual Life Exercisable Price - --------------- ----------- ---------------- ----------- ----- $ 11.25 2,640 9.5 years -- -- $ 11.62 71,916 8.5 years 14,383 $ 11.62 $ 11.75 4,000 9.0 years -- -- The Bank 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 Bank's Plan been determined based on the fair value at the dates using Statement of Financial Accounting Standards No. 123, the Bank's net income would have decreased by $32,187 and $16,083 and earnings per share would have decreased by $0.01 for 1997 and 1996. 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 14: TRANSACTION WITH RELATED PARTIES In June 1996, the Bank closed a $906,500 one-year term loan to the MHC for the purchase of and secured by certain real estate in Southwest Missouri. This loan is payable in monthly installments of interest at Prime plus 2% with the principal balance due in August 1998. The principal balance of the loan was $600,000 and $906,500 on June 30, 1997 and June 30, 1996, respectively. Beginning in November 1995, the Bank leased office space to the MHC at $200 per month. Rental income pursuant to this agreement was $2,400 and $1,400 in 1997 and 1996, respectively. The rental is negotiable November 1 of each subsequent year. Certain executive officers of the Bank were customers of and had transactions with the Bank in the ordinary course of business. At June 30, 1997 and 1996, loans outstanding to these executive officers amounted to $281,000 and $382,000, respectively. In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features. F-20 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 15: LEASES In September 1995, the Bank completed construction of a new home office facility. The Bank does not require full use of the building, so it leases the excess space to other tenants. As of June 30, 1997, the Bank has signed leases on all 8,938 square feet available for lease in the building. One lease agreement is with the holding company of the Bank as discussed in Note 14. The following minimum lease payments will be received as a result of leases signed as of June 30, 1997: 1998 $ 116,216 1999 97,601 2000 59,740 2001 54,762 --------- $ 328,319 ========= NOTE 16: 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 Bank evaluates each customer's credit worthiness on a casebycase basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At June 30, 1997 and 1996, the Bank had outstanding commitments to originate loans of approximately $2,084,000 and $850,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirtyday period. At June 30, 1997 and 1996, commitments of $395,000 and $140,000, respectively, were at fixed rates and $1,689,000 and $710,000, respectively, were at floating market rates. Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Related forward commitments to sell mortgage loans amounted to approximately $1,069,000 and $35,000 at June 30, 1997 and 1996, respectively. Letters of credit are conditional commitments issued by the 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 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 Bank had no outstanding letters of credit at June 30, 1997 and 1996. 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. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, 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. Management uses the same credit policies in granting lines of credit as it does for on balance sheet instruments. At June 30, 1997, the Bank had granted unused lines of credit to borrowers aggregating approximately $266,000 and $2,275,000 for commercial lines and open-end consumer lines, respectively. At June 30, 1996, unused lines of credit to borrowers aggregated approximately $66,000 for commercial lines and $1,837,000 for open-end consumer lines. F-21 Guaranty Federal Savings Bank Notes to Consolidated Financial Statements Years Ended June 30, 1997, 1996 and 1995 NOTE 16: COMMITMENTS AND CREDIT RISK (Continued) Although the Bank grants consumer loans, the majority of its loan originations are single or multi-family residential real estate in Springfield, Missouri, and the surrounding area. At June 30, 1997, the Bank had eighteen borrowers with balances in excess of $1,000,000 each, aggregating $35,171,000 for which the collateral is primarily singlefamily and multi-family residential rental real estate and commercial real estate. At June 30, 1996, the Bank had fifteen borrowers with balances in excess of $1,000,000 each, aggregating $30,259,000 for which the collateral is primarily single-family and multifamily residential rental real estate and commercial real estate. Also, at June 30, 1997 and 1996, the Bank had $19,340,000 and $13,590,000, respectively, in construction loans to or guaranteed by builders of primarily residential property. NOTE 17: REORGANIZATION TO A MUTUAL HOLDING COMPANY In connection with the Reorganization in April 1995, Guaranty Federal Savings and Loan Association (the "Association") reorganized from a federally chartered mutual savings and loan association into a federal mutual holding company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). As part of the reorganization, the Association incorporated a de novo federally chartered stock savings bank, Guaranty Federal Savings Bank (the "Bank") and transferred most of its assets and all its liabilities to the Bank. The Bank issued 3,125,000 shares of its common stock (par value $1.00) of which 972,365 shares were sold to parties other than the MHC, thus creating a minority ownership interest in the Bank. The shares had an initial public offering price of $8 per share, resulting in gross sales proceeds of $7,778,920. Costs related to the stock issuance, which have been applied to reduce the gross proceeds, were $654,388. Also $100,000 was transferred to the MHC for initial capitalization in connection with Reorganization. The net proceeds of $7,024,532 have been included in common stock and capital surplus on the accounts of the Bank. As long as they remain depositors of the Bank, persons who prior to the reorganization had liquidation rights with respect to the Association will continue to have such rights solely with respect to the MHC. For a period of three years after the reorganization, no person, other than the MHC, may directly or indirectly acquire the beneficial ownership of more than 10% of the common stock of the Bank without prior approval of the Office of Thrift Supervision. In May 1997, the Boards of Directors of the Bank and MHC announced a plan whereby the Bank would be wholly owned by a newly formed stock holding company. Each share of Bank common stock currently owned by public stockholders shall be automatically converted into shares of the Holding Company common stock based upon an exchange ratio. Subscription rights to purchase the remainder of the conversion stock will be granted to certain eligible depositors and other members of the Bank and MHC. Any shares not sold in the subscription offering will be offered to certain persons in a community offering. The Conversion and Reorganization are subject to several contingencies, including the receipt of regulatory approval, the approval of the depositors of the Bank and the approval of the stockholders of the Bank. F-22 Glossary -------- Affiliate means a Person who, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. Associate, when used to indicate a relationship with any Person, means (i) a corporation or organization (other than the Mutual Holding Company, the Bank, a majority-owned subsidiary of the Bank or the Company) of which such Person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, provided, however, that such term shall not include any Tax-Qualified Employee Stock Benefit Plan of the Company or the Bank in which such Person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Company or the Bank or any of the subsidiaries of the foregoing. Bank means Guaranty Federal Savings Bank in its mutual or stock form or Guaranty Federal Savings Bank following consummation of the Conversion and Reorganization, as the context of the reference indicates. Bank Common Stock means the common stock of the Bank, par value $1.00 per share, which stock is not and will not be insured by the FDIC or any other governmental authority. Bank Merger means the merger of Interim B with and into the Bank pursuant to the Plan of Reorganization which is included as an appendix to the Plan. Code means the Internal Revenue Code of 1986, as amended. Common Stock means the Common Stock of the Company, par value $.10 per share, which stock cannot and will not be insured by the FDIC or any other governmental authority. Community Offering means the offering for sale by the Company of any shares of Common Stock not subscribed for in the Subscription Offering or Public Stockholders' Offering to (i) natural persons residing in the Local Community, and (ii) such other Persons within or without the State of Missouri as may be selected by the Company and the Bank within their sole discretion. Company means Guaranty Federal Bancshares, Inc., a corporation organized under the laws of the State of Delaware. The Company is a first-tier, wholly owned subsidiary of the Bank. Upon completion of the Conversion and Reorganization, the Company will hold all of the outstanding capital stock of the Bank. Control (including the terms "controlling," "controlled by," and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction A-1 of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Conversion Stock means the Common Stock to be issued through the Offerings and, therefore, excludes Exchange Shares. Conversion and Reorganization means (i) the conversion of the Mutual Holding Company to an interim federal stock savings association and the subsequent merger, pursuant to which the Mutual Holding Company will cease to exist, (ii) the Bank Merger, pursuant to which the Bank will become a wholly owned subsidiary of the Company and, in connection therewith, each share of Bank Common Stock outstanding immediately prior to the effective time thereof that is held by Public Stockholders shall automatically be converted, without further action by the holder thereof, into and become the right to receive shares of Common Stock based on the Exchange Ratio, plus cash in lieu of any fractional share interest, and (iii) the issuance of Common Stock by the Company in the Offerings, which will increase the number of shares of Common Stock outstanding and the capitalization of the Company and the Bank. Deposit Account means savings and demand accounts, including passbook accounts, money market deposit accounts and negotiable order of withdrawal accounts, and certificates of deposit and other authorized accounts of the Bank held by a Member. Director, Officer and Employee means the terms as applied respectively to any person who is a director, officer or employee of the Mutual Holding Company, the Bank or any subsidiary thereof. Eligible Account Holder means any Person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining subscription rights and establishing subaccount balances in the liquidation account to be established pursuant to the Plan. Eligibility Record Date means the date for determining Qualifying Deposits of Eligible Account Holders and is the close of business on December 31, 1995. Estimated Price Range means the range of the estimated aggregate pro forma market value of the Conversion Stock to be issued in the Offerings, as determined by the Independent Appraiser. Exchange Ratio means the rate at which shares of Common Stock will be exchanged for shares of Bank Common Stock held by the Public Stockholders in connection with the Bank Merger. The exact rate shall be determined by the Mutual Holding Company and the Bank in order to ensure that upon consummation of the Conversion and Reorganization the Public Stockholders will own in the aggregate approximately the same percentage of the Common Stock to be outstanding upon completion of the Conversion and Reorganization as the percentage of Bank Common Stock owned by them in the aggregate on the Effective Date, as adjusted in accordance with OTS policy to reflect any special dividends declared by the Bank and waived by the Mutual Holding Company, but before giving effect to (a) cash paid in lieu of any A-2 fractional interests of Common Stock and (b) any shares of Common Stock purchased by the Public Stockholders in the Offerings or tax-qualified employee stock benefit plans thereafter. Exchange Shares means the shares of Common Stock to be issued to the Public Stockholders in connection with the Bank Merger. ESOP means the employee stock ownership plan. FBR means Friedman, Billings, Ramsey & Co., Inc., who has been engaged to render financial advisory advice to the Primary Parties and serve as the selling agent in the Offerings. FDIC means the Federal Deposit Insurance Corporation or any successor thereto. FHLB means the Federal Home Loan Bank. FHLMC means the Federal Home Loan Mortgage Corporation. GNMA means the Government National Mortgage Association. Guaranty Federal means Guaranty Federal Savings Bank. Independent Appraiser means the independent investment banking or financial consulting firm retained by the Holding Company and the Bank to prepare an appraisal of the estimated pro forma market value of the Common Stock. Interim A means Guaranty Federal Interim Bancshares, an interim federal stock savings bank, which will be formed as a result of the conversion of Guaranty Federal Bancshares, M.H.C. into the stock form of organization. Interim B means Guaranty Federal Interim Savings Bank, which will be formed as a first-tier, wholly owned subsidiary of the Company to facilitate the Bank Merger. IRS means Internal Revenue Service. Local Community means Greene County, Missouri. Member means any Person qualifying as a member of the Mutual Holding Company in accordance with its mutual charter and bylaws and the laws of the United States. MHC Merger means the merger of Interim A with and into the Bank pursuant to the Plan of Merger that is included as an appendix to the Plan Mutual Holding Company means Guaranty Federal Bancshares, M.H.C. prior to its conversion into an interim federal stock savings bank. OCC means Office of the Comptroller of the Currency. A-3 Offerings means the Subscription Offering, the Public Stockholders' Offering, the Community Offering and the Syndicated Community Offering, if applicable. Officer means the president, senior vice-president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any other person performing similar functions with respect to any organization whether incorporated or unincorporated. Order Form means the form or forms provided by the Company to a Participant or other Person by which Common Stock may be ordered in the Offerings. The Order Form includes a certification that, among other things, a prospectus has been received, and the risks described in the prospectus have been reviewed. Other Member means a Voting Member who is not an Eligible Account Holder or a Supplemental Eligible Account Holder. OTS means the Office of Thrift Supervision or any successor thereto. Participant means any Eligible Account Holder, Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible Account Holder and Other Member. Person means an individual, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or a government or any political subdivision thereof. Plan and Plan of Conversion means the Plan of Conversion and Agreement and Plan of Reorganization, as amended, as adopted by the Boards of Directors of the Mutual Holding Company, the Bank and the Company. Primary Parties means the Mutual Holding Company, the Bank and the Company. Prospectus means the one or more documents to be used in offering the Conversion Stock in the Offerings. Public Stockholders means those Persons who own shares of Bank Common Stock, excluding the Mutual Holding Company, as of the Stockholder Voting Record Date. Public Stockholders' Offering means the offering for sale by the Company of any shares of Common Stock not subscribed for in the Subscription Offering to Public Stockholders, at the sole discretion of the Bank and Company. Purchase Price means the $10.00 price per share at which the Conversion Stock is sold by the Holding Company in the Offerings. Qualifying Deposit means the aggregate balance of all Deposit Accounts in the Bank of (i) an Eligible Account Holder at the close of business on the Eligibility Record Date, provided such aggregate balance is not less than $50, and (ii) a Supplemental Eligible Account Holder at A-4 the close of business on the Supplemental Eligibility Record Date, provided such aggregate balance is not less than $50. Resident means any person who, on the date designated for that category of subscriber in the Plan, maintained a bona fide residence within the Local Community and has manifested an intent to remain within the Local Community for a period of time. The designated dates for Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are the Eligibility Record Date, the Supplemental Eligibility Record Date and the Voting Record Date, respectively. To the extent the person is a corporation or other business entity, the principal place of business or headquarters must be within the Local Community in order to qualify as a Resident. To the extent the person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is a bona fide resident of the Local Community. Subscribers in the Community Offering who are natural persons also will have a purchase preference if they were residents of the Local Community on the date of the Prospectus. In all cases, however, such determination shall be in the sole discretion of the Bank and the Company. RP Financial means RP Financial, L.C., who has been engaged as the Independent Appraiser. SAIF means the Savings Association Insurance Fund of the FDIC. SEC means the Securities and Exchange Commission. Special Meeting means the Special Meeting of Members of the Mutual Holding Company called for the purpose of submitting the Plan to the Members for their approval, including any adjournments of such meeting. Stockholders means those Persons who own shares of Bank Common Stock. Stockholders' Meeting means the annual or special meeting of Stockholders of the Bank called for the purpose of submitting the Plan to the Stockholders for their approval, including any adjournments of such meeting. Stockholder Voting Record Date means the date for determining the Public Stockholders of the Bank eligible to vote at the Stockholders' Meeting. Subscription Offering means the offering of the Common Stock to Participants. Subscription Rights means nontransferable rights to subscribe for Common Stock granted to Participants pursuant to the terms of the Plan. Supplemental Eligible Account Holder means any Person holding a Qualifying Deposit at the close of business on the Supplemental Eligibility Record Date. A-5 Supplemental Eligibility Record Date means the date for determining Qualifying Deposits of Supplemental Eligible Account Holders and is the close of business on September 30, 1997. Syndicated Community Offering means the offering for sale by a syndicate of broker-dealers to the general public of shares of Common not purchased in the Subscription Offering, Public Stockholders' Offering and the Community Offering. Tax-Qualified Employee Stock Benefit Plan means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which is established for the benefit of the employees of the Company and the Bank and which, with its related trust, meets the requirements to be "qualified" under Section 401 of the Code as from time to time in effect. A "Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or defined contribution stock benefit plan which is not so qualified. Voting Member means a Person who at the close of business on the Voting Record Date is entitled to vote as a Member of the Mutual Holding Company. Voting Record Date means the date or dates for determining the eligibility of Members to vote at the Special Meeting and is the close of business on ______________ 1997. A-6
=========================================================================== ==================================================== No dealer, salesman or other person has been authorized to give any information or to make any representations not contained in this Prospectus in connection with the offering made hereby, and, if given or made, such information or representations must not be relied upon as having been authorized by the Bank, the Company or the Selling Agent. This Prospectus does not constitute an offer Up to 5,410,019 Shares to sell, or the solicitation of an offer to buy, any of the securities (Anticipated Maximum) offered hereby to any person in any jurisdiction in which such Common Stock offer or solicitation would be unlawful. Neither the delivery of this Prospectus by the Bank, the Mutual Holding Company, the Company or the Agent nor any sale made hereunder shall in any circumstances create an implication that there has been no change in the affairs of the Bank or the Company since any of the dates as of which information is furnished herein or since the date hereof. [Logo] TABLE OF CONTENTS Page ---- Summary........................................ 1 Guaranty Federal Bancshares, Inc. Selected Consolidated Financial and Other Data. Recent Developments............................ (Proposed Holdling Company for Management's Discussion and Analysis of Guaranty Federal Savings Bank) Recent Developments.......................... Risk Factors................................... Common Stock Guaranty Federal Bancshares, Inc. ............. par value $0.10 per share The Bank ...................................... Guaranty Federal Bancshares, M.H.C............. Use of Proceeds................................ Dividend Policy................................ ------------- Market for Common Stock........................ Capitalization................................. PROSPECTUS Historical and Pro Forma Capital Compliance.... Pro Forma Data................................. ------------- Management's Discussion and Analysis of Financial Condition and Results of Operations.......... Business of the Bank........................... Regulation..................................... Federal and State Taxation..................... FRIEDMAN, BILLINGS, RAMSEY & CO., INC. Management of the Company...................... Management of the Bank......................... Beneficial Ownership of Common Stock........... Dated November ______, 1997 The Conversion and Reorganization.............. Comparison of Stockholders' Rights............. Certain Restrictions on Acquisition of the Company.................................. Description of Capital Stock of the Company.... Legal Opinions................................. Tax Opinions................................... Experts........................................ Registration Requirements...................... Additional Information......................... Index to Consolidated Financial Statements..... F-1 Until the later of __________ ___, 1997, or 25 days after commencement of the offering of Common Stock, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. =========================================================================== ====================================================
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution * Special Counsel Fees and Expenses.................. $ 250,000 * Local Counsel Fees and Expenses.................... 10,000 * Accounting Fees and Expenses....................... 60,000 * Appraisal/Business Plan Fees and Expenses.......... 42,500 * Blue Sky Legal and Filing Fees..................... 25,000 * Conversion Agent................................... 12,500 * Printing Fees and Expenses......................... 100,000 * Postage and Mailing Expenses....................... 60,000 * Stock Certificate Expenses......................... 15,000 * Transfer Agent Fees................................ 20,000 * Underwriting Fees.................................. 150,000 * Underwriting Expenses.............................. 50,000 * Filing Fees........................................ OTS....................................... 8,400 Nasdaq.................................... 36,100 SEC....................................... 19,000 NASD...................................... 6,700 * EDGAR Fees and Expenses............................ 20,000 * Other.............................................. 29,800 -------- Total............................. $ 915,000 ======== - ----------------- * Estimated. Item 14 Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Act sets forth circumstances under which directors, officers, employees and agents may be insured or indemnified against liability which they may incur in their capacities as such. The Certificate of Incorporation of the registrant (the "Certificate") requires indemnification of directors, officers and employees to the fullest extent permitted by Delaware law and limits the liability of directors to the fullest extent permitted by Delaware law. The registrant may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent thereof or who is or was serving at the request of the registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the registrant would have the power to indemnify him against such liability under the provisions of the Certificate. A result of such provisions could be to increase the expenses of the registrant and effectively reduce the ability of stockholders to sue on behalf of the registrant since certain suits could be barred or amounts that might otherwise be obtained on behalf of the registrant could be required to be repaid by the registrant to an indemnified party. Item 15. Recent Sales of Unregistered Securities. Not Applicable Item 16. Exhibits and Financial Statement Schedules: The financial statements and exhibits filed as part of this Registration Statement are as follows:
(a) List of Exhibits: 1 Agency Agreement with Friedman, Billings, Ramsey & Co., Inc.* 2 Amended Plan of Conversion of Guaranty Federal Bancshares, M.H.C. and Agreement and Plan of Reorganization between Guaranty Federal Bancshares, M.H.C. and Guaranty Federal Savings Bank 3(i) Certificate of Incorporation of Guaranty Federal Bancshares, Inc. 3(ii) Bylaws of Guaranty Federal Bancshares, Inc. 4 Specimen Stock Certificate of Guaranty Federal Bancshares, Inc. 5 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered 8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C. 8.2 Missouri Tax Opinion of Carnahan, Evans, Cantwell & Brown, P.C. 8.3 Statement of RP Financial, LC. as to the value of subscription rights 10.1 1994 Stock Option Plan of Guaranty Federal Savings Bank 10.2 1994 Recognition and Retention Plan of Guaranty Federal Savings Bank 23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (included with Exhibits 5 and 8.1) 23.2 Consent of Baird, Kurtz & Dobson 23.3 Consent of RP Financial, LC. 23.4 Consent of Carnahan, Evans, Cantwell & Brown, P.C. (included with Exhibit 8.2) 24 Power of Attorney (included with signature page) 99.1 Appraisal Report of RP Financial, LC. dated as of September 5, 1997. 99.2 Marketing Material*
- ------------------- * To be filed by amendment (b) Financial Statements and Schedules: Except for schedules required for electronic filers, financial statement schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or the notes thereto. Item 17. Undertakings I. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933 ("Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Springfield, Missouri, as of September 17, 1997. GUARANTY FEDERAL BANCSHARES, INC. By: /s/James E. Haseltine James E. Haseltine President and Chief Executive Officer (Duly Authorized Representative) We the undersigned directors and officers of Guaranty Federal Bancshares, Inc. do hereby severally constitute and appoint James E. Haseltine and Bruce Winston our true and lawful attorneys and agents, to do any and all things and acts in our names in the capacities indicated below and to execute all instruments for us and in our names in the capacities indicated below which said James E. Haseltine and Bruce Winston may deem necessary or advisable to enable Guaranty Federal Bancshares, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of Guaranty Federal Bancshares, Inc.'s common stock, including specifically but not limited to, power and authority to sign for us or any of us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby ratify and confirm all that James E. Haseltine and Bruce Winston shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities indicated as of September 17, 1997. /s/James E. Haseltine /s/George L. Hall - ------------------------------------- ----------------------------- James E. Haseltine George L. Hall President and Chief Executive Officer Director (Principal Executive Officer) /s/Bruce Winston /s/Ivy L. Rogers - ------------------------------------- ----------------------------- Bruce Winston Ivy L. Rogers Vice President and Chief Financial Officer Director (Principal Financial and Accounting Officer) /s/Jack L. Barham /s/Gary Lipscomb - ------------------------------------- ----------------------------- Jack L. Barham Gary Lipscomb Chairman of the Board and Director Director /s/Wayne V. Barnes - ------------------------------------- Wayne V. Barnes Director EX-2 2 EXHIBIT 2 EXHIBIT 2 PLAN OF CONVERSION of GUARANTY FEDERAL BANCSHARES, M.H.C. and AGREEMENT AND PLAN OF REORGANIZATION between GUARANTY FEDERAL BANCSHARES, M.H.C. and GUARANTY FEDERAL SAVINGS BANK as amended
TABLE OF CONTENTS Section Number Page - ------ ---- 1. Introduction............................................................................ 1 2. Definitions............................................................................. 3 3. General Procedure for Conversion and Reorganization..................................... 9 4. Total Number of Shares and Purchase Price of Conversion Stock...................................................................... 11 5. Subscription Rights of Eligible Account Holders (First Priority)........................ 12 6. Subscription Rights of the Tax-Qualified Employee Stock Benefit Plans (Second Priority)....................................................... 13 7. Subscription Rights of Supplemental Eligible Account Holders (Third Priority)...................................................................... 14 8. Subscription Rights of Other Members (Fourth Priority).................................. 15 9. Public Stockholders' Offering .......................................................... 16 10. Community Offering, Syndicated Community Offering and Other Offerings................................................................... 16 11. Limitations on Subscriptions and Purchases of Conversion Stock........................... 18 12. Timing of Subscription Offering; Manner of Exercising Subscription Rights and Order Forms................................................... 19 13. Payment for Conversion Stock............................................................ 21 14. Account Holders in Nonqualified States or Foreign Countries............................. 22 15. Voting Rights of Stockholders........................................................... 23 16. Liquidation Account..................................................................... 23 17. Transfer of Deposit Accounts............................................................ 24 18. Requirements Following Conversion and Reorganization for Registration, Market Making and Stock Exchange Listing................................ 25 19. Directors and Officers of the Bank...................................................... 25 20. Requirements for Stock Purchases by Directors and Officers Following the Conversion and Reorganization............................................ 25 21. Restrictions on Transfer of Stock....................................................... 25 22. Restrictions on Acquisition of Stock of the Holding Company............................. 26 23. Tax Rulings or Opinions................................................................. 27 24. Stock Compensation Plans................................................................ 27 25. Dividend and Repurchase Restrictions on Stock........................................... 27 26. Payment of Fees to Brokers.............................................................. 28 27. Effective Date.......................................................................... 28 28. Amendment or Termination of the Plan.................................................... 28 29. Interpretation of the Plan.............................................................. 29
Appendix A - Plan of Merger between the Mutual Holding Company and the Bank Appendix B - Plan of Reorganization between the Bank, Interim B and the Holding Company i 1. INTRODUCTION ------------ For purposes of this section, all capitalized terms have the meaning ascribed to them in Section 2. In April 1995, Guaranty Federal Savings Bank, a federally chartered mutual savings institution reorganized into the mutual holding company form of organization and consummated a sale of stock to its members. To accomplish this transaction, the Bank organized a federally chartered, stock savings bank as a wholly owned subsidiary. The mutual Bank then transferred substantially all of its assets and liabilities to the stock Bank in exchange for shares of Bank Common Stock, and reorganized itself into a federally chartered mutual holding company known as Guaranty Federal Bancshares, M.H.C. and sold shares of Bank Common Stock to parties other than the MHC. As of the date hereof, the Mutual Holding Company and the Public Stockholders own an aggregate of 68.9% and 31.1% of the outstanding Bank Common Stock, respectively. The Boards of Directors of the Mutual Holding Company and the Bank believe that a conversion of the Mutual Holding Company to stock form and reorganization of the Bank pursuant to this Plan of Conversion is in the best interests of the Mutual Holding Company and the Bank, as well as the best interests of their respective Members and Stockholders. The Boards of Directors have determined that this Plan of Conversion equitably provides for the interests of Members through the granting of subscription rights and the establishment of a liquidation account. The Conversion and Reorganization will result in the Bank being wholly owned by a stock holding company, which is a more common structure and form of ownership than a mutual holding company. In addition, the Conversion and Reorganization will result in the raising of additional capital for the Bank and the Holding Company and should result in a more active and liquid market for the Holding Company Common Stock than currently exists for the Bank Common Stock, although there can be no assurances that this will be the case. Finally, the Conversion and Reorganization has been structured to reunite the accumulated earnings and profits tax attribute retained by the Mutual Holding Company with the retained earnings of the Bank through a tax-free reorganization. This will increase the Bank's ability to pay dividends in the future. If the Bank had undertaken a standard conversion involving the formation of a stock holding company in 1995, applicable OTS regulations would have required a greater amount of Bank Common Stock to be sold than was sold in the Bank's initial public offering undertaken with the mutual holding company reorganization. In addition, if a standard conversion had been conducted in 1995, management of the Bank believed that it would have been difficult to profitably and prudently invest the larger amount of capital that would have been raised, when compared to the amount of net proceeds raised in the Bank's initial public offering. A standard conversion in 1995 also would have immediately eliminated all aspects of the mutual form of organization and possibly could have subjected the Bank to interference from stockholders and to an unwanted acquisition or other change in control of the Bank. 1 Subsequent to the decision of the Boards of Directors to form a the Mutual Holding Company, there have been changes in the policies of the OTS relating to mutual holding companies. In addition, market conditions for the stocks of savings institutions and their holding companies have improved. The Bank has also gained experience in being a company required to meet the filing requirements of the Securities and Exchange Act of 1934 and in conducting stockholder meetings and other stockholder matters, such as communications, press releases, NASD matters and dividend payments. In light of the foregoing, the Boards of Directors of the Mutual Holding Company and the Bank believe (i) that it is in the best interests of such companies and their respective Members and Stockholders to reorganize into the stock form of organization at this time, and (ii) that the most feasible way to do so is through the Conversion and the Reorganization. In connection with the Conversion and Reorganization, the Bank will form a new first-tier, wholly owned subsidiary known as Guaranty Federal Bancshares, Inc. which will become the Holding Company upon consummation of the Conversion and Reorganization. The Holding Company will in turn form Interim B as a wholly owned subsidiary. As described in more detail herein, the Mutual Holding Company will convert to an interim federal stock savings bank and will simultaneously merge with and into the Bank pursuant to the Plan of Merger included as Appendix A hereto, pursuant to which the Mutual Holding Company will cease to exist and a liquidation account will be established by the Bank for the benefit of depositor Members as of specified dates and Interim B will then merge with and into the Bank pursuant to the Plan of Reorganization included as Appendix B hereto, pursuant to which the Bank will become a wholly owned subsidiary of the Holding Company. In connection therewith, each share of Bank Common Stock outstanding immediately prior to the effective time thereof that is held by Public Stockholders shall be automatically converted, without further action by the holder thereof, into and become the right to receive shares of Holding Company Common Stock based on the Exchange Ratio, plus cash in lieu of any fractional share interest. In connection with the Conversion and Reorganization, the Holding Company will offer shares of Conversion Stock in the Offerings as provided herein. Shares of Conversion Stock will be offered in a Subscription Offering in descending order of priority to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members. Remaining shares may be subscribed for by Public Stockholders in the Public Stockholders' Offering. Any shares of Conversion Stock remaining unsold after the Subscription Offering and the Public Stockholders' Offering will be offered for sale to the public through a Community Offering and/or Syndicated Community Offering, as determined by the Boards of Directors of the Holding Company and the Bank in their sole discretion. The Conversion and Reorganization is intended to provide support to the Bank's lending and investment activities and thereby enhance the Bank's capabilities to serve the borrowing and other financial needs of the communities it serves. The use of the Holding Company will provide greater organizational flexibility and facilitate possible acquisitions and diversification. 2 This Plan is subject to the approval of the OTS and also must be approved by (1) at least a majority of the total number of votes eligible to be cast by Voting Members of the Mutual Holding Company at the Special Meeting and (2) holders of at least two-thirds of the outstanding Bank Common Stock at the Stockholders' Meeting. In addition, the Primary Parties have conditioned the consummation of the Conversion and Reorganization on the approval of the Plan by at least a majority of the votes cast, in person or by proxy, by the Public Stockholders at the Stockholders' Meeting. After the Conversion and Reorganization, the Bank will continue to be regulated by the OTS, as its chartering authority, and by the FDIC, which insures the Bank's deposits. In addition, the Bank will continue to be a member of the Federal Home Loan Bank System, and all insured savings deposits will continue to be insured by the FDIC up to the maximum amount provided by law. 2. DEFINITIONS ----------- As used in this Plan, the terms set forth below have the following meanings: Actual Purchase Price means the price per share at which the Conversion Stock is ultimately sold by the Holding Company in the Offerings in accordance with the terms hereof. Affiliate means a Person who, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. Associate, when used to indicate a relationship with any Person, means (i) a corporation or organization (other than the Mutual Holding Company, the Bank, a majority-owned subsidiary of the Bank or the Holding Company) of which such Person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, provided, however, that such term shall not include any Tax-Qualified Employee Stock Benefit Plan of the Holding Company or the Bank in which such Person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Holding Company or the Bank or any of the subsidiaries of the foregoing. Bank means Guaranty Federal Savings Bank in its mutual or stock form or Guaranty Federal Savings Bank following consummation of the Conversion and Reorganization, as the context of the reference indicates. Bank Common Stock means the common stock of the Bank, par value $1.00 per share, which stock is not and will not be insured by the FDIC or any other governmental authority. 3 Bank Merger means the merger of Interim B with and into the Bank pursuant to the Plan of Reorganization included as Appendix B hereto. Code means the Internal Revenue Code of 1986, as amended. Community Offering means the offering for sale by the Holding Company of any shares of Conversion Stock not subscribed for in the Subscription Offering or Public Stockholders' Offering to (i) natural persons residing in the Local Community, and (ii) such other Persons within or without the State of Missouri as may be selected by the Holding Company and the Bank within their sole discretion. Control (including the terms "controlling," "controlled by," and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Conversion and Reorganization means (i) the conversion of the Mutual Holding Company to an interim federal stock savings association and the subsequent merger, pursuant to which the Mutual Holding Company will cease to exist, (ii) the Bank Merger, pursuant to which the Bank will become a wholly owned subsidiary of the Holding Company and, in connection therewith, each share of Bank Common Stock outstanding immediately prior to the effective time thereof that is held by Public Stockholders shall automatically be converted, without further action by the holder thereof, into and become the right to receive shares of Holding Company Common Stock based on the Exchange Ratio, plus cash in lieu of any fractional share interest, and (iii) the issuance of Conversion Stock by the Holding Company in the Offerings as provided herein, which will increase the number of shares of Holding Company Common Stock outstanding and the capitalization of the Holding Company and the Bank. Conversion Stock means the Holding Company Common Stock to be issued and sold in the Offerings pursuant to the Plan of Conversion. Deposit Account means savings and demand accounts, including passbook accounts, money market deposit accounts and negotiable order of withdrawal accounts, and certificates of deposit and other authorized accounts of the Bank held by a Member. Director, Officer and Employee means the terms as applied respectively to any person who is a director, officer or employee of the Mutual Holding Company, the Bank or any subsidiary thereof. Eligible Account Holder means any Person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining subscription rights and establishing subaccount balances in the liquidation account to be established pursuant to the provision herein. 4 Eligibility Record Date means the date for determining Qualifying Deposits of Eligible Account Holders and is the close of business on December 31, 1995. Estimated Price Range means the range of the estimated aggregate pro forma market value of the Conversion Stock to be issued in the Offerings, as determined by the Independent Appraiser in accordance with Section 4 hereof. Exchange Ratio means the rate at which shares of Holding Company Common Stock will be exchanged for shares of Bank Common Stock held by the Public Stockholders in connection with the Bank Merger. The exact rate shall be determined by the Mutual Holding Company and the Bank in order to ensure that upon consummation of the Conversion and Reorganization the Public Stockholders will own in the aggregate approximately the same percentage of the Holding Company Common Stock to be outstanding upon completion of the Conversion and Reorganization as the percentage of Bank Common Stock owned by them in the aggregate on the Effective Date, as adjusted in accordance with OTS policy to reflect any special dividends declared by the Bank and waived by the Mutual Holding Company, but before giving effect to (a) cash paid in lieu of any fractional interests of Holding Company Common Stock and (b) any shares of Conversion Stock purchased by the Public Stockholders in the Offerings or tax-qualified employee stock benefit plans thereafter. Exchange Shares means the shares of Holding Company Common Stock to be issued to the Public Stockholders in connection with the Bank Merger. FDIC means the Federal Deposit Insurance Corporation or any successor thereto. Holding Company means Guaranty Federal Bancshares, Inc., a corporation to be organized under the laws of the State of Delaware. Such corporation will initially be formed as a first-tier, wholly owned subsidiary of the Bank. Upon completion of the Conversion and Reorganization, the Holding Company shall hold all of the outstanding capital stock of the Bank. Holding Company Common Stock means the Common Stock of the Holding Company, par value $.10 per share, which stock cannot and will not be insured by the FDIC or any other governmental authority. Independent Appraiser means the independent investment banking or financial consulting firm retained by the Holding Company and the Bank to prepare an appraisal of the estimated pro forma market value of the Conversion Stock. Initial Purchase Price means the price per share to be paid initially by Participants for shares of Conversion Stock subscribed for in the Subscription Offering, Public Stockholders for shares of Conversion Stock ordered in the Public Stockholders' Offering and by Persons for shares of Conversion Stock ordered in the Community Offering and/or Syndicated Community Offering. 5 Interim A means Guaranty Federal Interim Bancshares, an interim federal stock savings bank, which will be formed as a result of the conversion of Guaranty Federal Bancshares, M.H.C. into the stock form of organization. Interim B means Guaranty Federal Interim Savings Bank, which will be formed as a first-tier, wholly owned subsidiary of the Holding Company to facilitate the Bank Merger. Local Community means all counties in which the Bank has its home office or a branch office. Member means any Person qualifying as a member of the Mutual Holding Company in accordance with its mutual charter and bylaws and the laws of the United States. MHC Merger means the merger of Interim A with and into the Bank pursuant to the Plan of Merger included as Appendix A hereto. Mutual Holding Company means Guaranty Federal Bancshares, M.H.C. prior to its conversion into an interim federal stock savings bank. Offerings means the Subscription Offering, the Public Stockholders Offering, the Community Offering and the Syndicated Community Offering, if applicable. Officer means the president, senior vice-president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any other person performing similar functions with respect to any organization whether incorporated or unincorporated. Order Form means the form or forms provided by the Holding Company, containing all such terms and provisions as set forth herein, to a Participant or other Person by which Conversion Stock may be ordered in the Offerings. Other Member means a Voting Member who is not an Eligible Account Holder or a Supplemental Eligible Account Holder. OTS means the Office of Thrift Supervision or any successor thereto. Participant means any Eligible Account Holder, Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible Account Holder and Other Member. Person means an individual, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or a government or any political subdivision thereof. Plan and Plan of Conversion means this Plan of Conversion and Agreement and Plan of Reorganization as adopted by the Boards of Directors of the Mutual Holding Company and the 6 Bank and any amendment hereto approved as provided herein. The Board of Directors of the Holding Company shall adopt this Plan as soon as practicable following its organization, and the Board of Directors of Interim B shall adopt the Plan of Reorganization included as Appendix B hereto as soon as practicable following its organization. Primary Parties means the Mutual Holding Company, the Bank and the Holding Company. Prospectus means the one or more documents to be used in offering the Conversion Stock in the Offerings. Public Stockholders means those Persons who own shares of Bank Common Stock, excluding the Mutual Holding Company, as of the Stockholder Voting Record Date. Public Stockholders' Offering means the offering for sale by the Holding Company of any shares of Conversion Stock not subscribed for in the Subscription Offering to Public Stockholders, at the sole discretion of the Bank and Holding Company. Qualifying Deposit means the aggregate balance of all Deposit Accounts in the Bank of (i) an Eligible Account Holder at the close of business on the Eligibility Record Date, provided such aggregate balance is not less than $50, and (ii) a Supplemental Eligible Account Holder at the close of business on the Supplemental Eligibility Record Date, provided such aggregate balance is not less than $50. Resident means any person who, on the date designated for that category of subscriber in the Plan, maintained a bona fide residence within the Local Community and has manifested an intent to remain within the Local Community for a period of time. The designated dates for Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are the Eligibility Record Date, the Supplemental Eligibility Record Date and the Voting Record Date, respectively. To the extent the person is a corporation or other business entity, the principal place of business or headquarters must be within the Local Community in order to qualify as a Resident. To the extent the person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is a bona fide resident of the Local Community. Subscribers in the Community Offering who are natural persons also will have a purchase preference if they were residents of the Local Community on the date of the Prospectus. In all cases, however, such determination shall be in the sole discretion of the Bank and Holding Company. SEC means the Securities and Exchange Commission. Special Meeting means the Special Meeting of Members of the Mutual Holding Company called for the purpose of submitting this Plan to the Members for their approval, including any adjournments of such meeting. 7 Stockholders means those Persons who own shares of Bank Common Stock. Stockholders' Meeting means the annual or special meeting of Stockholders of the Bank called for the purpose of submitting this Plan to the Stockholders for their approval, including any adjournments of such meeting. Stockholder Voting Record Date means the date for determining the Public Stockholders of the Bank eligible to vote at the Stockholders' Meeting. Subscription Offering means the offering of the Conversion Stock to Participants. Subscription Rights means nontransferable rights to subscribe for Conversion Stock granted to Participants pursuant to the terms of this Plan. Supplemental Eligible Account Holder means any Person holding a Qualifying Deposit at the close of business on the Supplemental Eligibility Record Date. Supplemental Eligibility Record Date, if applicable, means the date for determining Qualifying Deposits of Supplemental Eligible Account Holders and shall be required if the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application for Conversion filed by the Mutual Holding Company prior to approval of such application by the OTS. If applicable, the Supplemental Eligibility Record Date shall be the last day of the calendar quarter preceding OTS approval of the Application for Conversion submitted by the Mutual Holding Company pursuant to this Plan of Conversion. Syndicated Community Offering means the offering for sale by a syndicate of broker-dealers to the general public of shares of Conversion Stock not purchased in the Subscription Offering and the Community Offering. Tax-Qualified Employee Stock Benefit Plan means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which is established for the benefit of the employees of the Holding Company and the Bank and which, with its related trust, meets the requirements to be "qualified" under Section 401 of the Code as from time to time in effect. A "Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or defined contribution stock benefit plan which is not so qualified. Voting Member means a Person who at the close of business on the Voting Record Date is entitled to vote as a Member of the Mutual Holding Company in accordance with its mutual charter and bylaws. Voting Record Date means the date or dates for determining the eligibility of Members to vote at the Special Meeting. 8 3. GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION --------------------------------------------------- A. After the Bank's organization of the Holding Company and the receipt of all requisite regulatory approvals, the Holding Company will form Interim B as a first-tier, wholly owned subsidiary of the Holding Company, and the Board of Directors of Interim B shall adopt the Plan of Reorganization included as Appendix B hereto by at least a two-thirds vote. In addition, the Holding Company shall approve such Plan of Reorganization in its capacity as the sole stockholder of Interim B. B. An application for the Conversion and Reorganization, including the Plan and all other requisite material (the "Application for Conversion"), shall be submitted to the OTS for approval. The Mutual Holding Company and the Bank also will cause notice of the adoption of the Plan by the Boards of Directors of the Mutual Holding Company and the Bank to be given by publication in a newspaper having general circulation in each community in which an office of the Bank is located; and will cause copies of the Plan to be made available at each office of the Mutual Holding Company and the Bank for inspection by Members and Stockholders. The Mutual Holding Company and the Bank will cause to be published, in accordance with the requirements of applicable regulations of the OTS, a notice of the filing with the OTS of an application to convert the Mutual Holding Company from mutual to stock form. C. Promptly following receipt of requisite approval of the OTS, this Plan will be submitted to the Members for their consideration and approval at the Special Meeting. The Mutual Holding Company may, at its option, mail to all Members as of the Voting Record Date, at their last known address appearing on the records of the Mutual Holding Company and the Bank, a proxy statement in either long or summary form describing the Plan which will be submitted to a vote of the Members at the Special Meeting. The Holding Company also shall mail to all such Members (as well as other Participants) either a Prospectus and Order Form for the purchase of Conversion Stock or a letter informing them of their right to receive a Prospectus and Order Form and a postage prepaid card to request such materials, subject to the provisions herein. The Plan must be approved by the affirmative vote of at least a majority of the total number of votes eligible to be cast by Voting Members at the Special Meeting. D. Subscription Rights to purchase shares of Conversion Stock will be issued without payment therefor to Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders and Other Members. E. The Bank shall file preliminary proxy materials with the OTS in order to seek the approval of the Plan by its Stockholders. Promptly following clearance of such proxy materials and the receipt of any other requisite approval of the OTS, the Bank will mail definitive proxy materials to all Stockholders as of the Stockholder Voting Record Date, at their last known address appearing on the records of the Bank, for their consideration and approval of this Plan at the Stockholders' Meeting. The Plan must be approved by the holders of at least two-thirds of the outstanding Bank Common Stock as of the Voting Record Date. In addition, the Primary 9 Parties have conditioned the consummation of the Conversion and Reorganization on the approval of the Plan by at least a majority of the votes cast, in person or by proxy, by the Public Stockholders as of the Stockholder Voting Record Date at the Stockholders' Meeting. F. The Holding Company shall submit or cause to be submitted an Application H-(e)1 or H-(e)1-S to the OTS for approval of the acquisition of the Bank. Such application also shall include applications to form Interim A and Interim B. In addition, an application to merge Interim A and the Bank and an application to merge Interim B and the Bank shall be filed with the OTS, either as an exhibit to the Application H-(e)1 or H-(e)1-S or separately. All notices required to be published in connection with such applications shall be published at the times required. G. The Holding Company shall file a Registration Statement with the SEC to register the Holding Company Common Stock to be issued in the Conversion and Reorganization under the Securities Act of 1933, as amended, and shall register such Holding Company Common Stock under any applicable state securities laws. Upon registration and after the receipt of all required regulatory approvals, the Conversion Stock shall be first offered for sale in a Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members. It is anticipated that any shares of Conversion Stock remaining unsold after the Subscription Offering will be sold first through the Public Stockholders' Offering and then through a Community Offering and/or a Syndicated Community Offering. The purchase price per share for the Conversion Stock shall be a uniform price determined in accordance with the provisions herein. The Holding Company shall contribute to the Bank an amount of the net proceeds received by the Holding Company from the sale of Conversion Stock as shall be determined by the Boards of Directors of the Holding Company and the Bank and as shall be approved by the OTS. H. The Effective Date of the Conversion and Reorganization shall be the date set forth in Section 27 hereof. Upon the effective date, the following transactions shall occur: (i) The Mutual Holding Company shall convert into an interim federal stock savings bank, Interim A, and Interim A shall simultaneously merge with and into the Bank in the MHC Merger, with the Bank being the surviving institution. As a result of the MHC Merger, (a) the shares of Bank Common Stock currently held by the Mutual Holding Company shall be extinguished and (b) Members of the Mutual Holding Company will be granted interests in the liquidation account to be established by the Bank pursuant to Section 16 hereof. (ii) Interim B shall merge with and into the Bank pursuant to the Bank Merger, with the Bank being the surviving institution. As a result of the Bank Merger, (a) the shares of Holding Company Common Stock held by the Bank shall be extinguished; (b) the shares of the Bank Common Stock held by the Public Stockholders shall be converted into the right to receive shares of Holding Company Common Stock based upon the Exchange Ratio, plus cash in lieu of any fractional share interest based upon the Actual 10 Purchase Price; and (c) the shares of common stock of Interim B held by the Holding Company shall be converted into shares of Bank Common Stock on a one-for-one basis, with the result that the Bank shall become a wholly owned subsidiary of the Holding Company. (iii) The Holding Company shall sell the Conversion Stock in the Offerings, as provided herein. I. The Primary parties may retain and pay for the services of financial and other advisors and investment bankers to assist in connection with any or all aspects of the Conversion and Reorganization, including in connection with the Offerings, the payment of fees to brokers and investment bankers for assisting Persons in completing and/or submitting Order Forms. All fees, expenses, retainers and similar items shall be reasonable. 4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION ------------------------------------------------------- STOCK ----- A. The aggregate price at which shares of Conversion Stock shall be sold in the Offerings shall be based on a pro forma valuation of the aggregate market value of the Conversion Stock prepared by the Independent Appraiser. The valuation shall be based on financial information relating to the Primary Parties, market, financial and economic conditions, a comparison of the Primary Parties with selected publicly held financial institutions and holding companies such other factors as the Independent Appraiser may deem to be important. The valuation shall be stated in terms of an Estimated Price Range, the maximum of which shall generally be no more than 15% above the average of the minimum and maximum of such price range and the minimum of which shall generally be no more than 15% below such average. The valuation shall be updated during the Conversion and Reorganization as market and financial conditions warrant and as may be required by the OTS. B. Based upon the independent valuation, the Boards of Directors of the Primary Parties shall fix the Initial Purchase Price and the number (or range) of shares of Conversion Stock ("Offering Range") to be offered in the Offerings. The Actual Purchase Price and the total number of shares of Conversion Stock to be issued in the Offerings shall be determined by the Boards of Directors of the Primary Parties upon conclusion of the Offerings in consultation with the Independent Appraiser and any financial advisor or investment banker retained by the Primary Parties in connection therewith. C. Subject to the approval of the OTS, the Estimated Price Range may be increased or decreased prior to completion of the Conversion and Reorganization to reflect changes in market, financial and economic conditions since the commencement of the Offerings, and under such circumstances the Primary Parties may correspondingly increase or decrease the total number of shares of Conversion Stock to be issued in the Conversion and Reorganization to reflect any such change. Notwithstanding anything to the contrary contained in this Plan, no resolicitation 11 of subscribers shall be required and subscribers shall not be permitted to modify or cancel their subscriptions unless the aggregate funds received from the offer of the Conversion Stock in the Conversion and Reorganization are less than the minimum or (excluding purchases, if any, by the Holding Company's and the Bank's Tax-Qualified Employee Stock Benefit Plans) more than 15% above the maximum of the Estimated Price Range set forth in the Prospectus. In the event of an increase in the total number of shares offered in the Conversion and Reorganization due to an increase in the Estimated Price Range, the priority of share allocation shall be as set forth in this Plan, provided, however, that such priority will have no effect whatsoever on the ability of the Tax-Qualified Employee Stock Benefit Plans to purchase additional shares pursuant to Section 4.D. D. (i) In the event that Tax-Qualified Employee Stock Benefit Plans are unable to purchase the number of shares subscribed for by such Tax-Qualified Employee Stock Benefit Plans due to an oversubscription for shares of Conversion Stock pursuant to Section 5 hereof, Tax- Qualified Employee Stock Benefit Plans may purchase from the Holding Company, and the Holding Company may sell to the Tax-Qualified Employee Stock Benefit Plans, such additional shares ("Additional Shares") of Holding Company Common Stock necessary to fill the subscriptions of the Tax-Qualified Employee Stock Benefit Plans, provided that such Additional Shares may not exceed 8% of the total number of shares of Conversion Stock sold in the Conversion and Reorganization. The sale of Additional Shares, if necessary, will occur contemporaneously with the sale of the Conversion Stock. The sale of Additional Shares to Tax- Qualified Employee Stock Benefit Plans by the Holding Company is conditioned upon receipt by the Holding Company of a letter from the Independent Appraiser to the effect that such sale would not have a material effect on the Conversion and Reorganization or the Actual Purchase Price and the approval of the OTS. The ability of the Tax-Qualified Employee Stock Benefit Plans to purchase up to an additional 8% of the total number of shares of Conversion Stock sold in the Conversion and Reorganization shall not be affected or limited in any manner by the priorities or purchase limitations otherwise set forth in this Plan of Conversion. (ii) Notwithstanding anything to the contrary contained in this Plan, if the final valuation of the Conversion Stock exceeds the maximum of the Estimated Price Range, up to 8% of the total number of shares of Conversion Stock sold in the Conversion and Reorganization may be sold to Tax-Qualified Stock Benefit Plans prior to filling any other orders for Conversion Stock from such shares in excess of the maximum of the Estimated Price Range. 5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS ----------------------------------------------- (FIRST PRIORITY) ---------------- A. Each Eligible Account Holder shall receive, without payment, nontransferable Subscription Rights to purchase, subject to the further limitations of Section 11 hereof, up to the greater of (i) the maximum purchase limitation set forth in Section 11 hereof, (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock offered in the Subscription Offering by a fraction, of 12 which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of all Qualifying Deposits of all Eligible Account Holders, subject to Section 14 hereof. B. In the event of an oversubscription for shares of Conversion Stock pursuant to the provisions herein, available shares shall be allocated among subscribing Eligible Account Holders so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares which will make his or her total allocation equal to the lesser of the number of shares subscribed for or 100 shares. Any available shares remaining after each such subscribing Eligible Account Holder has been allocated the lesser of the number of shares subscribed for or 100 shares shall be allocated among the subscribing Eligible Account Holders in the proportion which the Qualifying Deposit of each such subscribing Eligible Account Holder bears to the total Qualifying Deposits of all such subscribing Eligible Account Holders whose orders are unfilled, provided that no fractional shares shall be issued. Subscription Rights of Eligible Account Holders who are also Directors or Officers and their Associates shall be subordinated to those of other Eligible Account Holders to the extent that they are attributable to increased deposits during the one-year period preceding the Eligibility Record Date. 6. SUBSCRIPTION RIGHTS OF THE TAX-QUALIFIED EMPLOYEE STOCK ------------------------------------------------------- BENEFIT PLANS (SECOND PRIORITY) ------------------------------- Notwithstanding the purchase limitations discussed below, Tax-Qualified Employee Stock Benefit Plans of the Holding Company and the Bank shall receive, without payment, Subscription Rights to purchase in the aggregate up to 10% of the Conversion Stock, including first priority to purchase any shares of Conversion Stock to be issued in the Conversion and Reorganization as a result of an increase in the Estimated Price Range after commencement of the Subscription Offering and prior to completion of the Conversion and Reorganization. Consistent with applicable laws, regulations, policies and practices of the OTS, Tax-Qualified Employee Stock Benefit Plans may use funds contributed by the Holding Company or the Bank and/or borrowed from an independent third party to exercise such Subscription Rights, and the Holding Company and the Bank may make scheduled discretionary contributions thereto, provided that such contributions do not cause the Holding Company or the Bank to fail to meet any applicable regulatory capital requirement. 7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT ---------------------------------------------------- HOLDERS (THIRD PRIORITY) ------------------------ A. In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application for Conversion filed prior to OTS approval, then, and only in that event, a Supplemental Eligibility Record Date shall be set and each Supplemental Eligible Account Holder shall, subject to the further limitations of Section 11 hereof, receive, without payment, Subscription Rights to purchase up to the greater of (i) the maximum purchase limitation set forth in Section 11 hereof, (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, and (iii) 15 times the product (rounded down to 13 the next whole number) obtained by multiplying the total number of shares of Conversion Stock offered in the Subscription Offering by a fraction, of which the numerator is the amount of the Qualifying Deposits of the Supplemental Eligible Account Holder and the denominator is the total amount of all Qualifying Deposits of all Supplemental Eligible Account Holders, subject to Section 14 hereof and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders and Tax- Qualified Employee Stock Benefit Plans though the exercise of Subscription Rights under Sections 5 and 6 hereof. B. In the event of an oversubscription for shares of Conversion Stock, available shares shall be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares, if any, allocated in accordance with Section 5.A) equal to the lesser of the number of shares subscribed for or 100 shares. Any remaining available shares shall be allocated among subscribing Supplemental Eligible Account Holders in the proportion that the Qualifying Deposits of each bears to the total amount of the Qualifying Deposits of all such subscribing Supplemental Eligible Account Holders whose orders are unfilled, provided that no fractional shares shall be issued. 8. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY) ------------------------------------------------------ A. Each Other Member shall, subject to the further limitations of Section 11 hereof, receive, without payment, Subscription Rights to purchase up to the greater of (i) the maximum purchase limitation set forth in Section 11 hereof and (ii) one-tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, in each case subject to Section 14 hereof and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, and Supplemental Eligible Account Holders, if any, through the exercise of Subscription Rights under Sections 5, 6 and 7 hereof. B. If, pursuant to this Section, Other Members subscribe for a number of shares of Conversion Stock in excess of the total number of shares of Conversion Stock remaining, available shares shall be allocated among subscribing Other Members so as to permit each such Other Members, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to the lesser of the number of shares subscribed or 100 shares. Any remaining available shares shall be allocated among subscribing Other Members on a pro rata basis in the same proportion as each such Other Member's subscription bears to the total subscriptions of all such subscribing Other Members whose orders are unfilled, provided that no fractional shares shall be issued. 14 9. PUBLIC STOCKHOLDERS' OFFERING ----------------------------- A. If less than the total number of shares of Conversion Stock are sold in the Subscription Offering, all remaining shares of Conversion Stock shall, subject to the further limitations of Section 11 hereof, be sold to Public Stockholders as of the Stockholder Voting Record Date in an amount up to the greater of (i) the maximum purchase limitation established for the Community Offering and/or Syndicated Community Offering and (ii) one tenth of 1% of the total offering of shares of Conversion Stock in the Subscription Offering, in each case subject to Section 14 hereof and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders, Tax- Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members. The Public Stockholders' Offering may commence concurrently with, at any time during, or as soon as practicable after the end of the Subscription Offering. The Public Stockholders' Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by the Primary Parties with any required regulatory approval. The ability of Public Stockholders to purchase stock in the Public Stockholders' Offering is subject to the right of the Primary Parties in their absolute discretion to accept or reject in whole or in part all orders in the Public Stockholders' Offering. B. If, pursuant to this Section, Public Stockholders as of the Stockholder Voting Record Date subscribe for a number of shares of Conversion Stock in excess of the total number of shares of Conversion Stock remaining, available shares shall be allocated among subscribing Public Stockholders as of the Stockholder Voting Record Date in an equitable manner as determined by the Board of Directors, provided that no fractional shares shall be issued. 10. COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING AND ----------------------------------------------------- OTHER OFFERINGS --------------- A. If less than the total number of shares of Conversion Stock are sold in the Subscription Offering and Public Stockholders' Offering, it is anticipated that all remaining shares of Conversion Stock shall, if practicable, be sold in a Community Offering and/or a Syndicated Community Offering. Subject to the requirements set forth herein, the manner in which the Conversion Stock is sold in the Community Offering and/or the Syndicated Community Offering shall have as the objective the achievement of a wide distribution of such stock, subject to the right of the Primary Parties, in their absolute discretion, to accept or reject in whole or in part all orders in the Community Offering and/or Syndicated Community Offering. B. In the event of a Community Offering, all shares of Conversion Stock which are not subscribed for in the Subscription Offering and Public Stockholders' Offering shall be offered for sale by means of a direct community marketing program, which may provide for the use of brokers, dealers or investment banking firms experienced in the sale of financial institution securities. Any available shares in excess of those not subscribed for in the Subscription Offering and Public Stockholders' Offering will be available for purchase by members of the 15 general public to whom a Prospectus is delivered by the Holding Company or on its behalf, with preference given to natural persons who are Residents of the Local Community ("Preferred Subscribers"). C. A Prospectus and Order Form shall be furnished to such Persons as the Primary Parties may select in connection with the Community Offering, and each order for Conversion Stock in the Community Offering shall be subject to the absolute right of the Primary Parties to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Community Offering. Available shares will be allocated first to each Preferred Subscriber whose order is accepted in an amount equal to the lesser of 100 shares or the number of shares subscribed for by each such Preferred Subscriber, if possible. Thereafter, unallocated shares shall be allocated among the Preferred Subscribers whose accepted orders remain unsatisfied in an equitable manner as determined by the Board of Directors. If there are any shares remaining after all accepted orders by Preferred Subscribers have been satisfied, any remaining shares shall be allocated to other members of the general public who place orders in the Community Offering, applying the same allocation described above for Preferred Subscribers. D. The maximum amount of Conversion Stock that any Person, together with any Associate or Group of Persons Acting in Concert, may purchase in the Community Offering shall, subject to the further limitations of Section 11 hereof, not exceed such number of shares of Conversion Stock that shall equal $250,000 divided by the Actual Purchase Price, provided, however, that this amount may be decreased or increased to up to 5% of the total offering of shares in the Conversion and Reorganization, subject to any required regulatory approval but without the further approval of Members of the Mutual Holding Company or the Stockholders of the Bank, subject to the preferences set forth in Section 10.B and 10.C of this Plan. The Primary Parties may commence the Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering and Public Stockholders' Offering, and the Community Offering must be completed within 45 days after the completion of the Subscription Offering and Public Stockholders' Offering, unless extended by the Primary Parties with any required regulatory approval. E. Subject to such terms, conditions and procedures as may be determined by the Primary Parties, all shares of Conversion Stock not subscribed for in the Subscription Offering and Public Stockholders Offering or ordered in the Community Offering may be sold by a syndicate of broker-dealers to the general pubic in a Syndicated Community Offering. Each order for Conversion Stock in the Syndicated Community Offering shall be subject to the absolute right of the Primary Parties to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable after completion of the Syndicated Community Offering. The amount of Conversion Stock that any Person, together with any Associate or Group of Persons Acting in Concert, may purchase in the Syndicated Community Offering shall, subject to the further limitations of Section 11 hereof, not exceed the number of shares of Conversion Stock that shall equal $250,000 divided by the Actual Purchase Price, provided, however, that this amount may be decreased or increased to up to 5% of the total offering of 16 shares in the Conversion and Reorganization, subject to any required regulatory approval but without the further approval of Members of the Mutual Holding Company or the Stockholders of the Bank. The Primary Parties may commence the Syndicated Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering, the Public Stockholders' Offering and/or Community Offering. The Syndicated Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by the Primary Parties with any required regulatory approval. F. If for any reason a Syndicated Community Offering of shares of Conversion Stock not sold in the Subscription Offering and the Community Offering cannot be effected, or in the event that any insignificant residue of shares of Conversion Stock is not sold in the Subscription Offering, Public Stockholders' Offering, Community Offering or Syndicated Community Offering, the Primary Parties shall use their best efforts to obtain other purchasers for such shares in such manner and upon such conditions as may be satisfactory to the OTS. 11. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION -------------------------------------------------------- STOCK ----- The following limitations shall apply to all purchases of Conversion Stock: A. The number of shares of Conversion Stock which may be purchased by any Person (or persons through a single account), in the First Priority, Third Priority and Fourth Priority in the Subscription Offering shall not exceed such number of shares of Conversion Stock that shall equal $250,000 divided by the Actual Purchase Price, except for Tax-Qualified Employee Stock Benefit Plans, which in the aggregate may subscribe for up to 8% of the Conversion Stock. B. The number of shares of Conversion Stock which may be purchased by any Person, together with any Associate or group of persons Acting in Concert, in the Public Stockholders, the Community and/or the Syndicated Community Offerings shall not exceed such number of shares of Conversion Stock that shall equal $250,000 divided by the Actual Purchase Price. C. Except for the Tax-Qualified Employee Stock Benefit Plans, the maximum number of shares of Conversion Stock which may be purchased in all of the combined categories of the Conversion and Reorganization by any Person (or persons through a single account) together with any Associate or group of persons Acting in Concert shall not exceed such number of shares of Conversion Stock that when combined with Exchange Shares shall equal $250,000 divided by the Actual Purchase Price. D. The number of shares of Conversion Stock which Directors and Officers and their Associates may purchase in the aggregate in the Offering shall not exceed 31.7% of the total number of shares of Conversion Stock sold in the Offerings, including any shares which may be issued in the event of an increase in the maximum of the Estimated Price Range to reflect changes in market, financial and economic conditions after commencement of the Subscription Offering and prior to completion of the Offerings. E. No Person may purchase fewer than 25 shares of Conversion Stock in the Offerings, to the extent such shares are available; provided, however, that if the Actual Purchase Price is 17 greater than $20.00 per share, such minimum number of shares shall be adjusted so that the aggregate Actual Purchase Price for such minimum shares will not exceed $500.00. F. For purposes of the foregoing limitations and the determination of Subscription Rights, (i) Directors, Officers and Employees shall not be deemed to be Associates or a group acting in concert solely as a result of their capacities as such, (ii) shares purchased by Tax-Qualified Employee Stock Benefit Plans shall not be attributable to the individual trustees or beneficiaries of any such plan for purposes of determining compliance with the limitations set forth in this Section, (iii) shares purchased by Tax-Qualified Employee Stock Benefit Plans shall not be attributable to the individual trustees or beneficiaries of any such plan for purposes of determining compliance with the limitation set forth in this Section, and (iv) Exchange Shares shall be valued at the Actual Purchase Price. G. Subject to any required regulatory approval and the requirements of applicable laws and regulations, but without further approval of the Members of the Mutual Holding Company or the Stockholders of the Bank, the Primary Parties may increase or decrease the individual or overall purchase limitations set forth herein to a percentage which does not exceed 5% of the total shares of Holding Company Common Stock issued in the Conversion and Reorganization whether prior to, during or after the Subscription Offering, Community Offering and/or Syndicated Community Offering. In the event that the individual or overall purchase limitations are increased after commencement of the Subscription Offering or any other offering, the Primary Parties shall permit any Person who subscribed for the maximum number of shares of Conversion Stock to purchase an additional number of shares, so that such Person shall be permitted to subscribe for the then maximum number of shares permitted to be subscribed for by such Person, subject to the rights and preferences of any Person who has priority Subscription Rights. In the event that the individual or overall purchase limitations are decreased after commencement of the Subscription Offering or any other offering, the orders of any Person who subscribed for more than the new purchase limitation shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such Person. H. The Primary Parties shall have the right to take all such action as they may, in their sole discretion, deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in this Section and elsewhere in this Plan and the terms, conditions and representations contained in the Order Form, including, but not limited to, the absolute right (subject only to any necessary regulatory approvals or concurrences) to reject, limit or revoke acceptance of any subscription or order and to delay, terminate or refuse to consummate any sale of Conversion Stock which they believe might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all persons, and the Primary Parties and their respective Boards shall be free from any liability to any Person on account of any such action. 18 I. Notwithstanding anything to the contrary contained in this Plan, the Public Stockholders will not have to sell any Bank Common Stock or be limited in receiving Exchange Shares even if their ownership of Bank Common Stock when converted into Exchange Shares pursuant to the Bank Merger would exceed an applicable purchase limitation. 12. TIMING OF SUBSCRIPTION OFFERING; MANNER OF EXERCISING ----------------------------------------------------- SUBSCRIPTION RIGHTS AND ORDER FORMS ----------------------------------- A. The Subscription Offering may be commenced concurrently with or at any time after the mailing to Voting Members of the Mutual Holding Company and Stockholders of the Bank of the proxy statement(s) to be used in connection with the Special Meeting and the Stockholders' Meeting. The Subscription Offering may be closed before the Special Meeting and the Stockholders' Meeting, provided that the offer and sale of the Conversion Stock shall be conditioned upon the approval of the Plan by the Voting Members of the Mutual Holding Company and the Stockholders of the Bank at the Special Meeting and the Stockholders' Meeting, respectively. B. The exact timing of the commencement of the Subscription Offering shall be determined by the Primary Parties in consultation with the Independent Appraiser and any financial or advisory or investment banking firm retained by them in connection with the Conversion. The Primary Parties may consider a number of factors, including, but not limited to, their current and projected future earnings, local and national economic conditions, and the prevailing market for stocks in general and stocks of financial institutions in particular. The Primary Parties shall have the right to withdraw, terminate, suspend, delay, revoke or modify any such Subscription Offering, at any time and from time to time, as they in their sole discretion may determine, without liability to any Person, subject to compliance with applicable securities laws and any necessary regulatory approval or concurrence. C. The Primary Parties shall, promptly after the SEC has declared the Registration Statement, which includes the Prospectus, effective and all required regulatory approvals have been obtained, distribute or make available the Prospectus, together with Order Forms for the purchase of Conversion Stock, to all Participants for the purpose of enabling them to exercise their respective Subscription Rights, subject to Section 14 hereof. The Primary Parties may elect to mail a Prospectus and Order Form only to those Participants who request such materials by returning a postage-paid card to the Primary Parties by a date specified in the letter informing them of their Subscription Rights. Under such circumstances, the Subscription Offering shall not be closed until the expiration of 30 days after the mailing by the Primary Parties of the postage-paid card to Participants. D. A single Order Form for all Deposit Accounts maintained with the Bank by an Eligible Account Holder, Supplemental Eligible Account Holder and any Other Member may be furnished, irrespective of the number of Deposit Accounts maintained with the Bank on the Eligibility Record Date and Supplemental Eligibility Record Date and the Voting Record Date, respectively. 19 E. The recipient of an Order Form shall have no less than 20 days and no more than 45 days from the date of mailing of the Order Form (with the exact termination date to be set forth on the Order Form) to properly complete and execute the Order Form and deliver it to the Primary Parties. The Primary Parties may extend such period by such amount of time as they determine is appropriate. Failure of any Participant to deliver a properly executed Order Form to the Primary Parties, along with payment (or authorization for payment by withdrawal) for the shares of Conversion Stock subscribed for, within time limits prescribed, shall be deemed a waiver and release by such person of any rights to subscribe for shares of Conversion Stock. Each Participant shall be required to confirm to the Primary Parties by executing an Order Form that such Person has fully complied with all of the terms, conditions, limitations and restrictions in the Plan. F. The Primary Parties shall have the absolute right, in their sole discretion and without liability to any Participant or other Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed; (ii) not timely received; (iii) not accompanied by the proper payment (or authorization of withdrawal for payment) or, in the case of institutional investors in the Community Offering, not accompanied by an irrevocable order together with a legally binding commitment to pay the full amount of the purchase price prior to 48 hours before the completion of the Offerings; or (iv) submitted by a Person whose representations the Primary Parties believe to be false or who they otherwise believe, either alone, or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of the Plan. The Primary Parties may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Conversion Stock by such date as they may specify. The interpretation of the Primary Parties of the terms and conditions of the Order Forms shall be final and conclusive. 13. PAYMENT FOR CONVERSION STOCK ---------------------------- A. Payment for shares of Conversion Stock subscribed for by Participants in the Subscription Offering and payment for shares of Conversion Stock ordered by Persons in the Stockholders' Offering, Community Offering and Syndicated Community Offering (if applicable) shall be equal to the Initial Purchase Price multiplied by the number of shares which are being subscribed for or ordered, respectively. Such payment may be made in cash, if delivered in person, or by check or money order at the time the Order Form is delivered to the Primary Parties. In addition, the Primary Parties may elect to provide Participants and/or other Persons who have a Deposit Account with the Bank the opportunity to pay for shares of Conversion Stock by authorizing the Bank to withdraw from such Deposit Account an amount equal to the aggregate Purchase Price of such shares. If the Actual Purchase Price is less than the Initial Purchase Price, the Primary Parties shall refund the difference to all Participants and other Persons, unless the Primary Parties choose to provide Participants and other Persons the opportunity on the Order Form to elect to have such difference applied to the purchase of additional whole shares of Conversion Stock. If the Actual Purchase Price is more than the Initial Purchase Price, the Primary Parties shall reduce the number of shares of Conversion Stock ordered by Participants and other Persons and refund any remaining amount which is attributable to a fractional share interest, unless the Primary Parties choose to provide 20 Participants and other Persons the opportunity to increase the amount of funds submitted to pay for their shares of Conversion Stock. B. Consistent with applicable laws and regulations and policies and practices of the OTS, payment for shares of Conversion Stock subscribed for by Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed by the Holding Company and/or funds obtained pursuant to a loan from an independent third party pursuant to a loan commitment which is in force from the time that any such plan submits an Order Form until the closing of the transactions contemplated hereby. C. If a Participant or other Person authorizes the Bank to withdraw the amount of the Initial Purchase Price from his or her Deposit Account, the Bank shall have the right to make such withdrawal or to freeze funds equal to the aggregate Initial Purchase Price upon receipt of the Order Form. Notwithstanding any regulatory provisions regarding penalties for early withdrawals from certificate accounts, the Bank may allow payment by means of withdrawal from certificate accounts without the assessment of such penalties. In the case of an early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if any applicable minimum balance requirement ceases to be met. In such case, the remaining balance will be returned to the depositor. However, where any applicable minimum balance is maintained in such certificate account, the rate of return on the balance of the certificate account shall remain the same as prior to such early withdrawal. This waiver of the early withdrawal penalty applies only to withdrawals made in connection with the purchase of Conversion Stock and is entirely within the discretion of the Primary Parties. D. The Bank shall pay interest, at not less than the passbook rate, for all amounts paid in cash, by check or money order to purchase shares of Conversion Stock in the Subscription Offering, Public Stockholders' Offering and the Community Offering from the date payment is received until the date the Conversion and Reorganization is completed or terminated. E. The Bank shall not knowingly loan funds or otherwise extend credit to any Participant or other Person to purchase Conversion Stock. F. Each share of Conversion Stock shall be non-assessable upon payment in full of the Actual Purchase Price. 14. ACCOUNTHOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES ---------------------------------------------------------- The Primary Parties shall make reasonable efforts to comply with the securities laws of all jurisdictions in the United States in which Participants reside. However, no Participant will be offered or receive any Conversion Stock under the Plan if such Participant resides in a foreign country or resides in a jurisdiction of the United States with respect to which any of the following apply; (a) there are few Participants otherwise eligible to subscribe for shares under this Plan who reside in such jurisdiction; (b) the granting of Subscription Rights or the offer or sale of shares of Conversion Stock to such Participants would require any of the Primary Parties 21 or their respective Directors and Officers, under the laws of such jurisdiction, to register as a broker-dealer, salesman or selling agent or to register or otherwise qualify the Conversion Stock for sale in such jurisdiction, or any of the Primary Parties would be required to qualify as a foreign corporation or file a consent to service of process in such jurisdiction; and (c) such registration, qualification or filing in the judgment of the Primary Parties would be impracticable or unduly burdensome for reasons of cost or otherwise. 15. VOTING RIGHTS OF STOCKHOLDERS ----------------------------- Following consummation of the Conversion and Reorganization, voting rights with respect to the Bank shall be held and exercised exclusively by the Holding Company as holder of all of the Bank's outstanding voting capital stock, and voting rights with respect to the Holding Company shall be held and exercised exclusively by the holders of the Holding Company's voting capital stock. 16. LIQUIDATION ACCOUNT ------------------- A. At the time of the MHC Merger, the Bank shall establish a liquidation account in an amount equal to the amount of the dividends from Bank Common Stock waived by the Mutual Holding Company plus the greater of (i) the retained earnings of the Bank as of the date of the latest statement of financial condition contained in the final offering circular utilized in the Bank's initial public offering, or (ii) the Bank's total stockholders' equity as reflected in its latest statement of financial condition contained in the final Prospectus utilized in the Conversion and Reorganization. The function of the liquidation account will be to preserve the rights of certain holders of Deposit Accounts in the association who maintain such accounts in the Bank following the Conversion and Reorganization to priority to distributions in the unlikely event of a liquidation of the Bank subsequent to the Conversion and Reorganization. B. The liquidation account shall be maintained for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders, if any, who maintain their Deposit Accounts in the Bank after the Conversion and Reorganization. Each such account holder will, with respect to each Deposit Account held, have a related inchoate interest in a portion of the liquidation account balance, which interest will be referred to in this Section 16 as the "subaccount balance." All Deposit Accounts having the same social security number will be aggregated for purposes of determining the initial subaccount balance with respect to such Deposit Accounts, except as provided in this Section. C. In the event of a complete liquidation of the Bank subsequent to the Conversion and Reorganization (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current subaccount balances for Deposit Accounts then held (adjusted as described below) before any liquidation distribution may be made with respect to the capital stock of the Bank. No merger, consolidation, sale of bulk assets or similar combination transaction with another FDIC-insured institution in which the Bank is not the 22 surviving entity shall be considered a complete liquidation for this purpose. In any merger or consolidation transaction, the liquidation account shall be assumed by the surviving entity. D. The initial subaccount balance for a Deposit Account held by an Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall be determined by multiplying the opening balance in the liquidation account by a fraction, of which the numerator is the amount of the Qualifying Deposits of such account holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible Account Holders, if any. For Deposit Accounts in existence at both the Eligibility Record Date and the Supplemental Eligibility Record Date, if any, separate initial subaccount balances shall be determined on the basis of the Qualifying Deposits in such Deposit Accounts on each such record date. Initial subaccount balances shall not be increased, and shall be subject to downward adjustment as provided below. E. If the aggregate deposit balance in the Deposit Account(s) of any Eligible Account Holder or Supplemental Eligible Account Holder, if any, at the close of business on any June 30 annual closing date is less than the lesser of (a) the aggregate deposit balance in such Deposit Account(s) at the close of business on any other annual closing date subsequent to such record dates or (b) the aggregate deposit balance in such Deposit Account(s) as of the Eligibility Record Date or the Supplemental Eligibility Record Date, the subaccount balance for such Deposit Accounts(s) shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of such a downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the related Deposit Account(s). The subaccount balance of an Eligible Account Holder or Supplemental Eligible Account Holder, if any, will be reduced to zero if the Account Holder ceases to maintain a Deposit Account at the Bank that has the same social security number as appeared on his Deposit Account(s) at the Eligibility Record Date or, if applicable, the Supplemental Eligibility Record Date. F. Subsequent to the Conversion and Reorganization, the Bank may not pay cash dividends generally on deposit accounts and/or capital stock of the Bank, if such dividend or repurchase would reduce the Bank's regulatory capital below the aggregate amount of the then current subaccount balances for Deposit Accounts then held; otherwise, the existence of the liquidation account shall not operate to restrict the use or application of any of the net worth accounts of the Bank. G. For purposes of this Section, a Deposit Account includes a predecessor or successor account which is held by an Account Holder with the same social security number. 17. TRANSFER OF DEPOSIT ACCOUNTS ---------------------------- Each Deposit Account in the Bank at the time of the consummation of the Conversion and Reorganization shall become, without further action by the holder, a Deposit Account in the Bank equivalent in withdrawable amount to the withdrawal value (as adjusted to give effect to 23 any withdrawal made for the purchase of Conversion Stock), and subject to the same terms and conditions (except as to voting and liquidation rights) as such Deposit Account in the Bank immediately preceding consummation of the Conversion and Reorganization. Holders of Deposit Accounts in the Bank shall not, as such holders, have any voting rights. 18. REQUIREMENTS FOLLOWING CONVERSION AND REORGANIZATION FOR -------------------------------------------------------- REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING ------------------------------------------------------ In connection with the Conversion and Reorganization, the Holding Company shall register the Holding Company Common Stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, and shall undertake not to deregister such stock for a period of three years thereafter. The Holding Company also shall use its best efforts to (i) encourage and assist a market maker to establish and maintain a market for the Holding Company Common Stock and (ii) list the Holding Company Common Stock on a national or regional securities exchange or to have quotations for such stock disseminated on the National Association of Securities Dealers Automated Quotation System. 19. DIRECTORS AND OFFICERS OF THE BANK ---------------------------------- Each person serving as a Director or Officer of the Bank at the time of the Conversion and Reorganization shall continue to serve as a Director or Officer of the Bank for the balance of the term for which the person was elected prior to the Conversion and Reorganization, and until a successor is elected and qualified. 20. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS ---------------------------------------------------------- FOLLOWING THE CONVERSION AND REORGANIZATION ------------------------------------------- For a period of three years following the Conversion and Reorganization, the Directors and Officers of the Holding Company and the Bank and their Associates may not purchase, without the prior written approval of the OTS, Holding Company Common Stock except from a broker-dealer registered with the SEC. This prohibition shall not apply, however, to (i) a negotiated transaction arrived at by direct negotiation between buyer and seller and involving more than 1% of the outstanding Holding Company Common Stock and (ii) purchases of stock made by and held by any Tax-Qualified Employee Stock Benefit Plan (and purchases of stock made by and held by any Non-Tax-Qualified Employee Stock Benefit Plan following the receipt of stockholder approval of such plan) which may be attributable to individual officers or directors. The foregoing restriction on purchases of Holding Company Common Stock shall be in addition to any restrictions that may be imposed by federal and state securities laws. 21. RESTRICTIONS ON TRANSFER OF STOCK --------------------------------- All shares of the Conversion Stock which are purchased by Persons other than Directors and Officers shall be transferable without restriction, except in connection with a transaction 24 proscribed by Section 22 of this Plan. Shares of Conversion Stock purchased by Directors and Officers of the Holding Company and the Bank on original issue from the Holding Company (by subscription or otherwise) shall be subject to the restriction that such shares shall not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares following the death of the original purchaser or pursuant to any merger or similar transaction approved by the OTS. The shares of Conversion Stock issued by the Holding Company to Directors and Officers shall bear the following legend giving appropriate notice of such one-year restriction. The shares of stock evidenced by this Certificate are restricted as to transfer for a period of one year from the date of this Certificate pursuant to Part 563b of the Rules and Regulations of the Office of Thrift Supervision. These shares may not be transferred during such one-year period without a legal opinion of counsel for the Company that said transfer is permissible under the provisions of applicable law and regulation. This restrictive legend shall be deemed null and void after one year from the date of this Certificate. In addition, the Holding Company shall give appropriate instructions to the transfer agent for the Holding Company Common Stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares issued at a later date as a stock dividend, stock split or otherwise with respect to any such restricted stock shall be subject to the same holding period restrictions as may then be applicable to such restricted stock. The foregoing restriction on transfer shall be in addition to any restrictions on transfer that may be imposed by federal and state securities laws. 22. RESTRICTIONS ON ACQUISITION OF STOCK OF THE HOLDING COMPANY ----------------------------------------------------------- The articles of incorporation of the Holding Company shall prohibit any Person together with Associates or groups of Persons acting in concert from offering to acquire or acquiring, directly or indirectly, beneficial ownership of more than 10% of any class of equity securities of the Holding Company, or of securities convertible into more than 10% of any such class, for five years following completion of the Conversion and Reorganization. The articles of incorporation of the Holding Company also shall provide that all equity securities beneficially owned by any Person in excess of 10% of any class of equity securities during such five-year period shall be considered "excess shares," and that excess shares shall not be counted as shares entitled to vote and shall not be voted by any Person or counted as voting shares in connection with any matters submitted to the stockholders for a vote. The foregoing restrictions shall not apply to (i) any offer with a view toward public resale made exclusively to the Holding Company by underwriters or a selling group acting on this behalf, (ii) the purchase of shares by a Tax- Qualified Employee Stock Benefit Plan established for the benefit of the employees of the Holding Company and its subsidiaries which is exempt from approval requirements under 12 C.F.R. ss.574.3(c)(1)(vi) or any successor thereto, and (iii) any offer or acquisition approved in advance by the affirmative vote of two-thirds of the entire Board of Directors of the Holding 25 Company. Directors, Officers or Employees of the Holding Company or the Bank or any subsidiary thereof shall not be deemed to be Associates or a group acting in concert with respect to their individual acquisition of any class of equity securities of the Holding Company solely as a result of their capacities as such. 23. TAX RULINGS OR OPINIONS ----------------------- Consummation of the conversion and Reorganization is conditioned upon prior receipt by the Primary Parties of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling or an opinion of counsel with respect to Missouri tax laws, to the effect that consummation of the transactions contemplated hereby will not result in a taxable reorganization under the provisions of the applicable codes or otherwise result in any material adverse tax consequences to the Primary Parties or to account holders receiving Subscription Rights before or after the Conversion and Reorganization, except in each case to the extent, if any, that Subscription Rights are deemed to have fair market value on the date such rights are issued. 24. STOCK COMPENSATION PLANS ------------------------ A. The Holding Company and the Bank are authorized to adopt Tax-Qualified Employee Stock Benefit Plans in connection with the Conversion and Reorganization, including without limitation an employee stock ownership plan. B. The Holding Company and the Bank also are authorized to adopt stock option plans, restricted stock grant plans and other Non-Tax-Qualified Employee Stock Benefit Plans, provided that no stock options shall be granted, and no shares of Conversion Stock shall be purchased, pursuant to any of such plans prior to the earlier of (i) the one-year anniversary of the consummation of the Conversion and Reorganization or (ii) the receipt of stockholder approval of such plans at either the annual or special meeting of stockholders of the Holding Company to be held not earlier than six months after the completion of the Conversion and Reorganization. C. Existing as well as any newly created Tax-Qualified Employee Stock Benefit Plans may purchase shares of Conversion Stock in the Offerings, to the extent permitted by the terms of such benefit plans and this Plan. 25. DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK --------------------------------------------- A. Except as may otherwise may be permitted by the OTS, the Holding Company may not repurchase any shares of its capital stock during the first year following consummation of the Conversion and Reorganization. During the second and third years following consummation of the Conversion and Reorganization, the Holding Company may not repurchase any of its capital stock from any person, other than pursuant to (i) an offer to repurchase made by the Holding Company on a pro rata basis to all of its stockholders and which is approved by the OTS, (ii) the repurchase of qualifying shares of a director, if any, (iii) purchases in the open market by 26 a Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plan in an amount reasonable and appropriate to fund the plan, or (iv) a repurchase program approved by the OTS. B. The Bank may not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause the regulatory capital of the Bank to be reduced below the amount required for the liquidation account. Any dividend declared or paid on, or repurchase of, the Bank's capital stock also shall be in compliance with Section 563.134 of the Regulations Applicable to All Savings Associations, or any successor thereto. C. Notwithstanding anything to the contrary set forth herein, the Holding Company may repurchase its capital stock to the extent and subject to the requirements set forth in Section 563b.3(g)(3) of the Regulations Applicable to All Savings Associations, or any successor thereto, or as otherwise may be approved by the OTS. 26. PAYMENT OF FEES TO BROKERS -------------------------- The Primary Parties may elect to offer to pay fees on a per share basis to securities brokers who assist purchasers of Conversion Stock in the Offerings. 27. EFFECTIVE DATE -------------- The Effective Date of the Conversion and Reorganization shall be the date upon which the last of the following actions occurs: (i) the filing of Articles of Combination with the OTS with respect to the MHC Merger, (ii) the filing of Articles of Combination with the OTS with respect to the Bank Merger and (iii) the closing of the issuance of the shares of Conversion Stock in the Offerings. The filing of Articles of Combination relating to the MHC Merger and the Bank Merger and the closing of the issuance of shares of Conversion Stock in the Offerings shall not occur until all requisite regulatory, Member and Stockholder approvals have been obtained, all applicable waiting periods have expired and sufficient subscriptions and orders for the Conversion Stock have been received. It is intended that the closing of the MHC Merger, the Bank Merger and the sale of shares of Conversion Stock in the Offerings shall occur consecutively and substantially simultaneously. 28. AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ If deemed necessary or desirable by the Boards of Directors of the Primary Parties, this Plan may be substantively amended, as a result of comments from regulatory authorities or otherwise, at any time prior to the solicitation of proxies from members and Stockholders to vote on the Plan and at any time thereafter with the concurrence of the OTS. Any amendment to this Plan made after approval by the Members and Stockholders with the concurrence of the OTS shall not necessitate further approval by the Members or Stockholders unless otherwise required by the OTS. This Plan shall terminate if the sale of all shares of Conversion Stock is not completed within 24 months from the date of the Special Meeting. Prior to the earlier of the Special Meeting and the Stockholders' Meeting, this Plan may be terminated by the Boards of Directors 27 of the Primary Parties without approval of the OTS; after the Special Meeting or the Stockholder's Meeting, the Boards of Directors may terminate this Plan only with the approval of the OTS. 29. INTERPRETATION OF THE PLAN -------------------------- All interpretations of this Plan and application of its provisions to particular circumstances by a majority of each of the Boards of Directors of the Primary Parties shall be final, subject to the authority of the OTS. 28 APPENDIX A PLAN OF MERGER PLAN OF MERGER, dated as of __________ __, 199__ ("Plan of Merger") by and between Guaranty Federal Savings Bank (the "Bank") and Guaranty Federal Bancshares, M.H.C. ("Mutual Holding Company"). Unless otherwise noted, defined terms shall have the same meaning as those set forth in the Plan of Conversion of the Mutual Holding Company and the Agreement and Plan of Reorganization between Guaranty Federal Bancshares, Inc. (the "Holding Company") and the Bank ("Plan") (of which this Plan of Merger is Appendix A thereto). WITNESSETH: WHEREAS, in April 1995, Guaranty Federal Savings Bank, a federally chartered mutual savings bank (the "Savings Bank"), reorganized into the mutual holding company form of organization whereby (i) the Savings Bank organized the Bank, a federally chartered stock savings bank, as a wholly owned subsidiary; (ii) the Savings Bank then transferred substantially all of its assets and liabilities to the Bank in exchange for 2,152,635 or 68.9% of the shares of Bank Common Stock, and reorganized itself into a federally chartered mutual holding company known as Guaranty Federal Bancshares, M.H.C.; WHEREAS, the Board of Directors of the Mutual Holding Company has determined that it is in the best interests of the Mutual Holding Company and its members to convert from the mutual to stock form of organization; WHEREAS, the Bank is currently a majority owned subsidiary of the Mutual Holding Company; WHEREAS, the conversion of the Mutual Holding Company to stock form will be facilitated by causing the Mutual Holding Company to convert from the mutual form to a federal interim stock savings bank to be known as "Guaranty Federal Interim Bancshares" ("Interim A") and simultaneously merge with the Bank ("Conversion"); and WHEREAS, immediately upon completion of the Conversion, the Bank will form a Delaware corporation (the Holding Company), which will in turn form a second interim savings association ("Interim B"); Interim B will merge with and into the Bank; and the Bank will become a wholly owned subsidiary of the Holding Company ("Reorganization"). The existing minority stockholders of the Bank will exchange their shares of Bank Common Stock for shares of common stock of the Holding Company based upon an Exchange Ratio established in accordance with the independent appraisal of the Bank upon merger with Interim A, and the remaining shares will be sold in subscription and community offerings, giving priority subscription rights as set forth in the Plan in accordance with OTS conversion regulations. A - 1 NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, and in accordance with federal law, the Bank and the Mutual Holding Company hereby agree that, subject to the conditions hereinafter set forth, the Mutual Holding Company shall convert from the mutual form to a federal interim stock savings bank, and Interim B shall then be merged with and into the Bank with the Bank as the surviving entity. The terms and conditions of such merger shall be as follows: 1. Regulatory Approvals. The merger shall not become effective until receipt of approval of the OTS and any other agency having jurisdiction over the merger, if any. 2. Identity and Name of Resulting Bank. The resulting savings bank in the Reorganization shall be the Bank. 3. Offices of Resulting Bank. The home office of the Bank, as the resulting savings bank, shall be the Bank's office located at 1341 W. Battlefield, Springfield, Missouri. The locations of the branch offices of the resulting savings bank shall be those of the Bank in existence on the date of this Plan of Merger. In addition, the resulting savings bank shall operate branch offices at such additional locations as may be approved by the OTS. 4. The Bank's Federal Charter and Bylaws. The federal stock charter and bylaws of the Bank as in effect immediately prior to the effectiveness of the Reorganization shall be amended as necessary to accomplish the Reorganization. 5. Effective Date. The effective date of the Conversion ("Effective Date") shall be the date as soon as practicable after the issuance and/or execution by the OTS and any other federal or state regulatory agencies, of all approvals, certificates and documents as may be required in order to cause the Conversion and the Reorganization to become effective. 6. Bank Stockholder Approval. The affirmative vote of the holders of two-thirds of the outstanding Bank Common Stock and at least a majority of such Bank Common Stock not held by the Mutual Holding Company voting at a meeting of the stockholders shall be required to approve this Plan of Merger. 7. Mutual Holding Company Approval. The approval of a majority of the members of the Mutual Holding Company, as of a specified date shall be required to approve this Plan of Merger. A - 2 8. Cancellation of Savings Bank Common Stock held by the Mutual Holding Company and Member Interests; Liquidation Account. (a) On the Effective Date, (i) each share of Bank Common Stock issued and outstanding immediately prior to the Effective Date and held by the Mutual Holding Company shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be canceled, (ii) the interests in the Mutual Holding Company of any person, firm or entity who or which qualified as a member of the Mutual Holding Company in accordance with its mutual charter and bylaws and the laws of the United States prior to the Mutual Holding Company's conversion from mutual to stock form (the "Members") shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be canceled, and (iii) the Bank shall establish a liquidation account on behalf of each depositor member of the Mutual Holding Company, as defined in the Plan, in accordance with Section 16 of the Plan. (b) At or after the Effective Date and prior to the Merger, each certificate or certificates theretofore evidencing issued and outstanding shares of Bank Common Stock, other than any such certificate or certificates held by the Mutual Holding Company, which shall be canceled, shall continue to represent issued and outstanding shares of Bank Common Stock. 9. Dissenting Shares. No Member of the Mutual Holding Company or stockholder of the Bank shall have any dissenter or appraisal rights in connection with the Conversion. 10. Deposits of the Bank. All deposit accounts of the Bank shall be and will become deposits in the resulting savings bank without change in their respective terms, interest rates, maturities, minimum required balances or withdrawal values. After the Effective Date, the resulting savings bank will continue to issue deposit accounts on the same basis as immediately prior to the Effective Date. 11. Effect of Conversion. Upon the Effective Date of the Conversion and the Reorganization, all assets and property (real, personal and mixed, tangible and intangible, chooses in action, rights and credits) then owned by the Bank or the Mutual Holding Company or which would inure to either of them, shall immediately by operation of law and without any conveyance, transfer or further action, become the property of the resulting savings bank, which shall have, hold and enjoy them in its own right as fully and to the same extent as they were possessed, held and enjoyed by the Bank and the Mutual Holding Company immediately prior to the Effective Date of the Conversion. The resulting savings bank shall be deemed to be a continuation of the entity of both the Bank and the Mutual Holding Company and all of the rights and obligations of the Bank and the Mutual Holding Company shall remain unimpaired; and the resulting savings bank, upon the Effective Date of the Conversion, shall succeed to all those rights and obligations and the duties and liabilities connected therewith. 12. Directors and Executive Officers. The persons who are the current officers and directors of the Bank will be the directors and officers of the resulting savings bank and such terms or positions will be unchanged. A - 3 13. Abandonment of Plan of Merger. This Plan of Merger may be abandoned by either the Bank or the Mutual Holding Company at any time before the Effective Date in the manner set forth in Section 28 of the Plan. 14. Amendment of this Plan of Merger. This Plan of Merger may be amended or modified at any time by mutual agreement of the Boards of Directors of the Bank and the Mutual Holding Company in the manner set forth in Section 28 of the Plan. 15. Governing Law. This Plan of Merger is made pursuant to, and shall be construed and be governed by, the laws of the United States, and the rules and regulations promulgated thereunder, including without limitation, the rules and regulations of the OTS. 16. All Terms Included. This Plan of Merger sets forth all terms, conditions, agreements and understandings of the Bank and the Mutual Holding Company with respect to the Conversion. 17. Counterparts. This Plan of Merger may be executed in several identical counterparts, each of which when executed by the Parties and delivered shall be an original, but all of which together shall constitute a single instrument. In making proof of this Plan of Merger, it shall not be necessary to produce or account for more than one such counterpart. A - 4 IN WITNESS WHEREOF, the parties have caused this Plan of Merger to be executed by their duly authorized officers as of the date first above written. GUARANTY FEDERAL BANCSHARES, M.H.C. Attest:/s/ E. Lorene Thomas By: /s/ James E. Haseltine -------------------- ----------------------------------------- E. Lorene Thomas James E. Haseltine Secretary Chief Executive Officer and President GUARANTY FEDERAL SAVINGS BANK Attest:/s/ E. Lorene Thomas By: /s/ James E. Haseltine -------------------- ----------------------------------------- E. Lorene Thomas James E. Haseltine Secretary Chief Executive Officer and President APPENDIX B PLAN OF REORGANIZATION PLAN OF REORGANIZATION, dated as of __________ __, 199__ ("Agreement"), by and among Guaranty Federal Savings Bank, a federally chartered savings bank (the "Bank"), Guaranty Federal Interim Savings Bank ("Interim B"), a to-be-formed interim federal savings bank which will be organized for the sole purpose of consummating the reorganization provided for herein, and Guaranty Federal Bancshares, Inc. ("Holding Company"), a Delaware corporation wholly owned by the Bank (such entities collectively referred to herein as the "Parties" or individually as "Party"). Unless otherwise noted, defined terms shall have the same meaning as those set forth in the Plan of Conversion of Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company") and the Agreement and Plan of Reorganization between the Holding Company and the Bank (the "Plan") (of which this Plan of Reorganization is an Appendix thereto). W I T N E S S E T H: WHEREAS, the Board of Directors of the Bank has determined that it is in the best interests of the Bank and its stockholders for the Bank to be reorganized into the holding company form of ownership; WHEREAS, the Bank has caused the Holding Company to be organized under Delaware law as a wholly owned subsidiary for the purpose of becoming the holding company of the Bank; WHEREAS, Interim B is being organized by the officers of the Bank as a federally chartered interim stock savings bank with the Holding Company as its sole stockholder in order to effect the Reorganization; and WHEREAS, the formation of a holding company by the Bank will be effected by causing the Holding Company to become the sole stockholder of Interim B, and then merging Interim B with and into the Bank, so that as part of the merger all of the outstanding shares of common stock of the Bank will be converted automatically into and become shares of common stock of the Holding Company, which will as a result thereof become the sole stockholder of the Bank (such transactions collectively referred to as the "Reorganization"); WHEREAS, in connection with the Reorganization, the existing minority stockholders of the Bank will exchange their shares of the Bank Common Stock for shares of common of the Holding Company based upon an Exchange Ratio established in accordance with the independent appraisal of the Bank upon merger with Interim A, and the remaining shares will be sold in subscription and community offerings, giving priority subscription rights as set forth in the Plan in accordance with OTS conversion regulations; and WHEREAS, the Bank and Interim B (the Bank and Interim B may be referred to together the "Constituent Banks") and the Holding Company desire to provide herein for the terms and conditions of the Reorganization. B - 1 NOW, THEREFORE, the Bank, Interim B and the Holding Company do hereby agree as follows: 1. Effective Date. The Reorganization shall become effective only upon the effectiveness of the Conversion and the Reorganization on the date specified in the endorsement of the articles of combination relating to the Reorganization by the Secretary of the OTS pursuant to 12 C.F.R. ss. 552.13(k), or any successor thereto (the "Effective Date"). 2. The Merger and Effect Thereof. Subject to the terms and conditions set forth herein, including, without limitation, the prior approval of the OTS and the expiration of all applicable waiting periods, Interim B shall merge with and into the Bank, which shall be the surviving bank (the "Surviving Bank"). Upon consummation of the Reorganization, the Surviving Bank shall be considered the same business and corporate entity as each of the Constituent Banks and thereupon and thereafter all the property, rights, powers and franchises of each of the Constituent Banks shall vest in the Surviving Bank and the Surviving Bank shall be subject to and be deemed to have assumed all of the debts, liabilities, obligations and duties of each of the Constituent Banks and shall have succeeded to all of each of their relationships, fiduciary or otherwise, as fully and to the same extent as if such property, rights, privileges, powers, franchises, debts, obligations, duties and relationships had been originally acquired, incurred or entered into by the Surviving Bank. In addition, any reference to either of the Constituent Banks in any contract, will or document, whether executed or taking effect before or after the Effective Date, shall be considered a reference to the Surviving Bank if not inconsistent with the other provisions of the contract, will or document; and any pending action or other judicial proceeding to which either of the Constituent Banks is a party shall not be deemed to have abated or to have been discontinued by reason of the Reorganization, but may be prosecuted to final judgment, order or decree in the same manner as if the Reorganization had not occurred or the Surviving Bank may be substituted as a party to such action or proceeding, and any judgment, order or decree may be rendered for or against it that might have been rendered for or against either of the Constituent Banks if the Reorganization had not occurred. 3. Conversion of Stock. (a) On the Effective Date, (i) each share of common stock, par value $1.00 per share, of the Bank ("the Bank Common Stock") issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be converted, pursuant to the Exchange Ratio, into a fixed number of shares of common stock, par value $.10 per share, of the Company ("Holding Company Common Stock"), (ii) each share of common stock, par value $1.00 per share, of Interim B ("Interim B Common Stock") issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be converted into one share of the Savings Bank Common Stock, and (iii) each share of Holding Company Common Stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be canceled. The Company, as the sole stockholder of Interim B, shall (i) issue shares of Company Common B - 2 Stock in accordance with the terms hereof and (ii) cancel all previously issued and outstanding shares of Holding Company Common Stock upon the effectiveness of the Reorganization. (b) On and after the Effective Date, there shall be no registration of any transfers on the stock transfer books of Interim B or the Bank of shares of Interim B Common Stock or the Bank Common Stock which were outstanding immediately prior to the Effective Date. 4. Exchange of Shares. (a) At or after the Effective Date, each holder of a certificate or certificates theretofore evidencing issued and outstanding shares of the Bank Common Stock, upon surrender of the same to an agent, duly appointed by the Holding Company ("Exchange Agent"), shall be entitled to receive in exchange therefor a certificate or certificates representing the number of full shares of Holding Company Common Stock determined in accordance with the Exchange Ratio provided in Section 3 hereof. The Exchange Agent will mail to each holder of record of an outstanding certificate which immediately prior to the Effective Date evidenced shares of the Bank Common Stock, and which is to be exchanged for Holding Company Common Stock as provided in Section 3 hereof, a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the Exchange Agent) advising such holder of the terms of the exchange effected by the Reorganization and of the procedure for surrendering to the Exchange Agent such certificate in exchange for a certificate or certificates evidencing Holding Company Common Stock. (b) No holder of a certificate thereto representing shares of Bank Common Stock shall be entitled to receive any dividends in respect of the Holding Company Common Stock into which such shares shall have been converted by virtue of the Conversion and Reorganization until the certificate representing such shares of Bank Common Stock is surrendered in exchange for certificates representing shares of Holding Company Common Stock. In the event that dividends are declared and paid by the Holding Company in respect of Holding Company Common Stock after the consummation of the Conversion and Reorganization but prior to surrender of certificates representing shares of Bank Common Stock, dividends payable in respect of shares of Bank Common Stock not then issued shall accrue (without interest). Any such dividends shall be paid (without interest) upon surrender of the certificates representing such shares of Bank Common Stock. The Holding Company shall be entitled, after the consummation of the Conversion and Reorganization, to treat certificates representing shares of Bank Common Stock as evidencing ownership of the number of full shares of Holding Company Common Stock into which the shares of Bank Common Stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates. B - 3 (c) If any certificate evidencing shares of Company Common Stock is to be issued in a name other than that in which the certificate evidencing the Bank Common Stock surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange pay to the Exchange Agent any transfer or other tax required by reason of the issuance of a certificate for shares of Holding Company Common Stock in any name other than that of the registered holder of the certificate surrendered or otherwise establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) If, between the date hereof and the Effective Date, the shares of Bank Common Stock shall be changed into a different number or class of shares by reason of any reclassifica- tion, recapitalization, split-up, combination, exchange of shares or readjustment, or a stock dividend thereon shall be declared with a record date within said period, the Exchange Ratio specified in Section 3(a) hereof shall be adjusted accordingly. 5. Dissenting Shares. Holders of shares of the Bank Common Stock shall not be entitled to exercise dissenters' or appraisal rights in connection with the Reorganization in accordance with 12 C.F.R. ss. 552.14, or any successor thereto. 6. Name of Surviving Bank. The name of the Surviving Bank shall be "Guaranty Federal Savings Bank." 7. Directors and Officers of the Surviving Bank. The persons who are the current officers and directors of the Bank will be the directors and officers of the Surviving Bank and their terms and positions will remain unchanged. 8. Offices. As of the Effective Date, the main office of the Surviving Bank shall remain at 1341 W. Battlefield, Springfield, Missouri 65807 and the location of the other offices of the Surviving Bank shall be those of the Bank in existence on the date of this Plan of Reorganization. In addition, the Surviving Bank shall operated branch offices at such additional locations as may be approved by the OTS. 9. Charter and Bylaws. On and after the Effective Date, the Charter and Bylaws of the Bank as in effect immediately prior to the Effective Date shall be the Charter and Bylaws of the Surviving Bank until amended in accordance with the terms thereof and applicable law. The Bank shall amend its Charter to establish a liquidation account on behalf of each depositor member of the Mutual Holding Company, as defined in the Plan, in accordance with Section 16 of the Plan. 10. Savings Accounts. Upon the Effective Date, all savings accounts of the Bank, without reissue, shall be and become savings accounts of the Surviving Bank without change in their respective terms, including, without limitation, maturity, minimum required balances or withdrawal value. B - 4 11. Stock Compensation Programs. By voting in favor of this Agreement, the Company shall have approved adoption of the Bank's existing stock compensation programs, including the 1995 Stock Option Plan ("Option Plan"), and the Recognition and Retention Plan and Trust ("RRP") as plans of the Company and shall have agreed to issue Company Common Stock in lieu of Bank Common Stock pursuant to the terms of such plans, subject to the Exchange Ratio set forth in section 3 hereof. As of the Effective Date of the Reorganization, rights outstanding under the Option Plan and RRP shall be assumed by the Company and thereafter shall be rights only for shares of Company Common Stock, with each such right being for a number of shares of Company Common Stock equal to the number of shares of Bank Common Stock that were available thereunder immediately prior to the Effective Date of the Reorganization, adjusted pursuant to the Exchange Ratio, and with no change in any other term or condition of such right, other then as needed to adjust the price or number of shares pursuant to the Exchange Ratio. The Company shall make appropriate amendments to the Option Plan and RRP to reflect their adoption by the Company without adverse effect upon the options outstanding or rights thereunder. 12. Other Employment Agreements and Benefit Plans. At the Effective Date and except as otherwise provided in Section 11 above, all rights to purchase, sell or receive the Bank Common Stock and all rights to elect to make payment in the Bank Common Stock under any agreement between the Bank and any director, officer or employee thereof or under any plan or program of the Bank, shall automatically, by operation of law, be converted into and shall become an identical right to purchase, sell or receive Holding Company Common Stock and an identical right to make payment in Holding Company Common Stock under any such agreement between the Bank and any director, officer or employee thereof or under such plan or program of the Bank, subject to the Exchange Ratio set forth in Section 3 hereof. 13. Stockholder Approval. The affirmative vote of the holders of two-thirds of the issued and outstanding the Bank Common Stock held by persons other than the Mutual Holding Company shall be required to approve this Agreement on behalf of the Bank. The approval of the Bank, as the sole holder of Holding Company Common Stock, shall be required to approve this Plan of Reorganization on behalf of the Holding Company and the approval of the Holding Company, as the sole holder of Interim B Common Stock, shall be required to approve this Plan of Reorganization on behalf of Interim B. 14. Registration; Other Approvals. In addition to the approvals set forth in Sections 1 and 13 hereof, the Parties' obligations to consummate the Reorganization shall be subject to the Holding Company Common Stock to be issued hereunder in exchange for the Bank Common Stock being registered under the Securities Act of 1933, as amended, and registered or qualified under applicable state securities laws, as well as the receipt of all other approvals, consents or waivers as the Parties may deem necessary or advisable. 15. Income Tax Matters. The Parties hereto shall have received an opinion of counsel, or a private letter ruling from the Internal Revenue Service, satisfactory to them in form and B - 5 substance, with respect to the federal income tax consequences of this Plan of Reorganization, including the formation of a holding company, as contemplated herein. 16. Abandonment of Plan of Reorganization. This Plan of Reorganization may be abandoned by the Bank, Interim B or the Holding Company at any time before the Effective Date in the event that (a) any action, suit, proceeding or claim has been instituted, made or threatened relating to the Plan of Reorganization which shall make consummation of the transactions contemplated hereby inadvisable in the opinion of the Bank, Interim B or the Holding Company, (b) the Bank Common Stock, as the case may be, is no longer quoted on the National Association of Securities Dealers Automated Quotations System, or (c) for any other reason consummation of the transactions contemplated hereby is inadvisable in the opinion of the Bank, Interim B or the Holding Company. Such abandonment shall be effected by written notice by the Bank, Interim B or the Holding Company to the other Parties hereto, authorized or approved by the Board of Directors of the Party giving such notice. Upon the giving of such notice, this Agreement shall be terminated and there shall be no liability hereunder or on account of such termination on the part of the Bank, Interim B or the Holding Company or the directors, officers, employees, agents or stockholders of any of them. In the event of abandonment of this Plan of Reorganization, the Savings Bank, if in existence, shall pay the fees and expenses incurred by itself, the Bank, Interim B and the Holding Company in connection with this Plan of Reorganization and the Reorganization. 17. Amendments. To the extent permitted by law, this Plan of Reorganization may be amended by a subsequent writing signed by the Parties hereto upon the approval of the Board of Directors of each of the Parties hereto and subject to Section 28 of the Plan; provided, however, that the provisions of Section 3 hereof relating to the consideration to be exchanged for shares of the Bank Common Stock shall not be amended after the meeting of stockholders of the Bank at which this Agreement is considered so as to decrease the amount or change the form of such consideration without the approval of such stockholders. 18. Successors. This Plan of Reorganization shall be binding on the successors of the Bank, Interim B and the Holding Company. 19. Counterparts. This Plan of Reorganization may be executed in one or more counterparts. 20. Governing Law. This Plan of Reorganization shall be governed by and construed in accordance with the laws of the United States of America and, to the extent not governed by such laws, the laws of the State of Delaware. 21. Execution by Interim B. The Bank and the Holding Company acknowledge that as of the date hereof, Interim B is in organization and has not received its charter from the OTS. Therefore, Interim B does not have the legal capacity to execute this Plan of Reorganization as of the date hereof. The Holding Company agrees to cause Interim B to execute this Plan of Reorganization promptly following the organization of Interim B upon receipt of OTS approval B - 6 for Interim B to be organized. The Bank and the Holding Company agree to be bound by this Plan of Reorganization prior to and following such execution by Interim B. B - 7 IN WITNESS WHEREOF, the Parties hereto have caused this Plan of Reorganization to be duly executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. GUARANTY FEDERAL SAVINGS BANK By: /s/ James E. Haseltine ------------------------------------------- James E. Haseltine, Chief Executive Officer Attest: /s/ E. Lorene Thomas ------------------------------------------- E. Lorene Thomas, Secretary GUARANTY FEDERAL BANCSHARES, INC. By: /s/ James E. Haseltine ------------------------------------------- James E. Haseltine, Incorporator Attest: /s/ E. Lorene Thomas ------------------------------------------- E. Lorene Thomas, Secretary GUARANTY FEDERAL INTERIM SAVINGS BANK By: /s/ James E. Haseltine ------------------------------------------- James E. Haseltine, Chief Executive Officer Attest: /s/ E. Lorene Thomas -------------------------------------------- E. Lorene Thomas, Secretary EX-3.I 3 EXHIBIT 3.I EXHIBIT 3.i CERTIFICATE OF INCORPORATION OF GUARANTY FEDERAL BANCSHARES, INC. ARTICLE I Name The name of the corporation is Guaranty Federal Bancshares, Inc. (herein the "Corporation"). ARTICLE II Registered Office The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III Powers The purpose for which the Corporation is organized is to act as a savings and loan holding company and to transact all other lawful business for which corporations may be incorporated pursuant to the laws of the State of Delaware. The Corporation shall have all the powers of a corporation organized under said laws. ARTICLE IV Term The Corporation is to have perpetual existence. ARTICLE V Incorporators The name and mailing address of the incorporator is as follows: Name Mailing Address ---- --------------- James E. Haseltine 1341 W. Battlefield Springfield, Missouri 65807 ARTICLE VI Capital Stock The aggregate number of shares of all classes of capital stock which the Corporation has authority to issue is 12,000,000, of which 10,000,000 are to be shares of common stock, $.10 par value per share, and of which 2,000,000 are to be shares of serial preferred stock, $.01 par value per share. The shares may be issued by the Corporation without the approval of stockholders except as otherwise provided in this Article VI or the rules of a national securities exchange, if applicable. The consideration for the issuance of the shares shall be paid to or received by the Corporation in full before their issuance and shall not be less than the par value per share. The consideration for the issuance of the shares shall be cash, services rendered, personal property (tangible or intangible), real property, leases of real property or any combination of the foregoing. In the absence of actual fraud in the transaction, the judgment of the board of directors as to the value of such consideration shall be conclusive. Upon payment of such consideration such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, the part of the surplus of the Corporation which is transferred to stated capital upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. A description of the different classes and series (if any) of the Corporation's capital stock, and a statement of the relative powers, designations, preferences and rights of the shares of each class and series (if any) of capital stock, and the qualifications, limitations or restrictions thereof, are as follows: A. Common Stock. Except as provided in this Certificate the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holders. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock, and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when as declared by the board of directors of the Corporation. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class having preference over the common stock in any event, the full preferential amounts to which they are respectively entitled, the holders of the common stock and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets shall be entitled, after payment or provision for payment of all debts and liabilities of the Corporation, to receive the remaining assets of the Corporation available for distribution, in cash or in kind. Each share of common stock shall have the same relative powers, preferences and rights as, and shall be identical in all respects with, all the other shares of common stock of the Corporation. B. Serial Preferred Stock. Except as provided in this Certificate the board of directors of the Corporation is authorized, by resolution or resolutions from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the powers, designations, preferences and 2 relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof, including, but not limited to determination of any of the following: 1. the distinctive serial designation and the number of shares constituting such series; and 2. the dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends; and 3. the voting powers, full or limited, if any, of the shares of such series; and 4. whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions upon which such shares may be redeemed; and 5. the amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and 6. whether the shares of such series shall be entitled to the benefits of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and, if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such funds; and 7. whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation and, if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; and 8. the subscription or purchase price and form of consideration for which the shares of such series shall be issued; and 9. whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative powers, preferences and rights as, and shall be identical in all respects with, all the other shares of the Corporation of the same series. ARTICLE VII Preemptive Rights No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series, or any unissued bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of any class or series or carrying any right to purchase stock of any class or 3 series; but any such unissued stock, bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock or carrying any right to purchase stock may be issued pursuant to resolution of the board of directors of the Corporation to such persons, firms, corporations or associations, whether or not holders thereof, and upon such terms as may be deemed advisable by the board of directors in the exercise of its sole discretion. ARTICLE VIII Repurchase of Shares The Corporation may from time to time, pursuant to authorization by the board of directors of the Corporation and without action by the stockholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or other securities of the Corporation in such manner, upon such terms, and in such amounts as the board of directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law or regulation. ARTICLE IX Meetings of Stockholders; Cumulative Voting A. Notwithstanding any other provision of this Certificate or the Bylaws of the Corporation, no action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. B. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the board of directors of the Corporation, or by a committee of the board of directors which has been duly designated by the board of directors and whose powers and authorities, as provided in a resolution of the board of directors or in the Bylaws of the Corporation, include the power and authority to call such meetings, but such special meetings may not be called by any other person or persons. C. There shall be no cumulative voting by stockholders of any class or series in the election of directors of the Corporation. D. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. ARTICLE X Notice for Nominations and Proposals A. Nominations for the election of directors and proposals for any new business to be taken up at any annual or special meeting of stockholders may be made by the board of directors of the 4 Corporation or by any stockholder of the Corporation entitled to vote generally in the election of directors. In order for a stockholder of the Corporation to make any such nominations and/or proposals, he or she shall give notice thereof in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than thirty days nor more than sixty days prior to any such meeting; provided, however, that if less than thirty-one days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the tenth day following the day on which notice of the meeting was mailed to stockholders. Each such notice given by a stockholder with respect to nominations for election of directors shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominees, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, and (v) as to the stockholder giving such notice (a) his name and address as they appear on the Corporation's books, and (b) the class and number of shares of the Corporation which are beneficially owned by such stockholder. In addition, the stockholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. B. Each such notice given by a stockholder to the Secretary with respect to business proposals to bring before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder; and (iv) any material interest of the stockholder in such business. Notwithstanding anything in this Certificate to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Article. C. The Chairman of the annual or special meeting of stockholders may, if the facts warrant, determine and declare to the meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if he should so determine, he shall so declare to the meeting and the defective nomination or proposal shall be disregarded and laid over for action at the next succeeding adjourned, special or annual meeting of the stockholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of stockholders for the purpose of considering such defective nomination or proposal. ARTICLE XI Directors A. Number; Vacancies. The number of directors of the Corporation shall be such number, not less than three nor more than 15 (exclusive of directors, if any, to be elected by holders of preferred stock of the Corporation, voting separately as a class), as shall be provided from time to time in or in accordance with the Bylaws of the Corporation, provided that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further that no action shall be taken to decrease or increase the number of directors from time to time unless at least two-thirds of the directors then in office shall concur in said action. Vacancies in the board of directors of the 5 Corporation, however caused, and newly created directorships shall be filled by a vote of two-thirds of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified. B. Classified Board. The board of directors of the Corporation shall be divided into three classes of directors which shall be designated Class I, Class II and Class III. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire board of directors shall permit, with the terms of office of all members of one class expiring each year. At the first annual meeting of stockholders, directors in Class I shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. At the second annual meeting of stockholders, directors of Class II shall be elected to hold office for a term expiring at the third succeeding meeting thereafter. At the third annual meeting of stockholders, directors of Class III shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. Thereafter, at each succeeding annual meeting, directors whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the board of directors shall have been abolished by action taken to reduce the size of the board of directors prior to said meeting. The initial board of directors shall consist of Jack L. Barham and James E. Haseltine in Class 1, Wayne V. Barnes and Ivy L. Rogers in Class 2, and George L. Hall and Gary Lipscomb in Class 3. Should the number of directors of the Corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. The board of directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Should the number of directors of the Corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. Whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the board of directors shall consist of said directors so elected in addition to the number of directors fixed as provided above in this Article XI. Notwithstanding the foregoing, and except as otherwise may be required by law, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. ARTICLE XII Removal of Directors Notwithstanding any other provision of this Certificate or the Bylaws of the Corporation, no member of the board of directors of the Corporation may be removed except for cause, and then only by the affirmative vote of at least 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a 6 meeting of the stockholders called for that purpose. Notwithstanding the foregoing, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the preceding provisions of this Article XII shall not apply with respect to the director or directors elected by such holders of preferred stock. ARTICLE XIII Certain Limitations on Voting Rights Notwithstanding any other provision of this Certificate of Incorporation, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such person owning shares in excess of the Limit. B. The following definitions shall apply to this Article XIII. 1. "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Certificate of Incorporation. 2. "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of this Certificate of Incorporation; provided, however, that a person shall, in any event, also be deemed the "beneficial owner" of any Common Stock: (1) which such person or any of its affiliates beneficially owns, directly or indirectly; or (2) which such person or any of its affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this Corporation to effect any transaction which is described in any one or more of Sections 1 through 5 of Section A of Article XIV) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, 7 with respect to shares of which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or (3) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of this Corporation; and provided further, however, that (1) no Director or Officer of this Corporation (or any affiliate of any such Director or Officer) shall, solely by reason of any or all of such Directors or Officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by any other such Director or Officer (or any affiliate thereof), and (2) neither any employee stock ownership or similar plan of this Corporation or any subsidiary of this Corporation, nor any trustee with respect thereto or any affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any Common Stock held under any such plan. For purposes of computing the percentage beneficial ownership of Common Stock of a person, the outstanding Common Stock shall include shares deemed owned by such person through application of this subsection but shall not include any other Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. 3. A "person" shall mean any individual, firm, corporation, or other entity. C. The Board of Directors shall have the power to construe and apply the provisions of this Article XIII and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of Common Stock beneficially owned by any person, (ii) whether a person is an affiliate of another, (iii) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of the section to the given facts, or (v) any other matter relating to the applicability or effect of this Article XIII. D. The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own Common Stock in excess of the Limit (or holders of record of Common Stock beneficially owned by any person in excess of the Limit) supply the Corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such person who is reasonably believed to own shares in excess of the Limit, (ii) any other factual matter relating to the applicability or effect of this Article XIII as may reasonably be requested of such person. E. Except as otherwise provided by law or expressly provided in this Article XIII, the presence in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Article XIII) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in this Certificate of Incorporation to a majority or other proportion of capital stock (or the 8 holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock. F. The provisions of this Article XIII shall not be applicable to the acquisition of more than 10% of any class of equity security of the Corporation if such acquisition has been approved by a majority of the Continuing Directors, as defined in Article XIV of this Certificate; provided, however, that such approval shall only be effective if such continuing directors shall have the power to construe and apply the provisions of this Article XIII and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (a) the number of shares beneficially owned by any person, (b) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (c) the application of any other material fact relating to the applicability or effect of this Article XIII. Any constructions, applications, or determinations made by the Continuing Directors pursuant to this Article XIII in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its stockholders. G. In the event any provision (or portion thereof) of this Article XIII shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Article XIII shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken here from or otherwise rendered inapplicable, it being the intent of this Corporation and its stockholders that each such remaining provision (or portion thereof) of this Article XIII remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding. ARTICLE XIV Approval of Business Combinations A. Standards of Board of Directors' Evaluation of an Offer. The Board of Directors of the Corporation, when evaluating any offer of another Person to effect a Business Combination shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including, without limitation: (i) the social and economic effects of acceptance of such offer on its depositors, borrowers, other customers, employees, and creditors of the Corporation and its Subsidiaries, and on the communities in which the Corporation and its Subsidiaries operate or are located; (ii) the ability of the Corporation and its Subsidiaries to fulfill the objectives of a bank and/or savings bank and/or savings and loan association holding company, as applicable, and of commercial banking and/or savings bank and/or savings and loan entities, as applicable, under applicable federal and state statutes and regulations; (iii) the business and financial condition and prospects and earnings prospects of the Person or Persons proposing the Business Combination, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the Business Combination, and other likely financial obligations of such Person or Persons, and the possible effect of such conditions and prospects upon the Corporation and its Subsidiaries and the communities in which the Corporation and its Subsidiaries are located; (iv) the competence, experience, and integrity of the Person or Persons proposing the Business Combination and its or their management; and (v) the prospects for successful conclusion of the proposed 9 Business Combination. The provisions of this Article XIV shall be deemed solely to grant discretionary authority to the Board of Directors and shall not be deemed to provide any constituency the right to be considered or to compel the consideration of its interests. B. General Requirement. The affirmative vote of the holders of not less than eighty percent (80%) of the outstanding shares of "Voting Stock" (as hereinafter defined) shall be required for the approval or authorization of any "Business Combination", as defined and set forth below: 1. Any merger, reorganization, or consolidation of the Corporation or any of its Affiliates (as defined in Article XIII of this Certificate) with or into any Principal Shareholder (as hereinafter defined); 2. Any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or in a series of related transactions) of all or a "Substantial Part" (as hereinafter defined) of the assets of the Corporation or any of its Affiliates to any Principal Shareholder; 3. Any sale, lease, exchange, or other transfer (in one transaction or in a series of related transactions) by any Principal Shareholder to the Corporation or any of the Corporation's Affiliates of any assets, cash, or securities in exchange for shares of Voting Stock (or of shares of stock of any of the Corporation's Affiliates entitled to vote in the election of directors of such Affiliate or securities convertible into or exchangeable for shares of Voting Stock or such stock of an Affiliate, or options, warrants, or rights to purchase shares of Voting Stock or such stock of an Affiliate); 4. The adoption at any time when there exists any Principal Shareholder of any plan or proposal for the liquidation or dissolution of the Corporation; and 5. Any reclassification of securities (including any reverse stock split), recapitalization, or other transaction at any time when there exists any Principal Shareholder if such reclassification, recapitalization, or other transaction would result in a decrease in the number of holders of the outstanding shares of Voting Stock. The affirmative vote required by this Article XIV shall be in addition to the vote of the holders of any class or series of stock of the Corporation otherwise required by law, by any other Article of this Certificate, as amended, by any resolution of the Board of Directors providing for the issuance of a class or series of stock, or by any agreement between the Corporation and any national securities exchange. C. Certain Definitions. For the purposes of this Article XIV: 1. The term "Principal Shareholder" shall mean and include any individual, Corporation, partnership, or other person or entity which, together with its "Affiliates" and "Associates" (as defined in Article XIII of this Certificate), "beneficially owns" (as defined in Article XIII of this Certificate) in the aggregate ten percent (10%) or more of the outstanding shares of Voting Stock, and any Affiliate or Associate of any such individual, corporation, partnership, or other person or entity. 2. The term "Substantial Part" shall mean more than twenty-five percent (25%) of the fair market value of the total assets of the Corporation, as of the end of its most recent fiscal quarter ending prior to the time the determination is being made. 10 3. The term "Voting Stock" shall mean the stock of the Corporation entitled to vote in the election of directors. 4. Any corporation, partnership, person, or entity will be deemed to be a "beneficial owner" of or to own beneficially any share or shares of stock of the Corporation: (a) which it owns directly, whether or not of record; or (b) which it has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement or arrangement or understanding or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise, or which it has the right to vote pursuant to any agreement, arrangement, or understanding; or (c) which are beneficially owned, directly or indirectly (including shares deemed to be owned through application of clause (b) above) by any Affiliate or Associate; or (d) which are beneficially owned, directly or indirectly (including shares deemed to be owned through application of clause (b) above) by any other corporation, person, or entity with which it or any of its Affiliates or Associates have any agreement or arrangement or understanding for the purpose of acquiring, holding, voting, or disposing of Voting Stock. For the purpose only of determining the percentage of the outstanding shares of Voting Stock which any corporation, partnership, person, or other entity beneficially owns, directly or indirectly, the outstanding shares of Voting Stock will be deemed to include any shares of Voting Stock which such corporation, partnership, person or other entity beneficially owns pursuant to the foregoing provisions of this subsection (whether or not such shares of Voting Stock are in fact issued or outstanding), but shall not include any other shares of Voting Stock which may be issuable either immediately or at some future date pursuant to any agreement, arrangement, or understanding or upon exercise of conversion rights, exchange rights, warrants, options, or otherwise. D. Exceptions. The provisions of this Article XIV shall not apply to a Business Combination which is approved by two-thirds of those members of the Board of Directors who were directors prior to the time when the Principal Shareholder became a Principal Shareholder (the "Continuing Directors"). The provisions of this Article XIV also shall not apply to a Business Combination which (a) does not change any shareholder's percentage ownership in the shares of stock entitled to vote in the election of directors of any successor of the Corporation from the percentage of the shares of Voting Stock owned by such shareholder; (b) provides for the provisions of this Article XIV, without any amendment, change, alteration, or deletion, to apply to any successor to the Corporation; and (c) does not transfer all or a Substantial Part of the Corporation's assets other than to a wholly-owned subsidiary of the Corporation. E. Additional Provisions. Nothing contained in this Article XIV, shall be construed to relieve a Principal Shareholder from any fiduciary obligation imposed by law. In addition, nothing contained in this Article XIV shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such Shareholder. F. Notwithstanding Article XX or any provisions of this Certificate or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate or the Bylaws of the Corporation), the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series) shall be required to amend or repeal this Article XIV or adopt any provisions inconsistent with this Article XIV. 11 ARTICLE XV Fair Price Requirements A. General Requirement. No "Business Combination" (as defined in Article XIV) shall be effected unless all of the following conditions, to the extent applicable, are fulfilled. 1. The ratio of (a) the aggregate amount of the cash and the fair market value of the other consideration to be received per share by the holders of the common stock of the Corporation in the Business Combination to (b) the "Market Price" (as hereinafter defined) of the common stock of the Corporation immediately prior to the announcement of the Business Combination or the solicitation of the holders of the common stock of the Corporation regarding the Business Combination, whichever is first, shall be at least as great as the ratio of (x) the highest price per share previously paid by the "Principal Shareholder" (as hereinafter defined) (whether before or after it became a Principal Shareholder) for any of the shares of common stock of the Corporation at any time beneficially owned, directly, or indirectly, by the Principal Shareholder to (y) the Market Price of the common stock of the Corporation on the trading date immediately prior to the earliest date on which the Principal Shareholder (whether before or after it became a Principal Shareholder) purchased any shares of common stock of the Corporation during the two year period prior to the date on which the Principal Shareholder acquired the shares of common stock of the Corporation at any time owned by it for which it paid the highest price per share (or, if the Principal Shareholder did not purchase any shares of common stock of the Corporation during the two year period, the Market Price of the common stock of the Corporation on the date of two years prior to the date on which the Principal Shareholder acquired the shares of common stock of the Corporation at any time owned by it for which it paid the highest price per share). 2. The aggregate amount of the cash and the fair market value of the other consideration to be received per share by the holders of the common stock of the Corporation in the Business Combination shall be not less than the highest price per share previously paid by the Principal Shareholder (whether before or after it became a Principal Shareholder) for any of the shares of common stock of the Corporation at any time beneficially owned, directly or indirectly, by the Principal Shareholder. 3. The consideration to be received by the holders of the common stock of the Corporation in the Business Combination shall be in the same form and of the same kind as the consideration paid by the Principal Shareholder in acquiring the majority of the shares of common stock of the Corporation already beneficially owned, directly or indirectly, by the Principal Shareholder. The conditions imposed by this Article XV shall be in addition to all other conditions (including, without limitation, the vote of the holders of any class or series of stock of the Corporation) otherwise imposed by law, by any other Article of this Certificate, by any resolution of the Board of Directors providing for the issuance of a class or series of stock, or by any agreement between the Corporation and any national securities exchange. B. Certain Definitions. For the purpose of this Article XV, the definitions of "Business Combination," "Principal Shareholder", "Substantial Part", "Voting Stock," and "Beneficial Owner" set forth in Article XIV will apply to this Article XV. 12 The "Market Price" of the common stock of the Corporation shall be the mean between the high "bid" and the low "asked" prices of the common stock in the over-the-counter market on the day on which such value is to be determined or, if no shares were traded on such date, on the next preceding day on which such shares were traded, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or other national quotation service. If the common stock of the Corporation is not regularly traded in the over-the-counter market but is registered on a national securities exchange or traded in the national over-the-counter market, the market value of the common stock shall mean the closing price of the common stock on such national securities exchange or market on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by the National Quotation Bureau, Incorporated or other national quotation service. If no such quotations are available, the fair market value of the date in question of a share of such stock as determined by the Board of Directors in good faith; and in the case of property other than cash or stock, the fair market value of such property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. C. Exceptions. The provisions of this Article XV shall not apply to a Business Combination which was approved by two-thirds of those members of the Board of Directors of the Corporation who were directors prior to the time when the Principal Shareholder became a Principal Shareholder. The provisions of which this Article XV also shall not apply to a Business Combination which (a) does not change any shareholder's percentage ownership in the shares of stock entitled to vote in the election of directors of any successor of the Corporation from the percentage of the shares of Voting Stock beneficially owned by such shareholder; (b) provides for the provisions of this Article XV, without any amendment, change alteration, or deletion, to apply to any successor to the Corporation; and (c) does not transfer all or a Substantial Part of the Corporation's assets other than to a wholly-owned subsidiary of the Corporation; provided, however, that nothing contained in this Article XV shall permit the Corporation to issue any of its shares of Voting Stock or to transfer any of its assets to a wholly-owned subsidiary of the Corporation if such issuance of shares of Voting Stock or transfer of assets is part of a plan to transfer such shares of Voting Stock or assets to a Principal Shareholder. D. Additional Provisions. Nothing contained in this Article XV shall be construed to relieve a Principal Shareholder from any fiduciary obligation imposed by law. In addition, nothing contained in this Article XV shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such shareholders. E. Notwithstanding Article XX or any other provisions of this Certificate or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate or the Bylaws of the Corporation), the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series) shall be required to amend or repeal or adopt any provisions inconsistent with this Article XV. ARTICLE XVI Evaluation of Offers The Board of Directors of the Corporation, when evaluating any offer to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with 13 another corporation or entity or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effect of acceptance of such offer: on the Corporation's present and future customers and employees and those of its subsidiaries; on the communities in which the Corporation and its subsidiaries operate or are located; on the ability of the Corporation to fulfill its corporate objective as a savings and loan holding company under applicable statutes and regulations; and on the ability of its subsidiary savings bank to fulfill the objectives of a stock form savings bank under applicable statutes and regulations. ARTICLE XVII Elimination of Directors' Liability Directors of the Corporation shall have no liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this Article XVII shall not eliminate liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not made in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which a director derived an improper personal benefit. If the Delaware General Corporation Law is amended after the effective date of this Certificate to further eliminate or limit the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XVIII Indemnification A. Persons. The Corporation shall indemnify, to the extent provided in paragraphs B, D or F: 1. any person who is or was a director, officer, employee, of the Corporation; and 2. any person who serves or served at the Corporation's request as a director, officer, employee, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise. B. Extent -- Derivative Suits. In case of a threatened, pending or completed action or suit by or in the right of the Corporation against a person named in paragraph A by reason of his holding a position named in paragraph A, the Corporation shall indemnify him if he satisfies the standard in paragraph C, for expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of the action or suit. 14 C. Standard -- Derivative Suits. In case of a threatened, pending or completed action or suit by or in the right of the Corporation, a person named in paragraph A shall be indemnified only if: 1. he is successful on the merits or otherwise; or 2. he acted in good faith in the transaction which is the subject of the suit or action, and in a manner he reasonably believed to be in, or not opposed to, the best interest of the Corporation, including, but not limited to, the taking of any and all actions in connection with the Corporation's response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article XIV of this Certificate) not approved by the board of directors. However, he shall not be indemnified in respect of any claim, issue or matter as to which he has been adjudged liable to the Corporation unless (and only to the extent that) the Court of Chancery or the court in which the suit was brought shall determine, upon application, that despite the adjudication but in view of all the circumstances, he is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. D. Extent -- Nonderivative Suits. In case of a threatened, pending or completed suit, action or proceeding (whether civil, criminal, administrative or investigative), other than a suit by or in the right of the Corporation, together hereafter referred to as a nonderivative suit, against a person named in paragraph A by reason of his holding a position named in paragraph A, the Corporation shall indemnify him if he satisfies the standard in paragraph E, for amounts actually and reasonably incurred by him in connection with the defense or settlement of the nonderivative suit, including, but not limited to (i) expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii) judgments, and (iv) fines. E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a person named in paragraph A shall be indemnified only if: 1. he is successful on the merits or otherwise; or 2. he acted in good faith in the transaction which is the subject of the nonderivative suit and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, including, but not limited to, the taking of any and all actions in connection with the Corporation's response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article XIV of this Certificate) not approved by the board of directors and, with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. The termination of a nonderivative suit by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, in itself, create a presumption that the person failed to satisfy the standard of this paragraph E.2. F. Determination That Standard Has Been Met. A determination that the standard of paragraph C or E has been satisfied may be made by a court, or, except as stated in paragraph C.2 (second sentence), the determination may be made by: 1. the board of directors by a majority vote of a quorum consisting of directors of the Corporation who were not parties to the action, suit or proceeding; or 2. independent legal counsel (appointed by a majority of the disinterested directors of the Corporation, whether or not a quorum) in a written opinion; or 15 3. the stockholders of the Corporation. G. Proration. Anyone making a determination under paragraph F may determine that a person has met the standard as to some matters but not as to others, and may reasonably prorate amounts to be indemnified. H. Advance Payment. The Corporation may pay in advance any expenses (including attorneys' fees) which may become subject to indemnification under paragraphs A-G if the person receiving the payment undertakes in writing to repay the same if it is ultimately determined that he is not entitled to indemnification by the Corporation under paragraphs A-G. I. Nonexclusive. The indemnification and advancement of expenses provided by paragraphs A-H or otherwise granted pursuant to Delaware law shall not be exclusive of any other rights to which a person may be entitled by law, bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. J. Continuation. The indemnification and advance payment provided by paragraphs A-H shall continue as to a person who has ceased to hold a position named in paragraph A and shall inure to his heirs, executors and administrators. K. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who holds or who has held any position named in paragraph A, against any liability asserted against him and incurred by him in any such position, or arising out of his status as such, whether or not the Corporation would have power to indemnify him against such liability under paragraphs A-H of this Article XVIII. L. Savings Clause. If this Article XVIII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee, and agent of the Corporation as to costs, charges, and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Corporation to the full extent permitted by any applicable portion of this Article XVIII that shall not have been invalidated and to the full extent permitted by applicable law. If Delaware law is amended to permit further indemnification of the directors, officers, employees and agents of the Corporation, then the Corporation shall indemnify such persons to the fullest extent permitted by Delaware law, as so amended. Any repeal or modification of this Article by the stockholders of the Corporation shall not adversely affect any right or protection of a director, officer, employee or agent existing at the time of such repeal or modification. ARTICLE XIX Amendment of Bylaws of the Corporation In furtherance and not in limitation of the powers conferred by statute, the board of directors of the Corporation is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation. Notwithstanding any other provision of this Certificate or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the Bylaws of the 16 Corporation shall not be made, repealed, altered, amended or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), or, as set forth above, by the board of directors. ARTICLE XX Amendment of Certificate of Incorporation The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in this Certificate in the manner now or hereafter prescribed by law, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles IX, X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX, and this Article XX of this Certificate may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting). EX-3.II 4 EXHIBIT 3.II EXHIBIT 3.ii BYLAWS OF GUARANTY FEDERAL BANCSHARES, INC. ARTICLE I Home Office The home office of Guaranty Federal Bancshares, Inc. (the "Corporation") shall be at 1341 W. Battlefield, City of Springfield, County of Greene, in the State of Missouri. The Corporation may also have offices at such other places within or without the State of Missouri as the board of directors shall from time to time determine. ARTICLE II Stockholders SECTION 1. Place of Meetings. All annual and special meetings of stockholders shall be held at the home office of the Corporation or at such other place within or without the State in which the home office of the Corporation is located as the board of directors may determine and as designated in the notice of such meeting. SECTION 2. Annual Meeting. A meeting of the stockholders of the Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at such date and time as the board of directors may determine. SECTION 3. Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time by the majority of the board of directors or by a committee of the board of directors in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the rules and procedures established by the board of directors. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings. SECTION 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed by the secretary or the officer performing his duties, not less than ten days nor more than sixty days before the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid. If a stockholder is present at a meeting, or in writing waives notice thereof before or after the meeting, notice of the meeting to such stockholder shall be unnecessary. When any stockholders' meeting, either annual or special, is adjourned for thirty days, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than thirty days or -1- of the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. Fixing of Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than sixty days, and in case of a meeting of stockholders, not less than ten days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 7. Voting Lists. The officer or agent, having charge of the stock transfer books for shares of the Corporation shall make, at least ten days before each meeting of shareholders, a complete record of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Corporation, and shall be subject to inspection by any shareholder for any purpose germane to the meeting at any time during usual business hours. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder for any purpose germane to the meeting during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such record or transfer books or to vote at any meeting of stockholders. SECTION 8. Quorum. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 9. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. SECTION 10. Voting. At each election for directors every stockholder entitled to vote at such election shall be entitled to one vote for each share of stock held by him. Unless otherwise provided in the Certificate of Incorporation, by Statute, or by these Bylaws, a majority of those votes cast by stockholders at a lawful meeting shall be sufficient to pass on a transaction or matter. SECTION 11. Voting of Shares in the Name of Two or More Persons. When ownership of stock stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the stockholders of the Corporation any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event -2- an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose name shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 12. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian trustee or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Corporation, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 13. Inspectors of Election. In advance of any meeting of stockholders, the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the board of directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. SECTION 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation. -3- SECTION 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as provided in the Corporation's Certificate of Incorporation. ARTICLE III Board of Directors SECTION 1. General Powers. The business and affairs of the Corporation shall be under the direction of its board of directors. The board of directors shall annually elect a president from among its members and may also elect a chairman of the board from among its members. The board of directors shall designate, when present, either the chairman of the board or the president to preside at its meetings. SECTION 2. Number, Term and Election. The board of directors shall initially consist of six (6) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. The board of directors shall be classified in accordance with the provisions of the Corporation's Certificate of Incorporation. The board of directors may increase the number of members of the board of directors but in no event shall the number of directors be increased in excess of fifteen. SECTION 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of stockholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 4. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board or the president, or by one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place in the State of Missouri as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but directors will not receive any compensation for participation in meetings by conference telephone. SECTION 5. Notice. Written notice of any special meeting shall be given to each director at least two days previous thereto delivered personally or by telegram or at least five days previous thereto delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. -4- SECTION 6. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 5 of this Article III. SECTION 7. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by these Bylaws, the Certificate of Incorporation, or the laws of Delaware. SECTION 8. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 9. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Corporation addressed to the chairman of the board or the president. Unless otherwise specified herein such resignation shall take effect upon receipt thereof by the chairman of the board or the president. SECTION 10. Vacancies. Any vacancy occurring in the board of directors shall be filled in accordance with the provisions of the Corporation's Certificate of Incorporation. Any directorship to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of two-thirds of the directors then in office. The term of such director shall be in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 11. Removal of Directors. Any director or the entire board of directors may be removed for cause and then only in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 12. Compensation. Directors, as such, may receive a stated fee for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Nothing herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving remuneration therefor. SECTION 13. Presumption of Assent. A director of the Corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action. -5- ARTICLE IV Committees of the Board of Directors The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, as they may determine to be necessary or appropriate for the conduct of the business of the Corporation, and may prescribe the duties, constitution and procedures thereof. Each committee shall consist of one or more directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The board of directors shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the board. Any member of any such committee may resign at any time by giving notice to the Corporation provided, however, that notice to the board, the chairman of the board, the chief executive officer, the chairman of such committee, or the secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the board called for that purpose. ARTICLE V Officers SECTION 1. Positions. The officers of the Corporation shall be a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The president shall be the chief executive officer unless the board of directors designates the chairman of the board as chief executive officer. The president shall be a director of the Corporation. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. Election and Term of Office. The officers of the Corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The board of directors may authorize the Corporation to enter into an employment -6- contract with any officer in accordance with state law; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. Removal. Any officer may be removed by vote of two-thirds of the board of directors whenever, in its judgment, the best interests of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. SECTION 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. ARTICLE VI Contracts, Loans, Checks and Deposits SECTION 1. Contracts. To the extent permitted by applicable law, and except as otherwise prescribed by the Corporation's Certificate of Incorporation or these Bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. SECTION 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees or agents of the Corporation in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in any of its duly authorized depositories as the board of directors may select. -7- ARTICLE VII Certificates for Shares and Their Transfer SECTION 1. Certificates for Shares. The shares of the Corporation shall be represented by certificates signed by the chairman of the board of directors or by the president or a vice president and by the treasurer or by the secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. SECTION 2. Form of Share Certificates. All certificates representing shares issued by the Corporation shall set forth upon the face or back that the Corporation will furnish to any shareholder upon request and without charge a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. Each certificate representing shares shall state upon the face thereof: that the Corporation is organized under the laws of the State of Delaware; the name of the person to whom issued; the number and class of shares; the date of issue; the designation of the series, if any, which such certificate represents; the par value of each share represented by such certificate, or a statement that the shares are without par value. Other matters in regard to the form of the certificates shall be determined by the board of directors. SECTION 3. Payment for Shares. No certificate shall be issued for any shares until such share is fully paid. SECTION 4. Form of Payment for Shares. The consideration for the issuance of shares shall be paid in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 7. Lost Certificates. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen, or -8- destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 8. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VIII Fiscal Year; Annual Audit The fiscal year of the Corporation shall end on the last day of June of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. ARTICLE IX Dividends Subject to the provisions of the Certificate of Incorporation and applicable law, the board of directors may, at any regular or special meeting, declare dividends on the Corporation's outstanding capital stock. Dividends may be paid in cash, in property or in the Corporation's own stock. ARTICLE X Corporate Seal The corporate seal of the Corporation shall be in such form as the board of directors shall prescribe. -9- ARTICLE XI Amendments In accordance with the Corporation's Certificate of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the stockholders of the Corporation only by vote of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alternation, amendment or rescission is included in the notice of such meeting). In addition, the board of directors may repeal, alter, amend or rescind these Bylaws by vote of a majority of the board of directors at a legal meeting held in accordance with the provisions of these Bylaws. -10- EX-4 5 EXHIBIT 4 EXHIBIT 4 ================================================================================ COMMON STOCK COMMON STOCK CERTIFICATE NO. GUARANTY FEDERAL BANCSHARES, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.10 PAR VALUE PER SHARE OF Guaranty Federal Bancshares, Inc. The shares represented by this certificate are transferable only on the stock transfer books of the corporation by the holder of record hereof in person, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions contained in the corporation's official corporate papers filed with the Delaware Secretary of State (copies of which are on file with the Transfer Agent), to all of the provisions the holder, by acceptance hereof, assents. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. THIS SECURITY IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED. In Witness Whereof, Guaranty Federal Bancshares, Inc. has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. DATED: - ---------------------------- ---------------------------- PRESIDENT SEAL SECRETARY ================================================================================ GUARANTY FEDERAL BANCSHARES, INC. The shares represented by this certificate are subject to a limitation contained in the certificate of incorporation of the corporation ("Certificate") to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock ( the "Limit") be entitled or permitted to any vote in respect of shares held in excess of the Limit and may have their voting rights reduced below the Limit. [In addition, for five years from the initial sale of the corporation's common stock, no person or entity may offer to acquire or acquire over 10% of the then outstanding shares of any class of equity securities of the corporation.] The Board of Directors of the corporation is authorized by resolution(s), from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional, or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof. The shares represented by this certificate may not be cumulatively voted in the election of directors of the corporation. The Certificate also includes a provision the effect of which is to require the approval of not less than 80% of the corporation's voting stock prior to the corporation engaging in certain business combinations (as defined in the Certificate) with a person who is the beneficial owner of 10% or more of the corporation's outstanding voting stock, or with an affiliate or associate of the corporation (a "Principal Stockholder"). This restriction does not apply if certain approvals are obtained from the Board of Directors. The affirmative vote of holders of 80% of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) is required to amend this and certain other provisions of the Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF TRAN MIN ACT - Custodian --------------- --------------- (Cus) (Minor) TEN ENT - as tenants by the entireties under Uniform Transfers to Minors Act JT TEN - as joint tenants with right of survivorship and not as tenants ------------------------------- in common (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED hereby sell, ------------------------ assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- shares of the common stock represented by the within certificate and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- Attorney to transfer the said shares on the books of the within named corporation with full power of substitution in the premises. Dated X --------------------- ------------------------- X ------------------------- NOTICE: The signatures to this assignment must correspond with the name(s) as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. SIGNATURE(S) GUARANTEED: ---------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS, AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15. Countersigned and Registered: ----------------------------------------------- Transfer Agent and Registrar ----------------------------------------------- Authorized Signature EX-5 6 EXHIBIT 5 EXHIBIT 5 MALIZIA, SPIDI, SLOANE & FISCH, P.C. ATTORNEYS AT LAW 1301 K STREET, N.W. SUITE 700 EAST WASHINGTON, D.C. 20005 (202) 434-4660 FACSIMILE: (202) 434-4661 WRITER'S DIRECT DIAL NUMBER September 19, 1997 Board of Directors Guaranty Federal Bancshares, Inc. 1341 West Battlefield Springfield, Missouri 65807 Re: Registration Statement Under the Securities Act of 1933, as Amended ------------------------------------------------------------------- Ladies and Gentlemen: This opinion is rendered in connection with the Registration Statement on Form S-1 ("Registration Statement") to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, (the "Act") relating to the issuance of up to 6,221,522 shares of common stock, par value $0.10 per share (the "Common Stock"), of Guaranty Federal Bancshares, Inc. (the "Company"), in connection with the conversion of Guaranty Federal Bancshares, M.H.C. (the "MHC") from the mutual form to a federal interim stock savings bank ("Interim"), the merger of Interim into Guaranty Federal Savings Bank (the "Bank"), a subsidiary of the MHC, and the merger of a second interim savings institution, a to-be-formed wholly owned subsidiary of the Company, with and into the Bank (the "Conversion and Reorganization") all pursuant to a written plan (the "Plan"). As special counsel to the Company, we have reviewed the corporate proceedings relating to the Plan and the Conversion and Reorganization and such other legal matters as we have deemed appropriate for the purpose of rendering this opinion. Based on the foregoing, we are of the opinion that the shares of Common Stock of the Company covered by the aforesaid Registration Statement will, when issued in accordance with the terms of the Plan against full payment therefor, be validly issued, fully paid, and non-assessable. We hereby consent to the use of this opinion and to the reference to our firm appearing in the Company's Prospectus under the headings "The Conversion and Reorganization -- Tax Effects" and "Legal Opinions" and "Tax Opinions." We also consent to any references to our legal opinion referred to under the aforementioned headings in the Prospectus. In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission adopted under the Act. Board of Directors September 19, 1997 Page 2 This opinion is given as of the effective date of the Registration Statement and we assume no obligation to advise you of changes that may hereafter be brought to our attention. Very truly yours, /s/Malizia, Spidi, Sloane & Fisch, P.C. MALIZIA, SPIDI, SLOANE & FISCH, P.C. EX-8.1 7 EXHIBIT 8.1 EXHIBIT 8.1 MALIZIA, SPIDI, SLOANE & FISCH, P.C. ATTORNEYS AT LAW 1301 K STREET, N.W. SUITE 700 EAST WASHINGTON, D.C. 20005 (202) 434-4660 FACSIMILE: (202) 434-4661 September 17, 1997 Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank 1341 West Battlefield Springfield, Missouri 65807 Dear Board Members: In accordance with your request, set forth herein is the opinion of this firm relating to certain federal income tax consequences of the two integrated transactions described below. We have examined such corporate records, certificates and other documents as we have considered necessary or appropriate for this opinion. In our examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such copies. In rendering our opinion, we have relied upon certain written representations and covenants of Guaranty Federal Savings Bank (the "Savings Bank") and Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company") which are annexed hereto (collectively referred to herein as the "Officer Affidavits"). STATEMENT OF FACTS ------------------ Based solely upon our review of the documents described herein, and in reliance upon such documents, we understand that the relevant facts are as follows. The Savings Bank and the Mutual Holding Company were created in a reorganization of the Savings Bank from its prior mutual form (the "Mutual Institution") in April of 1995 (the "1995 Reorganization"). In April of 1995, the Mutual Holding Company and the Savings Bank received a federal tax opinion from the law firm of Arndt & Associates stating that the 1995 Reorganization constituted a tax-free transaction under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"). In the 1995 Reorganization, the Mutual Institution transferred substantially all of its assets and liabilities to the newly created Savings Bank in exchange for all of the outstanding stock of the Savings Bank ("Savings Bank Stock"), and converted its charter from that of a Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 2 federally-chartered mutual savings bank to that of a federally-chartered mutual holding company. As part of the 1995 Reorganization, the Savings Bank sold a portion of its stock to the public whereby immediately after the 1995 Reorganization the public owned less than 50.1% of the outstanding shares of Savings Bank Stock and the Mutual Holding Company owned the remaining shares. The principal business of the Savings Bank is the acceptance of savings deposits from the general public and the origination and purchase of mortgage loans for the purpose of constructing, financing or refinancing one-to-four family residences and other improved residential and commercial real estate. The Savings Bank's income is derived largely from interest and fees in connection with its lending activities. Its principal expenses are interest paid on savings deposits and operating expenses. Currently, the management of the Savings Bank and the Mutual Holding Company believe it would be in their best interest, as well as the best interest of their stockholders and members (respectively) to operate in the corporate structure specified below. The proposed transactions will result in the Savings Bank being wholly owned by a stock holding company (the "Holding Company"), which is a more common structure and form of ownership than a mutual holding company. The new corporate structure would also provide greater organizational flexibility, and enable the resulting institutions to increase their equity capital base available for expansion of services, facilities, possible future acquisitions of other financial institutions, possible diversification into other related financial services activities, and enhance their ability to render services to the public in a competitive manner. In addition, the proposed transactions will result in the raising of additional capital for the Savings Bank and the Holding Company and should result in a more active and liquid market for the common stock of the Holding Company ("Holding Company Stock") than currently exists for the Savings Bank Stock, although there can be no assurances that this will be the case. Finally, the proposed transactions have been structured to re-unite the accumulated earnings and profits tax attribute retained by the Mutual Holding Company with the retained earnings of the Savings Bank through a tax-free reorganization. This would increase the Savings Bank's ability to pay dividends in the future. The Savings Bank and the Mutual Holding Company have adopted a Plan of Conversion and a related Plan of Merger (collectively referred to herein as the "Plan of Conversion"). The Mutual Holding Company and the Savings Bank represent that the Plan of Conversion complies with the provisions of Subpart A of 12 C.F.R. Part 563b which sets forth the Office of Thrift Supervision (the "OTS") regulations for conversions of mutual institutions to stock form and that the Plan of Conversion also complies with the provisions of 12 C.F.R. ss. 575.12(a), which is the OTS regulation governing the conversion of mutual savings and loan holding companies to stock form. The Mutual Holding Company and the Savings Bank also represent that the Plan Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 3 of Conversion includes language that complies with 12 C.F.R. ss. 552.13, the OTS regulation governing mergers involving federal stock associations. For valid business reasons, as described above and in the prospectus to be used in the public offerings of Holding Company Stock described herein ("Prospectus"), the present corporate structure of the Mutual Holding Company and the Savings Bank will be changed pursuant to the following proposed transactions: (i) The Savings Bank will form "Guaranty Federal Bancshares, Inc." (i.e., the Holding Company) as a new, wholly owned, first tier subsidiary, which will become a new holding company. The Holding Company will receive approval from the OTS to acquire control (as defined by the OTS) of the Savings Bank. (ii) The Holding Company will form an interim corporation ("Interim B") as a new, wholly owned first tier subsidiary that is a federally-chartered stock savings bank. (iii) Pursuant to the Plan of Conversion, the Mutual Holding Company will convert from the mutual form to a federal interim stock savings bank ("Interim A") and simultaneously merge with and into the Savings Bank, with the Savings Bank being the surviving corporation ("Merger 1"). The Savings Bank Stock which was previously held by the Mutual Holding Company will be extinguished. Eligible members of the Mutual Holding Company as of certain specified dates set forth in the Plan of Conversion will be granted interests in a liquidation account to be established by the Savings Bank (referred to herein as "Savings Bank Liquidation Interests"). The initial balance of the liquidation account will equal the greater of: (i) 100% of the retained earnings of the Mutual Institution as of the date of the latest statement of financial condition contained in the final offering circular utilized in the 1995 Reorganization, or (ii) a certain percentage of the Savings Bank's total shareholder equity as reflected in its latest statement of financial condition contained in the Prospectus to be utilized in the Mutual Holding Company's mutual-to-stock conversion (the "Conversion"). (iv) Immediately following Merger 1, Interim B will merge with and into the Savings Bank, with the Savings Bank surviving ("Merger 2"). Merger 2 will be completed in accordance with applicable federal and state laws, and will be pursuant to an Agreement and Plan of Reorganization between the Holding Company and the Savings Bank (the "Plan of Reorganization"). The Savings Bank Stock held by the public stockholders will automatically be converted into Holding Company Stock based upon an exchange ratio which ensures that the public stockholders will own, in the aggregate, approximately the same percentage of Holding Company Stock outstanding upon completion of the Conversion as the percentage of Savings Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 4 Bank Stock owned by them in the aggregate immediately prior to the consummation of the Conversion, before giving effect to: (a) cash paid in lieu of fractional shares, (b) any shares of Holding Company Stock purchased by public stockholders in the offering described below; in addition, the shares of Interim B will be converted into 100 shares of Savings Bank Stock. Thereupon, the Holding Company will become a savings and loan holding company within the meaning of Section 10(a) of the Home Owners' Loan Act ("HOLA"), 12 U.S.C. Section 1467a, as amended, and Part 583 of Subchapter F of Title 12 of the Code of Federal Regulations. (v) Simultaneously with the consummation of Merger 2, the Holding Company will sell additional shares of Holding Company Stock, with priority subscription rights granted to certain members of the Mutual Holding Company at specified dates, and to tax qualified employee benefit plans, directors, and employees of the Savings Bank. With respect to the Plan of Conversion and the Plan of Reorganization, the following three issues are not adequately addressed by a statute, regulation, decision of the Supreme Court, tax treaty, revenue ruling, revenue procedure, notice, or other authority published in the Internal Revenue Bulletin. Further, in accordance with Rev. Proc. 97-3, 1997-1 I.R.B. 85, the Internal Revenue Service (the "Service") will not provide the Savings Bank or the Mutual Holding Company letter rulings that address such issues. 1. Whether the exchange of the members' equity interests in the Mutual Holding Company for interests in a liquidation account established at the Savings Bank in Merger 1 will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Treasury Regulations (cf. Rev. Rul. 69-646, 1969-1 C.B. 54)? 2. Whether the interests in the liquidation account established at the Savings Bank (i.e., the Savings Bank Liquidation Interests), and the shares of Savings Bank Stock held by the Mutual Holding Company prior to the consummation of Merger 1, will be disregarded for the purpose of determining that an amount of Savings Bank Stock which constitutes "control" of such corporation was acquired by the Holding Company in exchange for shares of Holding Company Stock pursuant to Merger 2 (Section 368(c) of the Code)? 3. Whether the exchange of Savings Bank Stock for shares of Holding Company Stock in Merger 2, following the consummation of Merger 1, will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Treasury Regulations with regard to Merger 2? Pursuant to Rev. Proc. 97-3, the proposed transaction constitutes a transaction that the Service will not issue related letter rulings. The Service's current position of non-issuance of letter rulings does not affect the tax status of the proposed transaction nor does it reflect a Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 5 change in how the Service would rule if said rulings were to be issued. The Service's position reflects the manner in which the Service reserves the right not to issue letter rulings as to certain transactions. ANALYSIS -------- Rev. Rul. 80-1051 provides that the conversion of a federal mutual savings and loan association to a state or federal stock savings and loan association, and the conversion of a state chartered mutual savings and loan association to a stock savings and loan association in the same state are reorganizations under Code Section 368(a)(1)(F) (Rev. Rul. 54-193 superseded). Section 368(a)(1)(F) of the Code provides that a mere change in identity, form, or place of organization, however effected, is a reorganization. If the Mutual Holding Company converts itself from a federal mutual holding company to a federal interim stock savings bank the changes at the corporate level, other than its place of organization and form of organization as described above, will be insubstantial. Throughout its brief period of existence Interim A will: (i) continue its business in the same manner as the Mutual Holding Company, (ii) hold the same assets previously held by the Mutual Holding Company, (iii) not engage in any business which the Mutual Holding Company is prohibited from engaging in, and (iv) be subject to the same regulatory agencies which regulated the Mutual Holding Company. Therefore, the change in the form of operation of the Mutual Holding Company from a federal mutual holding company to that of a federal interim stock savings bank should constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Code. It is important to note that Merger 1 could alternatively be accomplished by merging the Mutual Holding Company directly with and into the Savings Bank without the formation of an interim stock savings bank.2 However, solely for regulatory reasons, Merger 1 will take place immediately after the Mutual Holding Company converts its charter to that of a federal interim stock savings bank. It should be further noted that the formation of Interim A prior to Merger 1 will not be for the purpose of tax avoidance. Clearly, the transaction providing for the formation of Interim A, should be held to its chosen form when specific business benefits are - ------------------------ 1 1980-1 C.B. 78. 2 Prior taxpayers have accomplished a transaction similar to that of Merger 1 with a direct merger of a mutual holding company with and into its subsidiary stock savings institution. See Priv. Ltr. Ruls. 9449018 and 9437020. Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 6 sought (such as the avoidance of additional regulatory delay and expense) and presumably obtained by forming Interim A prior to Merger 1.3 Section 368(a)(1)(A) of the Code defines the term "reorganization" to include a "statutory merger or consolidation" of corporations such as Merger 1 and Merger 2. Section 368(a)(2)(E) of the Code provides that a transaction otherwise qualifying as a merger under Section 368(a)(1)(A), such as Merger 2, shall not be disqualified by reason of the fact that common stock of a corporation (referred to in the Code as the "controlling corporation") (i.e., the Holding Company) which before the merger was in control of the merged corporation, is used in the transaction if: (i) after the transaction, the corporation surviving the merger [the Savings Bank] holds substantially all of its properties and the properties of the merged corporation [Interim B] (other than common stock of the controlling corporation [the Holding Company] distributed in the transaction); and (ii) in the transaction, former stockholders of the surviving corporation [the Savings Bank public stockholders] exchanged, for an amount of voting common stock of the controlling corporation, an amount of common stock in the surviving corporation which constitutes control of such corporation. Section 1.368-2(b)(1) of the Treasury Regulations provides that, in order to qualify as a reorganization under Section 368(a)(1)(A), a transaction must be a merger or consolidation effected pursuant to the corporation laws of the United States or a state. The Plan of Conversion and Plan of Reorganization together provide that Merger 1 and Merger 2 will be consummated in accordance with applicable federal and state laws. The simple act of consummating the two transactions under applicable federal and state laws should be sufficient to not only satisfy the specifically expressed requirements of Code Section 368(a)(1)(A) but also the regulations promulgated thereunder. - ----------------- 3 The Service has accepted that a taxpayer may choose his form to obtain the tax consequences desired. In Rev. Rul. 70-223, 1970-2 C.B. 79, Corporation X acquired all of the outstanding stock of Corporation Y within a 12 month period. The assets of Y had an adjusted basis in its hands greater than the cost of the Y stock to X. It was thus decided, for good business reasons, to merge X into Y in order to avoid the reduction in basis of Y's assets that would have resulted under Code Sections 332 and 334(b)(2) had Y been liquidated into X (or merged upstream into X). In holding that the downstream merger qualified under Code Section 368(a)(1)(A), the ruling states "[s]ince X may accomplish its desired objective of combining the two businesses by either liquidating Y or by merging into Y, it may choose whichever form it desires for the transaction." Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 7 The Service has previously issued Rev. Proc. 94-76, 1994-2 C.B. 825 (the language of which is reiterated in Rev. Proc. 96-3, 1996-1 I.R.B. 82), which indicates the Service will be studying transactions "in which one corporation owns stock in a second corporation, the first corporation is not an 80-percent distributee of the second corporation under Code Section 337(c), and the two are combined." After two years of study, the Service has announced in Notice 96- 6, 1996-5 I.R.B. 27, that it has concluded the study described in Rev. Proc. 94-76. In connection with Notice 96-6, the Service issued Rev. Proc. 96-22, 1996-5 I.R.B. 27, which modified Rev. Proc. 96-3 by moving the specified transaction of Rev. Proc. 94-76 from the "under study" section to the "no rule" section of the revenue procedure. Consequently, Rev. Proc. 97-3 states that the Service will not provide taxpayers letter ruling guidance with respect to certain corporate combinations that are similar to the proposed transaction described herein. However, the Service's decision not to issue a letter ruling with respect to the proposed transaction does not affect the tax-free nature of the transaction. Treasury Regulations and case law require that, in addition to the existence of statutory authority for a merger, certain other conditions must be satisfied in order to qualify a proposed transaction as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. The "business purpose test," which required a proposed merger to have a bona fide business purpose, must be satisfied. See Treas. Reg. Section 1.368-1(c). We believe that Merger 1 and Merger 2 will satisfy the business purpose test for the reasons set forth herein and in the Prospectus which is related to the public offerings of Holding Company Stock pursuant to Merger 2. The "continuity of business enterprise test" requires an acquiring corporation to either continue an acquired corporation's historic business or use a significant portion of its historic assets in a business. See Treas. Reg. Section 1.368-1(d). We believe that the continuity of business enterprise test is satisfied because the Prospectus provides that the business conducted by the Savings Bank prior to Merger 1 and Merger 2 will be unaffected by the proposed transactions. The "continuity of interest doctrine" requires that the continuing common stock interest of the former owners of an acquired corporation, considered in the aggregate, represent a "substantial part" of the value of their former interest and provide them with a "definite and substantial interest" in the affairs of the acquiring corporation or a corporation in control of the acquiring corporation. Paulsen v. Comm'r, 469 U.S. 131 (1985); Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935); Southwest Natural Gas Co. v. Comm'r, 189 F.2d 332 (5th Cir. 1951), cert. denied, 342 U.S. 860 (1951). Due to the "no rule" position of the Service in Rev. Proc. 97-3, the Savings Bank and the Mutual Holding Company are not able to seek definitive confirmation from the Service on the following issues: Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 8 (i) whether the judicially-developed continuity of interest requirement is satisfied when the Mutual Holding Company converts to stock form, (ii) whether to include the Mutual Holding Company as a former stockholder of the Savings Bank in applying the continuity of interest requirement with respect to Merger 2, and (iii) whether the Savings Bank Liquidation Interests (to be distributed to certain members of the Mutual Holding Company in Merger 1) and the Savings Bank Stock held by the Mutual Holding Company prior to Merger 1, should be disregarded for purposes of determining if the Holding Company acquired "control" of the Savings Bank in Merger 2. First, as to the issue of continuity of interest with regard to Merger 1, the Mutual Holding Company, as a federally-chartered mutual holding company, does not have stockholders and has no authority to issue capital stock. Instead, the Mutual Holding Company (in mutual form) has a unique equity structure, in that the Mutual Holding Company has members who are accorded a variety of proprietary rights (pursuant to OTS regulations) such as voting rights and certain rights in the unlikely event of liquidation. Prior to Merger 1, certain depositors in the Savings Bank have both a deposit account in the institution and a pro rata inchoate proprietary interest in the net worth of the Mutual Holding Company based upon the balance in his (or her) account in the Savings Bank, an interest which may only be realized in the event of a liquidation of the Mutual Holding Company. However, this inchoate proprietary interest is tied to the depositor's account and has no tangible market value separate from such deposit account. A depositor who reduces or closes his (or her) account receives a portion or all of the balance in the account but nothing for his (or her) ownership interest in the net worth of the Mutual Holding Company, which is lost to the extent that the balance in the account is reduced. The eligible members of the Mutual Holding Company, set forth in the Plan of Conversion (the "Members"), maintain an inchoate proprietary interest represented by a liquidation interest in the Mutual Holding Company. In accordance with the Plan of Conversion, the Members will receive Savings Bank Liquidation Interests and continue their inchoate proprietary interests in the Savings Bank following Merger 1. Although the Savings Bank Liquidation Interests would not allow the Members the right to vote or the right to pro rata distributions of earnings, they would be entitled to share in the distribution of assets upon the liquidation of the Savings Bank following Merger 1. The Members' liquidation interests in the Savings Bank is substantially similar to their current ownership interest in the Mutual Holding Company (a liquidation interest in the Mutual Holding Company). Because the Members are not in effect "cashing out" their inchoate proprietary interests in the Mutual Holding Company, they would continue to maintain an inchoate proprietary interest in the Savings Bank upon the consummation of Merger 1. Such payments to be received as Savings Bank Liquidation Interests are not guaranteed and can only be received by Members who continue to maintain deposit Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 9 accounts in the Savings Bank following Merger 1. Therefore, it would seem that the exchange of the Members' equity interests in the Mutual Holding Company for Savings Bank Liquidation Interests should not violate the continuity of interest requirement of Section 1.368-1(b) of the Treasury Regulations (cf. Rev. Rul. 69-646, 1969-1 C.B. 544). Second, as to the issue of continuity of interest with regard to Merger 2, the fact that Merger 2 may occur only after the completion of Merger 1 raises another issue as to whether Merger 1 would be disregarded in applying the continuity of interest requirement to Merger 2. A judicially created substance over form concept often referred to as the "step transaction doctrine" applies throughout tax law, including the corporate reorganization area. The step transaction doctrine is an extremely amorphous concept. Often, application of the doctrine hinges on whether a court finds that a particular series of transactions runs counter to a significant tax policy. Notwithstanding years of litigation and hundreds of cases, the exact contours of the step transaction doctrine, and even its proper formulation, are still the subject of intense debate. Consequently, it often will be difficult to determine with a high degree of certainty whether a series of related transactions will be stepped together in some fashion for tax purposes. The courts over the years have developed three distinct verbal formulations of the doctrine: (i) the binding commitment test, (ii) the end result test, and (iii) the interdependence test. While the courts nominally apply one or more of these three tests, a careful reading of the relevant cases indicates that the courts, as a preliminary matter, in deciding whether to apply the step transaction doctrine, tend to focus primarily on two key factors: intent and temporal proximity. However, case law and IRS pronouncements indicate that there are limitations on the ability to assert the step transaction doctrine, regardless of (i) the taxpayer's intent at the time of the first transaction to engage in the later transactions, and (ii) the short period of time that elapses between the transactions. Case law and IRS pronouncements indicate that if two or more transactions carried out pursuant to an overall plan have economic significance independent of each other, the transactions generally will not be stepped together.5 The Service's most significant - ----------------- 4 In Rev. Rul. 69-646, a merger of two building and loan associations, whereby the acquired association's shareholders exchanged their passbook accounts and equity interests for equal passbook accounts and guaranty shares of the acquiring association was held to have satisfied the continuity of interest requirement and subsequently deemed to be a reorganization under Section 368(a)(1)(A) of the Code. 5 See e.g., Rev. Rul. 79-250, 1979-2 C.B. 156. Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 10 pronouncement regarding independent economic significance is Rev. Rul. 79-250.6 In that ruling, the Service asserted that: the substance of each of a series of steps will be recognized and the step transaction doctrine will not apply, if each such step demonstrates independent economic significance, is not subject to attack as a sham, and was undertaken for valid business purposes and not mere avoidance of taxes. The facts in Rev. Rul. 79-250 involved a situation where, pursuant to an overall plan, (i) the target corporation merged into the parent corporation's subsidiary, in a tax-free Code Section 368(a)(2)(D) reorganization, with the target corporation shareholders receiving parent corporation stock in exchange for their target corporation stock, and (ii) the parent corporation thereafter reincorporated in a different state by merging into a newly formed corporation in an intended "F" reorganization. If the two mergers were stepped together, the intended "F" reorganization would not qualify as such because the Service has taken the position that virtually 100% continuity of interest is required for an "F" reorganization. However, the Service concluded that the two mergers should not be stepped together because each merger was "real and substantial" and the economic motivation supporting each merger was sufficiently meaningful to warrant the conclusion that the mergers were independent of each other. The parties to Merger 1 maintain a separate and distinct business purpose for consummating Merger 1 (e.g., allowing for the conversion of the Mutual Holding Company from mutual to stock form). Similarly, the parties to Merger 2 maintain a separate and distinct business purpose for consummating Merger 2 (e.g., allowing the Holding Company flexibility in future corporate acquisitions and provides the Holding Company an opportunity to raise a substantial amount of capital). Although Merger 1 and Merger 2 are to be undertaken pursuant to an overall plan, the consummation of Merger 1 will result in a permanent alteration of a previous bona fide business relationship. Immediately after the consummation of Merger 1, the Savings Bank will no longer be controlled by the Mutual Holding Company but will instead be controlled by its public stockholders. The facts indicate that the initial merger of Interim A with and into the Savings Bank will result in a real and substantial change in the form of ownership of the Savings Bank that is sufficient to conclude that Merger 1 comports with the underlying purposes and assumptions of a reorganization under Section 368(a)(1)(A) of the Code (see Treas. Reg. Section 1.368-1(b)) and would not be subject to attack as a sham or illusory. The subsequent consummation of Merger 2 in which the public stockholders of the Savings Bank will continue their equity interests in the Holding Company, the sole shareholder - ------------------------- 6 1979-2 C.B. 156. Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 11 of the Savings Bank following the completion of Merger 2, is likewise real and substantial and would not be subject to attack as a sham or illusory. Further, although the overall plan comprehends both Merger 1 and Merger 2, the economic motivation supporting each transaction is sufficiently meaningful (as such term is used in Rev. Rul. 79-250) and is not dependent upon the other transaction for its substantiation to warrant the conclusion that the overall plan presents two separate and independent reorganizations. Given that the business reasons supporting Merger 1 exist regardless of Merger 2, the step transaction doctrine should not be applied under the facts and circumstances presented here. The final issue, focuses on whether the Savings Bank Liquidation Interests and the Savings Bank Stock held by the Mutual Holding Company prior to Merger 1, should be disregarded for purposes of determining whether the Holding Company acquired "control" of the Savings Bank in Merger 2. The Savings Bank has represented in its Officer Affidavit that, following Merger 2, it will hold at least 90% of the fair market value of its net assets and at least 70% of the fair market value of its gross assets, and at least 90% of the fair market value of Interim B's net assets and at least 70% of the fair market value of Interim B's gross assets held immediately prior to Merger 2. By holding such a high percentage of its assets and Interim B's assets following Merger 2, the Savings Bank would clearly satisfy the first requirement of Code Section 368(a)(2)(E). As further required by Code Section 368(a)(2)(E), the Holding Company must acquire control of the Savings Bank in Merger 2. Control is defined as at least 80% of the total combined voting power of all classes of stock entitled to vote, and at least 80% of the total number of shares.7 If the Savings Bank Liquidation Interests are to be included in determining whether the Holding Company acquired control of the Savings Bank in Merger 2, it would be necessary to recognize such interests as another class of Savings Bank Stock. Members of the Mutual Holding Company are entitled to liquidation interests in the Mutual Holding Company, and such liquidation interests resemble an equity/ownership interest in the Mutual Holding Company because of its unique equity structure. Pursuant to federal law, the Members are to receive Savings Bank Liquidation Interests in connection with Merger 1 which would entitle the Members to an interest similar to the interest enjoyed as a member of the Mutual Holding Company. However, upon receipt of Savings Bank Liquidation Interests, the Members would not enjoy any control over the business of the Savings Bank that would in any way resemble the control maintained by a true stockholder of the Savings Bank, and would not be entitled to any assets of the Savings Bank unless the Savings Bank is liquidated after Merger 2. Although the - ----------------------- 7 I.R.C. ss. 368(c). Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 12 Savings Bank Liquidation Interests may be compared to the equity interests held by members of the Mutual Holding Company, which afforded members an equity/ownership interest in the Mutual Holding Company, these interests in the Savings Bank are too remote to qualify as a separate class of Savings Bank Stock. Therefore, the Savings Bank Liquidation Interests should be disregarded in determining whether the Holding Company acquires control of the Savings Bank in Merger 2. In addition, if the Savings Bank Stock held by the Mutual Holding Company prior to Merger 1 is to be included in determining whether the Holding Company acquired control of the Savings Bank in Merger 2, it would be necessary to apply the step transaction doctrine to Merger 1 and Merger 2. As discussed earlier, the step transaction doctrine should not apply to Merger 1 and Merger 2. Therefore, the Savings Bank Stock, held by the Mutual Holding Company prior to Merger 1, should be disregarded in determining whether the Holding Company acquires control of the Savings Bank in Merger 2. The Service has previously ruled on the same three issues in Priv. Ltr. Rul. 9510044. Although Priv. Ltr. Rul. 9510044 may not be used or cited as precedent pursuant to Section 6110(j)(3) of the Code, it illustrates the Service's analysis and position concerning these particular issues. As provided in Priv. Ltr. Rul. 9510044, a mutual holding company owns approximately 57.5% of the outstanding stock of a federally-chartered stock savings bank. The proposed transaction in Priv. Ltr. Rul. 9510044 includes the conversion of a mutual holding company from mutual to stock form and the simultaneous merger of the mutual holding company with and into the federally-chartered stock savings bank with the stock savings bank being the surviving corporation. Subsequent to such mutual-to-stock conversion, the common stock of the stock savings bank held by the mutual holding company was to be extinguished, and eligible members of the mutual holding company were to be granted interests in a liquidation account to be established by the stock savings bank. This particular transaction, which is identical to the proposed transaction described herein as Merger 1, was held by the Service to satisfy the continuity of interest requirement of Section 1.368-1(b) of the Treasury Regulations. The Service cited Rev. Rul. 69-646, 1969-1 C.B. 54, as authority for this ruling.8 The issue of whether to include the Mutual Holding Company as a former stockholder of the Savings Bank in applying the continuity of interest requirement with respect to Merger 2 was also addressed by the Service in Priv. Ltr. Rul. 9510044. The Service found no cause to apply the step transaction doctrine to step together the two mergers contemplated in Priv. Ltr. - ------------------ 8 The Service has ruled consistently regarding the exchange of members' equity interests in a converting mutual holding company for interests in a liquidation account established by its subsidiary stock savings institution in other Private Letter Rulings with substantially similar facts. See Priv. Ltr. Ruls. 9602015, 9449018, and 9437020. Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 13 Rul. 9510044. The Service ruled that the exchange of shares of common stock of the savings and loan holding company for the shares of common stock of the stock savings bank satisfied the continuity of interest requirement of Treasury Regulation Section 1.368-1(b), an exchange which occurs immediately following the conversion of the mutual holding company. The Service also ruled in Priv. Ltr. Rul. 9510044 that liquidation interests (comparable to the Savings Bank Liquidation Interests) and stock previously held by a mutual holding company (comparable to the Savings Bank Stock held by the Mutual Holding Company prior to Merger 1) were to be disregarded in determining whether the acquiring corporation obtained control within the meaning of Code Section 368(c). The Service cited Code Section 368(c) as authority for this ruling. Although Code Section 6110 precludes the parties to Merger 1 and Merger 2 from using or citing Priv. Ltr. Rul. 9510044 as precedent, there is currently no reasonable basis to believe that the Service will take a position contrary to recent private letter rulings encompassing substantially similar facts and circumstances. However, should the Service take a contrary position as to these three issues, our opinions rendered herein (regarding the tax-free status of Merger 1 and Merger 2) may be significantly affected thereby. Further, we believe that Merger 2 satisfies the continuity of interest doctrine because the Savings Bank's public stockholders who do not exercise dissenters' rights following Merger 1, will receive only Holding Company Stock in exchange for their shares of Savings Bank Stock. In addition, we believe other applicable requirements of the Treasury Regulations and case law which are preconditions to the qualification of Merger 1 and Merger 2 as a reorganization, within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, are satisfied on the basis of the information contained in the Plan of Conversion, the Plan of Reorganization, the Officer Affidavits, and the Prospectus. The Service has previously issued Notice 94-93, 1994-41 I.R.B., wherein the Service warns that it is drafting regulations that will require appropriate recognition of income or gain, or reductions of the basis of stock or the parties to a transaction in which a parent and a subsidiary switch places -- an inversion transaction. The specific transaction described in the notice involves an inversion resulting in the disappearance of built-in gain inherent in the prior subsidiary corporation's stock when the prior subsidiary corporation becomes the new parent corporation. Further, the value of the new subsidiary corporation's stock has been reduced, following the inversion, and may allow the new parent corporation to obtain a loss upon the sale of its new subsidiary corporation's stock. Although, for a moment in time the Savings Bank will be the parent of the Holding Company when the Savings Bank first incorporates the Holding Company, the Holding Company Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 14 will not hold any assets of value until the Holding Company first acquires all of the outstanding Savings Bank Stock pursuant to Merger 2. In addition, the value of Savings Bank Stock would not likely be diluted following Merger 2. Further, the Holding Company Stock held by the Savings Bank is held for such a brief period of time that the possibility of built-in gain materializing is not likely to occur, in light of the minimal capitalization (all in cash) of Interim B. Therefore, the Service should not challenge the tax-free nature of Merger 2. Section 354 of the Code provides that no gain or loss shall be recognized by stockholders who exchange common stock in a corporation, such as the Savings Bank, which is a party to a reorganization, solely for common stock in another corporation which is a party to the reorganization, such as the Holding Company. Section 356 of the Code provides that stockholders shall recognize gain to the extent they receive money as part of a reorganization, such as money received in lieu of fractional shares. Section 358 of the Code provides that, with certain adjustments for money received in a reorganization, a stockholder's basis in the common stock he or she receives in a reorganization shall equal the basis of the common stock which he or she surrendered in the transaction. Section 1223(1) states that, where a stockholder receives property in an exchange which has the same basis as the property surrendered, he or she shall be deemed to have held the property received for the same period as the property exchanged, provided that the property exchanged had been held as a capital asset. Section 361 of the Code provides that no gain or loss shall be recognized to a corporation such as the Savings Bank which is a party to a reorganization on any transfer of property pursuant to a plan of reorganization. Section 362 of the Code provides that if property is acquired by a corporation such as the Savings Bank in connection with a reorganization, then the basis of such property shall be the same as it would be in the hands of the transferor immediately prior to the transfer. Section 1223(2) of the Code states that where a corporation such as the Savings Bank will have a carryover basis in property received from another corporation which is a party to a reorganization, the holding period of such assets in the hands of the acquiring corporation shall include the period for which such assets were held by the transferor, provided that the property transferred had been held as a capital asset. Section 1032 of the Code states that no gain or loss shall be recognized to a corporation, such as the Holding Company, on the receipt of property in exchange for common stock. OPINION OF COUNSEL ------------------ If Merger 1 and Merger 2 are consummated as described herein, and provided that the change in the form of operation of the Mutual Holding Company from a federal mutual holding company to that of a federal interim stock savings bank constitutes a reorganization within the meaning of Section 368(a)(1)(F) of the Code, we are of the opinion that: Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 15 1. Merger 1 qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Therefore, both the Mutual Holding Company and the Savings Bank will be a party to a "reorganization" as defined in Section 368(b) of the Code. 2. Interim A (Mutual Holding Company) will recognize no gain or loss upon the transfer of assets to the Savings Bank pursuant to Merger 1. 3. No gain or loss will be recognized by the Savings Bank upon the receipt of the assets of the Mutual Holding Company in Merger 1. 4. Merger 2 qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code, Merger 2 is not disqualified from qualifying as a reorganization within the meaning of Section 368(a)(1)(A) because Holding Company Stock will be conveyed to the Savings Bank's public stockholders in exchange for their Savings Bank Stock. Therefore, the Savings Bank, the Holding Company, and Interim B will each be a party to a reorganization as defined in Section 368(b) of the Code. 5. No gain or loss will be recognized by Interim B upon the transfer of its assets to the Savings Bank pursuant to Merger 2. 6. No gain or loss will be recognized by the Savings Bank upon the receipt of the assets of Interim B. 7. No gain or loss will be recognized by the Holding Company upon the receipt of Savings Bank Stock solely in exchange for Holding Company Stock. 8. No gain or loss will be recognized by the Savings Bank's public stockholders upon the receipt of Holding Company Stock solely in exchange for their shares of Savings Bank Stock. 9. The basis of the Holding Company Stock to be received by the Savings Bank's public stockholders will be the same as the basis of the Savings Bank Stock surrendered in exchange therefor, before giving effect to any payment of cash in lieu of fractional shares. 10. The holding period of the Holding Company Stock to be received by the Savings Bank's public stockholders will include the holding period of the Savings Bank Stock, provided that the Savings Bank Stock was held as a capital asset on the date of the exchange. 11. The Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members (as such terms are defined in the Plan of Conversion) will recognize gain upon the Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank September 17, 1997 Page 16 issuance, to them, of nontransferable subscription rights to purchase Holding Company Stock, but only to the extent of the value, if any, of the subscription rights. SCOPE OF OPINION ---------------- No opinion is expressed as to the tax consequences to any party, whether federal, state, local, or foreign, of either Merger 1 or Merger 2, or any transactions related to Merger 1 or Merger 2, or contemplated by either the Plan of Conversion or the Plan of Reorganization, or to the tax treatment of any conditions existing at the time of, or effects resulting from, the transactions which are not specifically referenced above. Further, no opinion is expressed or intended to be expressed herein as to the effect of Merger 1 or Merger 2 on the continued existence of, the carryover or carryback of, or the limitation on, any net operating losses of the Savings Bank, if any, under the Code. If any of the information upon which we have relied is incorrect, or if changes in the relevant facts occur after the date hereof, our opinion could be affected thereby. Moreover, our opinion is based on the case law, Code, Treasury Regulations thereunder, and the Revenue Rulings from the Service as they now exist. These authorities are all subject to change, and such change may be made with retroactive effect. We can give no assurance that, after such change, the opinions set forth herein would not significantly change. We undertake no responsibility to update or supplement our opinion. This opinion is not binding on the Service and there can be no assurance, and none is hereby given, that the Service will not take a position contrary to one or more of the positions reflected in the foregoing opinion, or that our opinion will be upheld by the courts if challenged by the Service. CONSENT ------- We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-1 ("Form S-1") to be filed by the Holding Company with the Securities and Exchange Commission, and as an exhibit to the Mutual Holding Company's Application for Conversion on the Form AC as filed with the OTS ("Form AC"), and to the references to our firm in the Prospectus which is part of both the Form S-1 and the Form AC. Very truly yours, /s/Mallizia, Spidi, Sloane, & Fisch, P.C. Malizia, Spidi, Sloane, & Fisch, P.C. EX-8.2 8 EXHIBIT 8.2 EXHIBIT 8.2 CARNAHAN, EVANS, CANTWELL & BROWN, P.C. Four Corporate Centre, Suite 410 1949 F. Sunshine P.O. Box 10009 G.S.S. Springfield, Missouri 65808-0009 (417) 887-8490 FAX: (417) 887-8935 E-Mail: carnahan@cland.net Web: http://www.cland.net/~carnahan/cecb JOHN M. CARNAHAN III JULIE T. BROWN WILLIAM E. EVANS DOUGLAS D. LEE C. BRADFORD CANTWELL -------------- CLIFFORD S. BROWN JOHN M. CARNAHAN, JR. FRANK C. CARNAHAN (Retired) JOSEPH D. SHEPPARD III September 18, 1997 Boards of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank 1341 West Battlefield Springfield, Missouri 65807 Dear Members: We have been engaged by Guaranty Federal Savings Bank (herein after referred to as "Savings Bank") in connection with certain matters pertaining to a reorganization transaction. Specifically, we have been engaged to render an opinion from this firm regarding the income tax consequences of the reorganization under the laws of the State of Missouri. We have been provided with an opinion of tax counsel, Malizia, Spidi, Sloane & Fisch, PC ("Federal Tax Opinion"), to the Savings Bank dated September 17, 1997, pertaining to the treatment of the reorganization for federal income tax purposes under the Internal Revenue Code of 1986, as amended ("Code"), and stating in relevant part that: "If Merger 1 and Merger 2 are consummated as described in the Federal Tax Opinion, and provided that the change in the form of operation of the Mutual Holding Company from a federal mutual holding company to that of a federal interim stock savings bank constitutes a reorganization within the meaning of Section 368(a)(1)(F) of the Code, we are of the opinion that: 1. Merger 1 qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Therefore, both Mutual Holding Company and Savings Bank will be a party to a "reorganization" as defined in Section 368(b) of the Code. 2. Interim A (Mutual Holding Company) will recognize no gain or loss upon the transfer of assets to the Savings Bank pursuant to Merger 1. 3. No gain or loss will be recognized by the Savings Bank upon the receipt of the assets of the Mutual Holding Company in Merger 1. 4. Merger 2 qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code, Merger 2 is not disqualified Letter to Guaranty Federal Bancshares, M.H.C. Page - 2 September 18, 1997 from qualifying as a reorganization within the meaning of Section 368(a)(1)(A) because Holding Company Stock will be conveyed to the Savings Bank's public stockholders in exchange for their Savings Bank Stock. Therefore, the Savings Bank, the Holding Company, and Interim B will each be a party to a reorganization as defined in Section 368(b) of the Code. 5. No gain or loss will be recognized by Interim B upon the transfer of its assets to the Savings Bank pursuant to Merger 2. 6. No gain or loss will be recognized by the Savings Bank upon the receipt of the assets of Interim B. 7. No gain or loss will be recognized by the Holding Company upon the receipt of Savings Bank Stock solely in exchange for Holding Company Stock. 8. No gain or loss will be recognized by the Savings Bank's public stockholders upon the receipt of Holding Company Stock solely in exchange for their shares of Savings Bank Stock. 9. The basis of the Holding Company Stock to be received by the Savings Bank's public stockholders will be the same as the basis of the Savings Bank Stock surrendered in exchange therefore, before giving effect to any payments of cash in lieu of fractional shares. 10. The holding period of the Holding Company Stock to be received by the Savings Bank's public stockholders will include the holding period of the Savings Bank Stock, provided that the Savings Bank Stock was held as a capital asset on the date of the exchange. 11. The Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members (as such terms are defined in the Plan of Conversion) will recognize gain upon the issuance to them, of nontransferable subscription rights to purchase Holding Company Stock, but only to the extent of the value, if any, of the subscription right." In rendering the opinion set forth below, we have assumed, without independent verification or investigation, that the facts and circumstances attendant to the reorganization as described in the Federal Tax Opinion are true, accurate and complete. Based upon your specific instructions, we Letter to Guaranty Federal Bancshares, M.H.C. Page - 3 September 18, 1997 have specifically relied upon the conclusions of law stated in the Federal Tax Opinion as to the treatment of the Reorganization for federal income tax purposes, and our opinions as set forth herein assume the accuracy and correctness of such conclusions of law. Further, our opinion is subject to the qualifications set forth in the Federal Tax Opinion, and is limited to the law of the State of Missouri. Defined terms shall have the same meanings set forth in the Federal Tax Opinion. Based upon the foregoing, we are of the opinion that: 1. For Missouri income tax purposes the State of Missouri will treat the reorganization in an identical manner as it is treated by the Code, for federal income tax purposes. 2. No gain or loss will be recognized which would result in Missouri taxable income of the Savings Bank upon the receipt of the assets of the Mutual Holding Company in Merger 1. 3. No gain or loss will be recognized which would result in Missouri taxable income of the Savings Bank upon its receipt of the assets of Interim B. 4. The Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members (as such terms are defined in the Plan of Conversion ) will recognize gain which would result in Missouri taxable income upon the issuance to them, of nontransferable subscription rights to purchase Holding Company Stock, but only to the extent of the value, if any, of the subscription right. The opinion herein expressed specifically does not include, without limitation by the specification hereof: (1) any opinion with respect to any franchise tax, capital stock tax, transfer tax, bank and or credit institutions tax, or similar tax which might result from the implementation of the Plan or Conversion; or (2) any opinion as to the effect, if any, of the reorganization transaction on the continued existence of, carry back or carry forward of, or the limitation on, any net operating losses of the Savings Bank. This opinion is solely for your information in connection with the transaction described above and should not be quoted or otherwise referred to in whole or in part, in any financial statement or other document, or furnished to any other person or agency without prior written consent. Other than the addressee hereof, no one is entitled to use or rely on this opinion letter. We hereby consent to the filing of this opinion as an exhibit to the Letter to Guaranty Federal Bancshares, M.H.C. Page - 4 September 18, 1997 Registration Statement on Form S-1 ("Form S- 1") to be filed by the Holding Company with the Securities and Exchange Commission, and as an exhibit to the Mutual Holding Company's Application for Conversion on the Form AC as filed with the OTS ("Form AC"), and to the references to our firm in the Prospectus which is part of both the Form S-1 and the Form AC. We expressly undertake no responsibility or duty to inform any party whether addressees hereof or not, as to any change in fact, circumstance or law occurring after the date hereof which may affect or alter any of the opinions set forth above. Very Truly yours, /s/Carnahan, Evans, Cantwell and Brown, P.C. Carnahan, Evans, Cantwell and Brown, P.C. EX-8.3 9 EXHIBIT 8.3 EXHIBIT 8.3 RP FINANCIAL, LC [Financial Services Industry Consultants - Letterhead] September 18, 1997 Board of Directors Guaranty Federal Savings Bank Guaranty Federal Bancshares, M.H.c. Guaranty Federal Bancshares, Inc. 1341 West Battlefield Springfield, Missouri 65807 Re: Plan of Conversion: Subscription Rights ---------------------------------------- Gentlemen: All capitalized terms no otherwise defined in this letter have the meanings given such terms in the Plan of Conversion (the "Plan") adopted by the Boards of Directors of Guaranty Federal Savings Bank (the "Bank") and Guaranty Federal Bancshares, M.H.C. (the "Mutual Holding Company"). Pursuant to the Plan, Guaranty Federal Bancshares, Inc. (the "Company") will offer and sell the Conversion Stock. We understand that "subscription rights" to purchase shares of the Conversion Stock are to be issued to (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account Holders; and (iv) Other Members collectively referred to as the "Recipients". Based solely upon our observation that the subscription rights will be available to such Recipients without cost, will be legally non-transferable and of short duration, and will afford the Recipients the right only to purchase shares of Conversion Stock at the same price as will be paid by members of the general public in the Community Offering and Syndicated Community Offering, but without undertaking any independent investigation of state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that: (1) the subscription rights will have no ascertainable market value; and, (2) the price at which the subscription rights are exercisable will not e more or less than the pro forma market value of the shares upon issuance. Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Company's value alone. Accordingly, no assurance can be given that persons who subscribe to shares of Conversion Stock in the conversion will thereafter be able to buy or sell such shares at the same price paid in the Subscription Offering. Sincerely, /s/James J. Oren ---------------- James J. Oren Vice President EX-10.1 10 EXHIBIT 10.1 GUARANTY FEDERAL SAVINGS BANK 1994 STOCK OPTION PLAN 1. Purpose of the Plan. The purpose of this Guaranty Federal Savings Bank ("Savings Bank") 1994 Stock Option Plan ("Plan") is to advance the interests of the Savings Bank through providing select key Employees and Directors of the Savings Bank with the opportunity to purchase shares of Common Stock of the Savings Bank. By encouraging such stock ownership, the Savings Bank seeks to attract, retain and motivate the best available personnel for positions of substantial responsibility and to provide additional incentive to key Employees and Directors of the Savings Bank or any present or future Parent or Subsidiary of the Savings Bank to promote the success of the business. It is intended that options issued pursuant to this Plan may constitute either ISOs or Non-ISOs. 2. Definitions As used herein, the following definitions shall apply. (a) "Board" shall mean the Board of Directors of the Savings Bank. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean the Stock Option Committee appointed by the Board in accordance with paragraph 4(a) of the Plan hereof. (d) "Common Stock" shall mean the common stock, par value $1.00 per share, of the Savings Bank. (e) "Continuous Employment" or "Continuous Status as an Employee" shall mean the absence of any interruption or termination of employment by the Savings Bank. Employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Savings Bank or in the case of transfers between payroll locations of the Savings Bank, its Parent, its Subsidiaries or a successor. (f) "Director" shall mean any member of the Board of Directors. (g) "Effective Date" shall mean the date specified in paragraph 12 hereof. (h) "Employee" shall mean any person employed by the Savings Bank. (i) "Option" shall mean an option to purchase Shares granted pursuant to the Plan, whether the option is an incentive stock option within the meaning of Section 422 of the Code ("ISO"), or an option that does not so qualify ("Non-ISO"). (j) "Option Price" shall mean the price per Option Share at which an Option may be exercised. (k) "Optioned Shares" shall mean Shares subject to an Option granted pursuant to this Plan. (l) "Optionee" shall mean any person who receives an Option pursuant to the Plan. (m) "Parent" shall mean any present or future corporation which would be a "parent corporation" as defined in Subsections 424(e) and (g) of the Code. (n) "Plan" shall mean the Savings Bank 1995 Stock Option Plan. (o) "Savings Bank" shall mean the Guaranty Federal Savings Bank. The term shall include any present or future Parent or Subsidiary of the Savings Bank. (p) "Share" shall mean one share of Common Stock. (q) "Subsidiary" shall mean any present or future corporation which would be a "subsidiary corporation" as defined in Subsections 424(f) and (g) of the Code. 3. Shares Subject to the Plan. Except as otherwise required by the provisions of paragraph 11 hereof, the aggregate number of Shares deliverable upon the exercise of Options pursuant to the Plan shall not exceed 972,365 Shares. Such Shares may either be authorized but unissued Shares or Shares held in treasury. If Options should expire, become unexercisable or be forfeited for any reason without having been exercised in full, the Option Shares shall, unless the Plan shall have been terminated, be available for the grant of additional Options under the Plan. 4. Administration of the Plan. (a) Composition of Committee. The Plan shall be administered by the Committee, which shall consist of not less than three (3) Directors appointed by the Board. All persons designated as members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange of 1934, as amended ("Rule 16b-3"). Members of the committee shall serve at the pleasure of the Board. In the absence at any time of a duly appointed Committee, the Plan shall be administered by those Directors who are "disinterested persons" within the meaning of Rule 16b-3. (b) Powers of the Committee. The Committee shall have discretionary authority (but only to the extent not contrary to the express provisions of the Plan or to resolutions adopted by - 2 - the Board) to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the form and content of Options to be issued under the Plan and to make other determinations necessary or advisable for the administration of the Plan, and shall have any may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. (c) Effect of Committee's Decision. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby. 5. Eligibility. (a) General Rule. In its sole discretion, the Committee may grant Options to Employees of the Savings Bank. Each nonemployee director shall be granted Non-ISOs only in accordance with paragraph 11 hereof. An Optionee who has been granted an Option may, if otherwise eligible, be granted an additional Option or Options. However, no Employer or Director shall have a right to be granted an Option or, having received an option, the right to again be granted an Option. (b) Special Rules. The aggregate fair market value (determined in accordance with paragraph 7 hereof), as of the date the Option is granted, of the Shares with respect to which incentive stock options are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans, as defined in Section 422 of the Code, of the Savings Bank or any present or future Parent or Subsidiary of the Savings Bank) shall not exceed $100,000. Notwithstanding the prior provisions of this paragraph, the Committee may grant Options in excess of the foregoing limitations, in which case such Options granted in excess of such limitation shall be Options which are Non-ISOs. Furthermore, in no event shall Shares subject to Options granted to non-employee Directors under this Plan exceed in the aggregate more than 20% of the total number of Shares authorized for issuance pursuant to paragraph 3 hereof. 6. Term of Plan; Term of Options. (a) The Plan shall continue in effect for a term of ten years from the Effective Date, unless sooner terminated pursuant to paragraph 17 hereof. No Option shall be granted under the Plan after ten years from the Effective Date. (b) The term of each Option granted under the Plan shall be established by the Committee, but shall not exceed 10 years; provided, however, that in the case of an Employee who owns Shares representing more than 10% of the outstanding Common Stock at the time the Option is granted, the term of such Option shall not exceed five (5) years. - 3 - (c) All options will be exercisable in five equal installments commencing the first year following the effective date of the Option Plan; provided that all options will be 100% exercisable in the event the Optionee terminates his or her employment due to death, disability, or in the event of a change in control of the Guaranty Federal Bancshares, M.H.C., the mutual holding company of the Savings Bank ("MHC"). 7. Option Price . (a) The Option Price as to any particular Option granted under the Plan shall not be less than the fair market value of the Optioned Shares on the date of grant. In the case of an Employee who owns Shares representing more than 10% of the Savings Bank's outstanding Shares of Common Stock at the time an ISO is granted, the Option Price shall not be less than 110% of the fair market value of the Optioned Shares at the time the ISO is granted. (b) Determination of Option Price. If the Common Stock is traded otherwise than on a national securities exchange at the time of the granting of an Option, then the Option Price per Share shall not be less than the mean between the bid and asked price on the date the Option is granted or, if there is no bid and asked price on said date, then on the next prior business day on which there was a bid and asked price. If no such bid and asked price is available, then the Option Price per Share shall be determined by the Committee, in its sole and absolute discretion. If the Common Stock is listed on a national securities exchange (including the NASDAQ National Market System) at the time of granting an Option, then the Option Price per share shall be not less than the average of the highest and lowest selling price on such exchange on the date such Option is granted or if there were no sales on said date, then the Option Price shall be not less than the mean between the bid and asked price on such date. 8. Exercise of Option. (a) Procedure for Exercise. Any Option granted hereunder shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Option granted to an Optionee. An Option may not be exercised for a fractional Share. An Optionee may exercise Options granted pursuant to the Plan, subject to provisions relative to its termination and limitations on its exercise, only by (1) written notice of intent to exercise the Option with respect to a specified number of Shares, and (2) payment to the Savings Bank (contemporaneously with delivery of such notice) in cash, in Common Stock, or a combination of cash and Common Stock, of the amount of the Option price for the number of Shares with respect to which the Option is then being exercised. Each such notice and payment shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Savings Bank at the Savings Bank's executive offices. Common Stock utilized in full or partial payment of the Option Price shall be valued at is fair market value at the date of exercise. (b) Exercise During Employment or Following Death or Disability. Except as may be specifically provided for by the terms of an Option as may be authorized by the Committee - 4 - at the time of such grant, an Option may be exercised by an Optionee only while he is an Employee and has maintained Continuous Status as an Employee since the date of the grant of the Option or within three months after termination of status as an Employee (but not later than the date on which the Option would otherwise expire), except if the Savings Bank terminates the Employee's Continuous Employment by reason of (1 "Just Cause" (which for purposes hereof shall have the same meaning as defined in the then existing employment agreement between the Optionee and the Savings Bank and, in the absence of any such agreement, shall have the meaning defined in 12 C.F.R. ss.563.39(b)(1) as in effect on the Effective Date), then the Optionee's rights to exercise such Option shall expire on the date of such termination; (2) death, then to the extent that the Optionee would have been entitled to exercise the Option immediately prior to his death, such Option of the deceased Optionee may be exercised within two years from the date of his death (but not later than the date on which the option would otherwise expire) by the personal representatives of his estate or person or persons to whom his rights under such Option shall have passed by will or by laws of descent and distribution; or (3) Permanent and Total Disability (as such term is defined in Section 22(e)(3) of the Code), then to the extent that Optionee would have been entitled to exercise the Option immediately prior to his Permanent and Total Disability, such Option may be exercised within one year from the date of such Permanent and Total Disability, but not later than the date on which the Option would otherwise expire. Notwithstanding the provisions of any Option which provides for its exercise in installments as designated by the Committee, such Option shall become immediately exercisable upon death or Permanent and Total Disability, as defined herein, of the Optionee. The Committee's determination whether an Optionee's Continuous Employment has ceased, and the effective date thereof shall be final and conclusive on all persons affected thereby. (c) Notwithstanding anything herein to the contrary, in no event shall any Option granted pursuant to the Plan be exercisable for one year from the date of grant, except in the event of the death, retirement or Permanent and Total Disability of the Optionee. 9. Non-Transferability of Options. Options granted under the Plan may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. An Option may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Effect of Change in Common Shares Subject to the Plan. In the event that each of the outstanding shares of Common Stock (other than Shares held by dissenting shareholders) shall be changed into or exchanged for a different number or kind of shares of capital stock of the Savings Bank or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, stock dividend, split-up, combination of shares, or otherwise), then there shall be substituted for each Share of Common Stock then - 5 - under Option or available for Option the number and kind of shares of capital stock into which each outstanding Share of Common Stock (other than Shares held by dissenting stockholders) shall be so changed or for which each such Share shall be so exchanged, together with an appropriate adjustment of the Option Price. In the event there shall be any change in the number of, or kind of, issued shares of Common Stock, or of any capital stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, then if the Committee shall, in its discretion, determine that such change equitably requires an adjustment in the number, or kind, or Option Price of Shares then subject to an Option or available for Option, such adjustment shall be made by the Board and shall be effective and binding for all purposes of the Plan. 11. Time of Granting Options. The date of grant of an Option under the Plan shall, for all purposes, be the date following the effective date on which the Committee makes the determination of granting such Option. Notice of the determination shall be given to each Optionee to whom an Option is so granted within a reasonable time after the date of such grant. 12. Effective Date. The Plan shall become effective upon the effective date the Plan is approved by the stockholders, other than the MHC, of the Savings Bank at a properly called meeting of shareholders to be held no earlier than six months following the effective date of the formation of the Savings Bank. The Plan shall continue in effect for a term of ten years from the Effective Date, unless sooner terminated under paragraph 15 hereof. 13. Modification of Options. At any time, and from time to time, the Board may authorize the Committee to direct execution of an instrument providing for the modification of any outstanding Option, provided no such modification, extension or renewal shall confer on the holder of said Option any right or benefit which could not be conferred on him by the grant of a new Option at such time, or impair the Option without the consent of the holder of the Option. 14. Amendment and Termination of the Plan. The Board may from time to time amend, modify or terminate the Plan, except that no action of the Board may materially increase (other than as provided in Paragraph 12) the maximum number of Shares permitted to be optioned or become available for the granting of Options under the Plan, materially increase the benefits accruing to Optionees, or materially modify the requirements for eligibility for participation in the Plan, unless such action of the Board shall be subject to approval or ratification by the stockholders of the Savings Bank. - 6 - No amendment, suspension or termination of the Plan shall, without the consent of any affected Optionee, alter or impair any rights or obligations under any Option theretofore granted to such Optionee under the Plan. 15. Conditions Upon Insurance of Shares. Shares of Common Stock shall not be issued with respect to any Option granted under the Plan unless the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities law, and the requirements of any stock exchange upon which the Shares may then be listed. The inability of the Savings Bank to obtain approval from any regulatory body or authority deemed by the Savings Bank's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Savings Bank of any liability in respect of the non- issuance or sale of such Shares. As a condition to the exercise of an Option, the Savings Bank may require the person exercising the Option to make such representations and warranties as may be necessary to assure the availability of an exception from the registration requirements of federal or state securities law. 16. Reservation of Shares. The Savings Bank, during the term of the Plan, will reserve and keep available a number of Shares sufficient to satisfy the requirements of the Plan. 17. Withholding Tax. The Savings Bank's obligation to deliver shares of Common Stock upon exercise of Options, in whole or in part, shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The Committee, in its discretion, may permit the Optionee to satisfy the obligation, in whole or in part, by irrevocably electing to have the Savings Bank withhold shares of Common Stock, or to deliver to the Savings Bank shares of Common Stock that he already owns, having a value equal to the amount required to be withheld. The value of shares to be withheld, or delivered to the Savings Bank, shall be based on the fair market value of the shares, as determined in accordance with procedures to be established by the Committee, on the date the amount of tax to be withheld is to be determined (the "Tax Date"). The Optionee's election to have shares withheld, or delivered to the Savings Bank, for this purpose will be subject to the following restrictions: (1) the election must be made prior to the Tax Date. (2) the election must be irrevocable. (3) the election will be subject to the disapproval of the Committee, and - 7 - (4) if an optionee is a person whose transactions in stock of the Savings Bank are subject to Section 16(b) of the Securities Exchange Act of 1934 and the Plan is then intended to qualify under Rule 16b-3, such election may not be made within six months of the date the Option is granted and must be made during the period beginning on the third business day and ending on the twelfth business day that follows the release of the Savings Bank's quarterly or annual summary statement of sales and earnings. 18. Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Missouri, except to the extent preempted by federal law as now or hereafter in effect. - 8 - EX-10.2 11 EXHIBIT 10.2 GUARANTY FEDERAL SAVINGS BANK RECOGNITION AND RETENTION PLAN ARTICLE I ESTABLISHMENT OF THE PLAN AND TRUST 1.01 Guaranty Federal Savings Bank ("Savings Bank") hereby establishes this Recognition and Retention Plan ("Plan") upon the terms and conditions hereinafter stated in this Recognition and Retention Plan and Trust Agreement ("Agreement"). 1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust assets existing on the date of this Agreement and all additions and accretions thereto upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to reward and retain personnel of experience and ability by providing such persons with a proprietary interest in the Savings Bank as compensation for their contributions to the Savings Bank and as an incentive to make such contributions and to promote the Savings Bank's growth and profitability in the future. ARTICLE III DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any, or if none, his estate. 3.02 "Board" means the board of directors of the Savings Bank. 3.03 "Committee" means a Committee of the Board consisting of all Directors of the Savings Bank. 3.04 "Common Stock" means shares of the common stock of the Savings Bank. 3.05 "Company" means Guaranty Federal Bancshares, M.H.C., the mutual holding company of the Savings Bank. 3.06 "Director" means a director of the Savings Bank or the Company who is not an Officer of the Savings Bank or the Company. 3.07 "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of a participant to perform the work customarily assigned to him. Additionally, a medical doctor selected or approved by the Board must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said participant's lifetime. 3.08 "Employee" means any person who is currently employed by the Savings Bank or a subsidiary, including Officers. 3.09 "Minority Stock Offering" means one or more offerings of Common Stock by the Savings Bank to persons other than the Company. 3.10 "Normal Retirement" means retirement at the date set forth in the Savings Banks Retirement Plan, or any successor plan. 3.11 "Officer" means an executive officer of the Savings Bank which includes the Chief Executive Officer, President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in charge of principal business functions, the Secretary, the Treasurer and any other person performing similar functions. 3.12 "Plan Shares" means shares of Common Stock held in the Trust and issued or issuable to a Recipient pursuant to the Plan. 3.13 "Plan Share Award" means a right granted under this Plan to earn Plan Shares. 3.14 "Plan Share Reserve" means the shares of Common Stock held by the Trustee pursuant to Sections 5.03 and 5.04. 3.15 "Recipient" means an Employee, Officer or Director who receives a Plan Share Award under the Plan. 3.16 "Reorganization" means the reorganization of Guaranty Federal Savings and Loan Association of Springfield as a mutual holding company and the establishment of the Savings Bank as its majority-owned subsidiary. 3.17 "Savings Bank" means Guaranty Federal Savings Bank. - 2 - 3.18 "Trustee" mans that person or entity nominated by the Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets for the purposes set fort herein. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall have all of the powers allocated to it in this and other Sections of the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. The Committee shall recommend to the Board one or more persons or entity to act as Trustee in accordance with the provisions of this Plan and Trust and the terms or Article VIII. 4.02 Role of the Board. The members of the Committee and the Trustee shall be appointed or approved by, and will serve at the pleasure of, the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee, and may remove, replace or add Trustees. The Board shall have all of the powers allocated to it in this and other Sections of the Plan, may take any action under or with respect to the Plan which the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan, provided, however, that except as proved in Section 7.01(d), the Board may not revoke any Plan Share Award except in the event of revocation for Cause, or with respect to unearned Plan Share Awards in the event a Recipient of a Plan Share Award voluntarily terminates his employment or his directorship (as the case may be) with the Savings Bank prior to retirement. 4.03 Limitation on Liability. No member of the Board or the Committee or the Trustee shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If a member of the Board or the Committee or any Trustee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Savings Bank shall indemnify such member against expense (including reasonable attorneys' fees), judgements, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Savings Bank and a subsidiary and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. - 3 - ARTICLE V CONTRIBUTIONS; PLAN SHARE RESERVE 5.01 Amount and Timing of Contributions. The Board shall determine the amounts (or the method of computing the amounts) to be contributed by the Savings Bank to the Trust established under this Plan. Such amounts shall be paid to the Trustees at the time of contribution. No contributions by Employees or Directors shall be permitted. 5.02 Initial Investment. Any amounts held by the Trust prior to the effective date of the Reorganization and the Minority Stock Offering shall be invested by the Trustee in such interest-bearing account or accounts at the Savings Bank as the Trustee shall determine to be appropriate. 5.03 Investment of Trust Assets upon the Reorganization; Creation of Plan Share Reserve. Upon the consummation of the Reorganization and the Minority Stock Offering, the Trustee shall invest all of the Trust's assets exclusively in Common Stock except as otherwise provided below; provided, however, that the Trust shall not invest in more than two percent (4%) of the shares of Common Stock issued in connection with the Minority Stock Offering which shall constitute the Plan Share Reserve. Any earnings received with respect to Common Stock held in the Plan Share Reserve shall be held in an interest-bearing account. Any earnings received with respect to Common Stock subject to a Plan Share Award shall be held in an interest-bearing account on behalf of the individual Recipient. 5.04 Effect of Allocations, Returns and Forfeitures upon Plan Share Reserves. Upon the allocation of Plan Share Awards under Section 6.02, or the decision of the Committee to return Plan Shares to the Savings Bank, the Plan Share Reserve shall be reduced by the number of Shares subject to the Awards so allocated or returned. Any shares subject to an Award that may not be earned because of a forfeiture by the Recipient pursuant to Section 7.01 shall be returned to the Plan Share Reserve. - 4 - ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 Eligibility. Employees Directors of the Savings Bank and a subsidiary are eligible to receive Plan Share Awards. 6.02 Allocations. The Committee may determine which of the Employees referenced in Section 6.01 will be granted Plan Share Awards and the number of shares covered by each Award; provided, however, that the number of shares covered by such Awards may not exceed the number of shares in the Plan Share Reserve immediately prior to the grant of such Awards, and provided, further, that in no event shall any Awards be made that will violate the Charter, Bylaws or Plan of Reorganization and Stock Issuance of the Savings Bank or any applicable federal or state law or regulation. In the event Plan Shares are forfeited for any reason, the Committee, from time to time, may determine which of the Recipients referenced in Section 6.01 will be granted additional Plan Share Awards to be awarded from forfeited Plan Shares. In selecting those Recipients to whom Plan Share Awards will be granted and the number of Plan Shares covered by such Awards, the Committee shall consider the position and responsibilities of the eligible Recipients, the length and value of their services to the Savings Bank, the compensation paid to the Recipients and any other factors the Committee may deem relevant. 6.03 Form of Allocation. As promptly as practicable after a determination is made pursuant to Section 6.02 that a Plan Share Award has been granted, the Committee shall notify the Recipient in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the Award may be earned. The date on which the Committee so notifies the Recipient shall be considered the date of grant of the Plan Share Awards. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.04 Allocations Not Required. Notwithstanding anything to the contrary in Sections 6.01 and 6.02, no Recipient shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee and the Board, nor shall the salaried Recipients as a group have such a right. The Committee, with the approval of the Board (or if so directed by the Board), may return all Common Stock in the Plan Share Reserve to the Savings Bank at any time, and cease issuing Plan Share Awards. - 5 - ARTICLE VII EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Earning Plan Shares; Forfeitures. (a) General Rules. Unless the Committee shall specifically state to the contrary at the time a Plan Share Award is granted, Plan Shares subject to an Award shall be earned and non-forfeitable by a Recipient according to the following schedule: Years of Service Vested Interest ---------------- --------------- Less than 1 0% 2 20% 3 20% 4 20% 5 20% 6 20% (b) Exception for Termination Due to Death or Disability. Notwithstanding the general rule contained in Section 7.01(a), Plan Shares subject to a Plan Share Award held by a Recipient whose service as an Employee, Officer or Director with the Savings Bank or a subsidiary terminates due to death or disability, or any part thereof that has not theretofore been earned, shall be deemed earned as of the Recipient's last day or service as an Employee, Officer or Director with the Savings Bank or a subsidiary. (c) Revocation for Cause. Notwithstanding anything hereinafter to the contrary, the Board may be resolution immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent Plan Shares have not been delivered thereunder to the Recipient, whether or not yet earned, in the case of an Employee, Officer or Director who is discharged from the Savings Bank or a subsidiary for Cause (as hereinafter defined), or who is discovered after termination of employment to have engaged in conduct that would have justified termination for Cause. "Cause" is defined as personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the wilful violation of any law, rule or regulation (other than traffic violations or similar offenses) that results in a material loss to the Savings Bank or a subsidiary, or a final cease-and-desist order. 7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be entitled to receive, with respect to each Plan Share paid, an amount equal to any cash dividends and a number of shares of Common Stock equal to any stock dividends, declared and paid with respect to a share of Common Stock between the date the relevant Plan Share Award became fully vested and the date the Plan Shares are being distributed. There shall also be distributed an appropriate amount of net earnings, if any, of the Trust with respect to any cash dividends so paid out. - 6 - 7.03 Distribution of Plan Shares. (a) Timing of Distributions; General Rule. Except as provided in subsection (b) below, Plan Shares shall be distributed to the Recipient or his Beneficiary, as the case may be, as soon as practicable after they have been earned. No fractional shares shall be distributed. (b) Timing; Exception for Ten Percent (10%) Shareholders. Notwithstanding subsection (a) above, no Plan Shares may be distributed prior to the date that is five (5) years from the effective date of the Reorganization to the extent the Recipient or Beneficiary, as the case may be, would after receipt of such shares own in excess of then ten percent (10%) of the issued and outstanding shares of Common Stock. Any Plan Shares remaining unpaid solely by reason of the operation of this subsection (b) shall be paid to the Recipient or his Beneficiary on the date that is five (5) years from the effective date of the Reorganization. (c) Form of Distribution. All Plan Shares, together with any shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned and payable. Payments representing accumulated cash dividends (and earnings thereon) shall be made in cash. (d) Withholding. The Trustee may withhold from any payment or distribution made under this Plan sufficient amounts of cash or shares of Common Stock to cover any applicable withholding and employment taxes, and if the amount of such payment is insufficient, the Trustee may require the Recipient or Beneficiary to pay to the Trustee the amount required to be withheld as a condition of delivering the Plan Shares. The Trustee shall pay over to the Savings Bank or a subsidiary that employs or employed such Recipient any such amount withheld from or paid by the Recipient or Beneficiary. 7.04 Voting of Plan Shares. After a Plan Share Award has been granted, the Recipient shall be entitled to direct the Trustee as to the voting of the Plan Shares that are covered by the Plan Share Award and that have not yet been earned and distributed to him pursuant to Section 7.03, subject to rules and procedures adopted by the Committee for this purpose. All shares of Common Stock held by the Trust as to which Recipients are not entitled to direct, or have not directed, the voting, shall be voted by the Trustee in the same proportion as Plan Shares that have been awarded and voted. - 7 - ARTICLE VIII TRUST 8.01 Trust. The Trustee shall receive, hold, administer, invest and make distributions and disbursements from the Trust in accordance with the provisions of the Plan and Trust and the applicable directions, rules, regulations, procedures and policies established by the Committee pursuant to the Plan. 8.02 Management of Trust. It is the intent of this Plan and Trust that, subject to the provisions of this Plan, the Trustee shall have complete authority and discretion with respect to the management, control and investment of the Trust, and that the Trustee shall invest all assets of the Trust, except those attributable to cash dividends paid with respect to Plan Shares, in Common Stock to the fullest extent practicable, and except to the extent that the Trustee determines that the holdings of monies in cash or cash equivalents is necessary to meet the obligations of the Trust. In performing their duties, the Trustees shall have the power to do all things and execute such instruments as may be deemed necessary or proper, including the following powers: (a) To invest up to one hundred percent (100%) of all Trust assets in Common Stock without regard to any law now or hereafter in force limiting investments for Trustees or other fiduciaries. The investment authorized herein constitutes the only investment of the Trust, and in making such investment, the Trustees are authorized to purchase Common Stock from the Savings Bank or a subsidiary or from any other source, and such Common Stock so purchased may be outstanding, newly issued, or treasury shares. (b) To invest any Trust assets not otherwise invested in accordance with (a) above in such deposit accounts, and certificates of deposit (including those issued by the Savings Bank), obligations of the United States government or its agencies or such other investments as shall be considered the equivalent of cash. (c) To sell, exchange or otherwise dispose of any property at any time held or acquired by the Trust. (d) To cause stocks, bonds or other securities to be registered in the name of a nominee, without the addition of words indicating that such security is an asset of the Trust (but accurate records shall be maintained showing that such security is an asset of the Trust). (e) To hold cash without interest in such amounts as may be in the opinion of the Trustee reasonable for the proper operation of the Plan and Trust. (f) To employ brokers, agents, custodians, consultants and accountants. - 8 - (g) To hire counsel to render advice with respect to their rights, duties and obligations hereunder, and such other legal services or representation as they may deem desirable. (h) To hold funds and securities representing the amounts to be distributed to a Recipient or his Beneficiary as a consequence of a dispute as to the disposition thereof, whether in a segregated account or held in common with other assets of the Trust. Notwithstanding anything herein contained to the contrary, the Trustee shall not be required to make any inventory, appraisal or settlement or report to any court, or to secure any order of court for the exercise of any power herein contained, or give bond. 8.03 Records and Accounts. The Trustee shall maintain accurate and detailed records and accounts of all transactions of the Trust, which shall be available at all reasonable times for inspection by any legally entitled person or entity to the extent required by applicable law, or any other person determined by the Committee. 8.04 Earnings. All earnings, gains and losses with respect to Trust assets shall be allocated, in accordance with a reasonable procedure adopted by the Committee, to bookkeeping accounts for Recipients or to the general account of the Trust, depending on the nature and allocation of the assets generating such earnings, gains and losses. In particular, any earnings on cash dividends received with respect to shares of Common Stock shall be allocated to accounts for Recipients, if such shares are the subject of outstanding Plan Share Awards, or, otherwise to the Plan Share Reserve. 8.05 Expenses. All costs and expenses incurred in the operation and administration of this Plan, including those incurred by the Trustee, shall be borne by the Savings Bank. 8.06 Indemnification. The Savings Bank shall indemnify, defend and hold the Trustee harmless against all claims, expenses and liabilities arising out of or related to the exercise of the Trustee's powers and the discharge of their duties hereunder, unless the same shall be due to their gross negligence or willful misconduct. ARTICLE IX MISCELLANEOUS 9.01 Adjustments for Capital Changes. In the event of any change in the outstanding shares of Common Stock of the Savings Bank by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares effected without receipt or payment of consideration by the Savings Bank, the Committee shall adjust the aggregate number of Plan Shares available for issuance pursuant to the Plan and shall adjust the number of shares to which any Plan Share Award relates to prevent dilution or enlargement of the rights granted to the Recipient under the Plan. - 9 - 9.02 Amendment and Termination of Plan. The Board may, by resolution, at any time amend or terminate the Plan and Trust. The power to amend or terminate shall include the power to direct the Trustee to return to the Savings Bank all or any part of the assets of the Trust, including shares of Common Stock held in the Plan Share Reserve, as well as shares of Common Stock and other assets subject to Plan Share Awards but not yet earned by the Employees to whom they are allocated. However, the termination of the Trust shall not affect a Recipient's right to earned Plan Share Awards and to the distribution of Common Stock relating thereto, including earnings thereon, in accordance with the terms of this Plan and the grant by the Committee or Board. 9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Recipient, and during the lifetime of the Recipient, Plan Shares may only be earned by and paid to the Recipient who was notified in writing of the Award by the Committee pursuant to Section 6.03. 9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee, the Committee or the Board in connection with the Plan shall create any right on the part of any Employee to continue in the employ of the Savings Bank or a subsidiary thereof, or the Company. 9.05 Voting and Dividend Rights. No Recipient shall have any voting or dividend rights or other rights of a shareholder in respect to any Plan Shares covered by a Plan Share Award, except as expressly provided in Sections 7.02 and 7.04, prior to the time said Plan Shares are actually distributed to such Recipient. 9.06 Governing Law. The Plan and Trust and this Agreement shall be governed by the laws of the State of Missouri. 9.07 Effective Date. This Plan is effective as of the date the Plan is approved by the stockholders, other than the MHC, of the Savings Bank at a properly called meeting of shareholders to be held no earlier than six months following the effective date of the formation of the Savings Bank. 9.08 Term of Plan. This Plan shall remain in effect until the earlier of (1) termination by the Board, or (2) the distribution of all assets of the Trust. Termination of the Plan shall not affect any Plan Share Awards previously granted, and such Awards shall remain valid and in effect until they have been earned and paid, or by their terms expire or are forfeited. - 10 - EX-23.2 12 EXHIBIT 23.2 EXHIBIT 23.2 [Baird, Kurtz & Dobson Letterhead] Consent of Independent Auditors We hereby consent to the reference to our firm under the caption "Experts" included in the Registration Statement on Form S-1 filed by Guaranty Federal Bancshares, Inc. and to the use therein of our report dated July 31, 1997, concerning the consolidated financial statements of Guaranty Federal Savings Bank and its subsidiary. /s/ Baird, Kurtz & Dobson Springfield, Missouri September 22, 1997 EX-23.3 13 EXHIBIT 23.3 EXHIBIT 23.3 RP FINANCIAL, LC [Financial Services Industry Consultants - Letterhead] September 18, 1997 Board of Directors Guaranty Federal Savings Bank Guaranty Federal Bancshares, M.H.c. Guaranty Federal Bancshares, Inc. 1341 West Battlefield Springfield, Missouri 65807 Gentlemen: We hereby consent to the use of our firm's name in the Application for Conversion of Guaranty Federal Bancshares, M.H.C., the mutual holding company for Guaranty Federal Savings Bank, Springfield, Missouri and any amendments thereto, in the Forms S-1 Registration Statement and any amendments thereto and in the Form H-(e)1-S for Guaranty Federal Bancshares, Inc. We also hereby consent to the inclusion of, summary of and references to our Appraisal Report and our statement concerning subscription rights in such filings including the Prospectus of Guaranty Federal Bancshares, Inc. Sincerely, /s/James J. Oren ---------------- James J. Oren Vice President EX-27 14 FDS FOR S-1
9 1,000 12-MOS JUN-30-1997 JUN-30-1997 417 3,400 0 0 3,360 8,586 8,373 170,965 2,177 199,465 151,246 18,151 2,578 0 0 0 3,125 24,365 199,465 12,347 1,965 400 14,712 7,471 839 6,401 0 61 5,105 1,826 0 0 0 1,162 .37 .37 3.52 715 113 0 502 2,108 (63) 132 2,177 0 0 2,177 INCLUDES MORTGAGE-BACKED AND RELATED SECURITIES.
EX-99.1 15 EXHIBIT 99.1 ================================================================================ CONVERSION APPRAISAL REPORT GUARANTY FEDERAL BANCSHARES, INC. PROPOSED HOLDING COMPANY FOR GUARANTY FEDERAL SAVINGS BANK Springfield, Missouri Dated As Of: September 5, 1997 ================================================================================ Prepared By: RP Financial, LC. 1700 North Moore Street Suite 2210 Arlington, Virginia 22209 RP Financial, LC. - --------------------------------------- Financial Services Industry Consultants September 5, 1997 Board of Directors Guaranty Federal Bancshares, M.H.C. Guaranty Federal Savings Bank 1341 West Battlefield Springfield, Missouri 65807 Gentlemen: At your request, we have completed and hereby provide an independent appraisal ("Appraisal") of the estimated pro forma market value of the common stock which is to be issued by Guaranty Federal Bancshares, Inc. (the "Holding Company"), in connection with the mutual-to-stock conversion of Guaranty Federal Bancshares, M.H.C., Springfield, Missouri (the "Mutual Holding Company"). The Mutual Holding Company currently has a majority ownership interest in, and its principal asset consists of, the common stock of Guaranty Federal Savings Bank, Springfield, Missouri, ("Guaranty" or the "Bank"). It is our understanding that the Holding Company will offer its stock to depositors, the Bank's employee stock ownership plan ("ESOP"), members of the local community and the public at large. This Appraisal is furnished pursuant to the requirements of the Code of Federal Regulations 563b.7 and has been prepared in accordance with the "Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization" of the Office of Thrift Supervision ("OTS"), which have been adopted in practice by the Federal Deposit Insurance Corporation ("FDIC"), including the most recent revisions as of October 21, 1994, and applicable regulatory interpretations thereof. Description of Reorganization - ----------------------------- The Boards of Directors of the Bank and the Mutual Holding Company have adopted Plan of Conversion pursuant to which the Mutual Holding Company will convert from a federally-chartered mutual holding company to a Delaware stock corporation. In the reorganization process, to become effective concurrent with the completion of the stock sale, which is targeted for the fourth calendar quarter of 1997: (1) the Mutual Holding Company, which currently owns approximately 68.9 percent of the Bank, will convert to an interim federal stock savings bank and merge with and into the Bank, with the Bank being the surviving entity; (2) as a result of the merger of the interim federal stock savings bank into the Bank, the Bank will become a wholly-owned subsidiary of the Holding Company operating under the name Guaranty Federal Savings Bank; and, (4) the outstanding shares of Bank common stock, (other than those held by the Mutual Holding Company, which will be cancelled) (the "Public Shares"), will be converted into shares of common stock of the Holding Company (the "Exchange Shares") pursuant to a ratio that will result in the holders of such shares owning the same percentage of the Holding Company as they currently own of the Bank (adjusted for assets currently held at the Mutual Holding Company level). Pursuant to the reorganization, the Holding Company will issue shares in the Subscription and Community Offerings that will represent an ownership interest in the Holding Company equal to the percentage ownership that the Mutual Holding Company currently maintains in the Bank, adjusted for assets currently held at the Mutual Holding Company level. Also pursuant to the reorganization, the Holding Company will issue the Exchange Shares to the current minority stockholders of the Bank in exchange for the - -------------------------------------------------------------------------------- Washington Headquarters Rosslyn Center 1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700 Arlington, VA 22209 FAX No.: (703) 528-1788 RP Financial, L.C. Board of Directors September 5, 1997 Page 2 Public Shares pursuant to an exchange ratio determined by the Board of Directors that will maintain the current minority stockholders' existing ownership interest (the "Exchange Ratio"), adjusted for assets currently held at the Mutual Holding Company level. RP Financial, LC. - ----------------- RP Financial, LC. ("RP Financial") is a financial consulting firm that specializes in financial valuations and analyses of business enterprises and securities. The background and experience of RP Financial are detailed in Exhibit V-1. We believe that, except for the fee we will receive for our appraisal of the shares to be issued by the Holding Company, and the preparation of and the fee received for the regulatory business plan filed with the application, we are independent of the Bank, the Mutual Holding Company, the Holding Company and other parties engaged by the Bank to assist in the stock issuance process. Valuation Methodology - --------------------- In preparing our appraisal, we have reviewed the Mutual Holding Company's Application for Approval of Conversion, including the Proxy Statement, as filed with the OTS and the Holding Company's Form S-1 registration statement as filed with the Securities and Exchange Commission ("SEC"). We have conducted an analysis of the Bank and the Mutual Holding Company (hereinafter, collectively referred to as the "Bank") that has included due diligence related discussions with the Bank's management; Baird, Kurtz & Dobson, the Bank's independent auditor; Malizia, Spidi, Sloane & Fisch, P.C., the Bank's conversion counsel; and Friedman, Billings, Ramsey, & Co., Inc., which has been retained by the Bank as a financial and marketing advisor in connection with the Holding Company's stock offering. All conclusions and assumptions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable we cannot guarantee the accuracy and completeness of such information. We have investigated the competitive environment within which the Bank operates, and have assessed the Bank's relative strengths and weaknesses. We have kept abreast of the changing regulatory and legislative environment and analyzed the potential impact on the Bank and the industry as a whole. We have analyzed the potential effects of the stock offering on the Bank's operating characteristics and financial performance as they relate to the pro forma market value of the Bank. We have reviewed the economy in the Bank's primary market area and have compared the Bank's financial performance and condition with selected publicly-traded thrift institutions in the Midwest region of the U.S. We have reviewed conditions in the securities markets in general and for thrift stocks in particular, including the market for existing thrift issues (including both full stock institutions and institutions organized as mutual holding companies), initial public offerings by thrifts and second step conversion offerings. Our Appraisal is based on the Bank's representation that the information contained in the regulatory applications and additional information furnished to us by the Bank and its independent auditors are truthful, accurate and complete. We did not independently verify the financial statements and other information provided by the Bank and its independent auditors, nor did we independently value the individual assets or liabilities of the Bank. The valuation considers the Bank only as a publicly-held going concern and should not be considered as an indication of the liquidation or control values of the Bank. RP Financial, L.C. Board of Directors September 5, 1997 Page 3 Our appraised value is predicated on a continuation of the current operating environment for the Bank and for all thrifts. Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Bank's value alone. To the extent that such factors can be foreseen, they have been factored into our analysis. Pro forma market value is defined as the price at which the Holding Company's shares would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Valuation Conclusion - -------------------- It is our opinion that, as of September 5, 1997, the aggregate pro forma market value of the Bank and the Mutual Holding Company, inclusive of the sale of an approximate 70.2 percent ownership interest in the Subscription and Community Offerings, was $47,043,645 at the midpoint. Based on the range of value set forth in the OTS conversion guidelines, the resultant valuation range equals $39,987,098 at the minimum and $54,100,192 at the maximum. Based on this valuation and the approximate 70.2 percent ownership interest being sold in the Subscription and Community Offerings, the midpoint of the Holding Company's stock offering was $33,000,000, equal to 3,300,000 shares offered at a per share value of $10.00. The resultant offering range includes a minimum of $28,050,000 and a maximum of $37,950,000. Based on the $10.00 per share offering price, this range equates to an offering of 2,805,000 shares at the minimum to 3,795,000 shares at the maximum. The Holding Company's offering also includes a provision for a super range, which if exercised, based on a market value of $62,215,221, would result in an offering size of $43,642,500, equal to 4,364,250 shares at the $10.00 per share offering price. Establishment of Exchange Ratio - ------------------------------- OTS regulations provide that in a conversion of a mutual holding company, the minority stockholders are entitled to exchange their shares of the Bank's common stock for common stock of the Holding Company. The Board of Directors of the Mutual Holding Company has independently established a formula to determine the exchange ratio. The formula has been designed to preserve the current aggregate percentage ownership in the Bank represented by the Public Shares, adjusted for assets currently held at the Mutual Holding Company level, which results in an approximate 29.9 percent minority ownership interest. Pursuant to the formula, the Exchange Ratio will be determined at the end of the Holding Company's stock offering based on the total number of shares sold in the Subscription and Community Offerings. Based upon this formula, and the valuation conclusion and offering range concluded above, the Exchange Ratio would be 1.2276 shares, 1.4443 shares, 1.6609 shares and 1.9101 shares of Holding Company stock issued for each Public Share, at the minimum, midpoint, maximum and super range of the offering, respectively. Limiting Factors and Considerations - ----------------------------------- Our valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the initial offering will thereafter be able to sell such shares at prices related to the foregoing valuation of the pro forma market value. The Appraisal does not take into account any trading activity with respect to the purchase and sale of common stock in the secondary market, and reflects only a valuation range as of this date for the pro forma market value of the Bank immediately upon issuance of the stock. RP Financial, L.C. Board of Directors September 5, 1997 Page 4 RP Financial's valuation was determined based on the financial condition, operations and shares outstanding as of June 30, 1997, the date of the financial data included in the Holding Company's Prospectus. The proposed Exchange Ratio and the exchange of Public Shares for newly issued Holding Company shares was determined independently by the Boards of Directors of the Mutual Holding Company and the Bank. RP Financial expresses no opinion on the proposed Exchange Ratio and the exchange of Public Shares for newly issued Holding Company shares. RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy which prohibits the company, its principals or employees from purchasing stock of its client institutions. The valuation will be updated should market conditions or changes in Guaranty's operating results warrant. The valuation will also be updated at the completion of the Holding Company's stock offering. These updates will consider, among other things, any developments or changes in the Bank's financial performance and condition, management policies, and current conditions in the equity markets for thrift shares, both existing issues and new issues. Also, these updates will consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment (including changes in the appraisal guidelines), the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update. Respectfully submitted, RP FINANCIAL, LC. /s/William E. Pommerening -------------------------------- William E. Pommerening Chief Executive Officer /s/James J. Oren -------------------------------- James J. Oren Vice President RP Financial, LC. TABLE OF CONTENTS GUARANTY FEDERAL BANCSHARES, INC. GUARANTY FEDERAL SAVINGS BANK Springfield, Missouri
PAGE DESCRIPTION NUMBER ----------- ------ CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS Plan of Conversion and Holding Company Reorganization 1.1 Strategic Discussion 1.2 Balance Sheet Trends 1.5 Income and Expense Trends 1.8 Interest Rate Risk Management 1.11 Lending Activities and Strategy 1.12 Asset Quality 1.14 Funding Composition and Strategy 1.14 Subsidiary Operations 1.15 Legal Proceedings 1.15 CHAPTER TWO MARKET AREA Introduction 2.1 National Economic Factors 2.2 Market Area Demographics 2.5 Economy 2.6 Deposit Trends and Competition 2.7 Summary 2.9 CHAPTER THREE PEER GROUP ANALYSIS Selection of Peer Group 3.1 Financial Condition 3.4 Income and Expense Components 3.7 Loan Composition 3.9 Credit Risk 3.9 Interest Rate Risk 3.12 Summary 3.12
TABLE OF CONTENTS GUARANTY FEDERAL BANCSHARES, INC. GUARANTY FEDERAL SAVINGS BANK Springfield, Missouri (continued)
PAGE DESCRIPTION NUMBER ----------- ------ CHAPTER FOUR VALUATION ANALYSIS Introduction 4.1 Appraisal Guidelines 4.1 Valuation Analysis 4.2 1. Financial Condition 4.2 2. Profitability, Growth and Viability of Earnings 4.3 3. Asset Growth 4.4 4. Primary Market Area 4.4 5. Dividends 4.6 6. Liquidity of the Shares 4.7 7. Marketing of the Issue 4.7 A. The Public Market 4.8 B. The New Issue Market 4.11 C. Secondary Step Conversion Offerings 4.14 D. The Acquisition Market 4.14 E. Trading in Guaranty's Stock 4.14 8. Management 4.18 9. Effect of Government Regulation and Regulatory Reform 4.18 Summary of Adjustments 4.18 Valuation Approaches 4.19 1. Price-to-Tangible Book ("P/TB") 4.21 2. Price-to-Earnings ("P/E") 4.21 3. Price-to-Assets ("P/A") 4.22 Valuation Conclusion 4.22 Establishment of Exchange Ratio 4.23
RP Financial, LC. LIST OF TABLES GUARANTY, FEDERAL SAVINGS BANK GUARANTY FEDERAL BANCSHARES, INC. Springfield, Missouri
TABLE NUMBER DESCRIPTION PAGE - ------ ----------- ---- 1.1 Historical Balance Sheets 1.6 1.2 Historical Income Statements 1.9 2.1 Major Employers 2.6 2.2 Market Area Unemployment Trends 2.7 2.3 Deposit Summary 2.8 3.1 Peer Group of Publicly-Traded Thrifts 3.2 3.2 Balance Sheet Composition and Growth Rates 3.5 3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads 3.8 3.4 Loan Portfolio Composition & Related Info. 3.10 3.5 Credit Risk Measures & Related Information 3.11 3.6 Interest Rate Risk Comparative Analysis 3.13 4.1 Peer Group Market Area Comparative Analysis 4.5 4.2 Recent Conversions: Market Pricing Comparatives 4.12 4.3 Market Pricing Comparatives 4.13 4.4 Completed Second Step Conversions 4.15 4.5 MHC Institutions - Implied Pricing Ratios 4.16 4.6 Calculation of Exchange Ratios 4.23 4.7 Public Market Pricing: Valuation Conclusion 4.24
RP Financial, LC. Page 1.1 I. OVERVIEW AND FINANCIAL ANALYSIS Guaranty Federal Savings Bank ("Guaranty" or the "Bank") is a federally-chartered stock savings bank headquartered in Springfield, Greene County, Missouri. The Bank also operates three other branch offices in Springfield. The Bank considers its primary market for deposits to consist of the city of Springfield and Greene County, in particular the areas surrounding the office locations. Lending activities are also concentrated in Greene County, although additional lending activities are performed in the surrounding counties of Christian and Webster, and to a lesser extent, other outlying counties (see Exhibit I-1). The Bank was chartered as a state mutual savings association in 1913, and in 1935 obtained federal deposit insurance. The Bank is currently a member of the Federal Home Loan Bank ("FHLB") system and is regulated by the Office of Thrift Supervision ("OTS"). The Bank's deposits are insured up to the regulatory maximums by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). As of June 30, 1997, the Bank maintained $199.5 million in assets, $151.2 million in deposits and $27.5 million in stockholders' equity, equal to 13.8 percent of assets. In April 1995, the Bank completed a reorganization from a mutual savings bank to a stock savings bank concurrent with the reorganization as a federal mutual holding company. Pursuant to the reorganization, Guaranty transferred substantially all of its assets and liabilities to a newly-formed stock association in exchange for 2,152,635 shares of stock issued to Guaranty Federal Bankshares, M.H.C. (the "Mutual Holding Company" or "MHC"). Simultaneously, the Bank sold 972,365 shares of stock to the public in a subscription and community offering. As of June 30, 1997 there were 3,125,000 total shares of the Bank common stock issued and outstanding, of which 2,152,635 shares, or 68.88 percent, were owned by the Mutual Holding Company and 972,365 shares, or 31.12 percent, were owned by the public. Other than the ownership of stock in the Bank, the MHC's other assets consist of land acquired for the purpose of a future branch office building, equity securities of approximately $116,000 and cash which is deposited at the Bank level. Plan of Conversion and Holding Company Reorganization - -------------------------------------------------------- On May 21, 1997, the Board of Directors of the Bank and the Mutual Holding Company adopted the Plan of Conversion and Agreement and Plan of Reorganization (the "Plan") pursuant to which the Mutual Holding Company will convert from mutual to stock form and simultaneously merge with and into the Bank. A newly formed Delaware corporation, Guaranty Federal Bancshares, Inc. (the "Holding Company"), will be formed as a unitary savings and loan holding company to facilitate the reorganization. In the reorganization process, to become effective concurrent with the completion of the stock sale which is targeted for the fourth calendar quarter of 1997: (1) the Mutual Holding Company, which currently owns approximately 68.9 percent RP Financial, LC. Page 1.2 of the Bank, will convert to an interim federal stock savings bank and merge with and into the Bank, with the Bank being the surviving entity; (2) as a result of the merger of the interim federal savings bank into the Bank, the Bank will become a wholly-owned subsidiary of the Holding Company operating under the name Guaranty Federal Savings Bank; and, (3) the publicly-owned shares of Bank common stock (the "Public Shares") will be converted into shares of common stock of the Holding Company (the "Exchange Shares") pursuant to a ratio that will result in the holders of such shares owning the same percentage of the Company as they currently own of the Bank, adjusted for the assets currently held by the Mutual Holding Company. Pursuant to the reorganization, the Holding Company will issue shares in a subscription and community offering that will represent an ownership interest in the Holding Company of approximately 70.2 percent (the percentage ownership that the Mutual Holding Company currently maintains in the Bank, adjusted for assets currently held at the Mutual Holding Company level). The Holding Company will also issue the Exchange Shares to the current minority stockholders of the Bank. The number of exchange shares issued by the Holding Company will be calculated pursuant to an exchange ratio determined by the Board of Directors that will maintain the current minority stockholders' existing ownership interest (the "Exchange Ratio"), adjusted for assets currently held at the Mutual Holding Company level. The Holding Company anticipates granting common stock awards to directors, officers and other key personnel (1998 Restricted Stock Plan or "1998 RSP") up to 4 percent of the shares being offered publicly, supplementing stock awards granted in the mutual holding company reorganization (1994 RRP). The Bank's Employee Stock Ownership Plan ("ESOP") intends to purchase 8.0 percent of the common stock being offered publicly, funded by a loan from the Holding Company. The Holding Company also intends to implement, subject to stockholder approval, a stock option plan no less than six months after conversion, which will reserve for future issuance 10 percent of the stock issued in the Subscription and Community offerings. At this time, no other activities are contemplated for the Holding Company other than the ownership of the Bank, although in the future the Holding Company may acquire or organize other operating subsidiaries. The Holding Company plans to retain a portion of the net proceeds from the sale of common stock and infuse the remaining proceeds into the Bank. Strategic Discussion - -------------------- The Bank is a community-oriented family financial institution dedicated to meeting the borrowing, savings and financial services needs of its communities served. The market area served by the Bank (the city of Springfield and Greene County), has been experiencing increases in the levels of population and households in recent years. The economy and employment base is relatively diversified into most economic sectors, including RP Financial, LC. Page 1.3 services and manufacturing. Springfield is located in southwestern Missouri and serves as a regional population center. Thus, there are a number of other community-oriented banks and savings banks as well as larger regional financial institutions operating in the area. In this operating environment the Bank has pursued a strategy of increasing the asset base and the number of products and services offered in order to more effectively compete. Throughout its history, the Bank has generally pursued a traditional operating strategy of mortgage lending secured by 1-4 family residential properties in the local market area. Guaranty diversified its loan portfolio beginning in the mid-1980s by increasing the emphasis on income property lending, resulting in higher balances of various types of commercial real estate loans in portfolio. Following a period of elevated non-performing assets due to the higher credit risk associated with these loan types, the Bank returned to a strategy of emphasizing residential lending in the early 1990's and permitted the commercial real estate loan portfolio to decline through repayments and amortization. Upon attaining a relatively higher credit quality earning asset base, the Bank completed the mutual holding company minority stock offering in 1995 and has since continued to expand the loan portfolio primarily in the area of 1-4 family permanent and construction loans. In context with the emphasis on providing a wider range of products, recently the Bank has also expanded its activities in consumer loans, primarily home equity, automobile and personal loans. The increases in loans receivable has been funded internally through a reduction in cash and investments and mortgage-backed securities ("MBS"), and externally through FHLB advances. The Bank also sells a portion of the 1-4 family loan originations for interest rate risk management purposes. The Bank expects the majority of its loan activity in the future to be within the Greene County market area. The Bank's more recent emphasis on originating 1-4 family permanent mortgage loans in local and familiar markets and strong underwriting criteria on loans originated has resulted in recently improving credit quality measures. The Bank's allowance for loan losses relative to loans is also comparatively higher by industry standards, a level that the Bank has historically maintained, even in light of the recent growth in the loan portfolio (the portfolio increased by 17 percent during fiscal 1997). The ratio of non-performing assets ("NPAs"), consisting of real estate owned and other repossessed assets, non-accruing loans and delinquent accruing loans to assets has dropped steadily over the past five fiscal years, and was 0.53 percent of assets as of June 30, 1997. The Bank's lending strategies to limit exposure to interest rate risk have involved originating adjustable rate residential mortgage loans ("ARMs"), adjustable rate commercial real estate loans and shorter-term construction, consumer and commercial business loans. Liability strategies have involved increasing the level of core deposits (i.e. checking accounts and other savings accounts), which are deemed less sensitive to changes in interest rates, and FHLB advances utilized in recent months to meet loan demand have been in general RP Financial, LC. Page 1.4 maturity-matched to certain real estate loans. As of June 30, 1997, ARM loans comprised approximately 75 percent of the loan portfolio. Residential loan products offered by the Bank include adjustable rate loans that are fixed for one, three or five years and adjust annually thereafter. Regarding the measure of interest rate risk, Guaranty's projected change in net portfolio value ("NPV"), based on calculations provided by the OTS, reveal that the Bank's NPV would decrease by 11 percent upon a positive 200 basis point change in interest rates. Guaranty anticipates the conversion proceeds will facilitate improvement in the asset/liability gap analysis as the net capital raised in the conversion will increase the ratio of interest-earning assets ("IEA") to interest-bearing liabilities ("IBL") and the proceeds will increase the proportion of shorter-term or adjustable rate assets. The Bank's main source of net income, the net interest margin, has remained relatively stable over the past few years, with overall net interest income increasing in step with the growth in assets. Core profitability has been primarily affected by an increasing level of operating expenses that have been incurred in connection with the Bank's growth in operations. The Bank opened a new headquarters office in 1995, requiring investment in fixed assets and personnel. Further improvement in core profitability has also been limited by historical deposit pricing strategies that increased the Bank's overall cost of funds (the Bank attempted to obtain additional funds for lending operations through aggressive pricing). Deposit pricing strategies have been recently changed to permit the most costly deposit funds to roll out of the Bank and deposit costs have recently declined, improving the net interest margin. Future core profitability is projected to improve moderately with the reinvestment benefit of the new capital raised. Guaranty's Board of Directors has determined that a full conversion to stock form is an attractive business strategy for several reasons. First, the new structure will provide the ability to diversify business activities, provide greater flexibility in structuring acquisitions and increase the future access to capital markets. Second, it will provide the capital necessary to improve the overall competitive position of the Bank in its market area, with regard to rates and services offered and ability to expand. Third, an increase in the publicly-held shares may increase the stock liquidity. Fourth, the conversion may provide the opportunity for expanded local stock ownership which could enhance the financial success of the Bank as local shareholders promote the Bank's products and services. Furthermore, the new structure is being pursued in view of certain regulatory uncertainties regarding the MHC structure and thrift industry as a whole. As disclosed in the prospectus, the proceeds from stock conversion are anticipated to be invested as follows. o Holding Company. Approximately 50 percent of the conversion proceeds will be retained by the Holding Company, with the balance to be invested in the Bank. Such holding company funds are anticipated to be invested initially into high-quality short- to intermediate-term securities, a loan to the Bank's ESOP to fund stock purchases in the conversion or a loan to the Bank in order to downstream additional funds to the Bank. The Holding Company funds RP Financial, LC. Page 1.5 will be utilized for various corporate purposes, including funding expansion through diversification or acquisition, stock repurchase programs, funding stock purchases for the RSP and/or payment of regular or special dividends, although there are no specific plans at present. o Guaranty. The net proceeds infused into the Bank will be exchanged for all of the Bank's newly issued stock. The Bank's proceeds are anticipated to initially be used to repay a portion of the outstanding FHLB advances and also be held in short-term cash and investments until such funds are redeployed into lending and investment activities consistent with the Bank's plan. On a pro forma basis, Guaranty is expected to have a capital ratio above both regulatory requirements and industry averages. The Board of Directors has determined to pursue a strategy of controlled growth in order to maintain well-capitalized status, with growth expected to be funded primarily through local retail deposit growth and additional borrowings. Balance Sheet Trends - -------------------- Table 1.1 shows key balance sheet items at the close of the last five fiscal years. Guaranty's audited financial statements are incorporated by reference as Exhibit I-2, while historical key operating ratios are presented in Exhibit I-3. From June 30, 1993 through June 30, 1997, Guaranty exhibited annual asset growth of 6.0 percent, with the asset growth channelled into increases in loans receivable. This trend of increased focus on loan portfolio growth is evident as loans receivable as a percent of total assets increased from 61 percent to 79 percent from fiscal 1993 to fiscal 1997. The balance of MBS and cash and investments has fallen since 1993, with funds utilized in the lending operations. Guaranty's annual deposit growth totaled 1.5 percent over the period in Table 1.1, although deposits declined during fiscal 1997 by 3.7 percent as the Bank allowed certain high cost deposits to roll-out. Borrowings, consisting of FHLB advances, have been used as a supplemental funding source in fiscal 1997 to support lending operations. The balance of loans receivable increased consistently since fiscal 1993, averaging a 13.3 percent annual increase. Over the most recent fiscal years, Guaranty has been successful in expanding its residential loan origination efforts in the local market (including construction loans), and has more recently increased the level of consumer loans. At June 30, 1997, loans receivable totaled $158.1 million, or 79.3 percent of total assets. The composition of the loan portfolio reflects the concentration on residential lending, as loans secured by residential property (including construction loans), constituted $141.6 million, or 82.8 percent of the gross loan portfolio at June 30, 1997. Commercial real estate loans (including multi-family loans), totaled $23.8 million, or 13.9 percent of the loan portfolio, as Guaranty has not emphasized these types of loans recently. As RP Financial, LC. Table 1.1 Guaranty Federal Savings Bank Historical Balance Sheets (1) (Amount and Percent of Assets)
6/30/92- 9/30/96 For the Fiscal Year Ended June 30, Annualized ----------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 Growth Rate ----------------- -------------------- ------------------ ------------------ --------------- ------------ Amount Pct Amount Pct Amount Pct Amount Pct Amount Pct Pct ------ --- ------ --- ------ --- ------ --- ------ --- --- ($000) (%) ($000) (%) ($000) (%) ($000) (%) ($000) (%) (%) > Total Amount of: Assets $158,311 100.00% $158,850 100.00% $170,884 100.00% $185,167 100.00% $199,465 100.00% 5.95% Loans Receivable (net) 96,142 60.73% 105,265 66.27% 119,842 70.13% 135,029 72.92% 158,135 79.28% 13.25% Mortgage-Backed Securities 24,101 15.22% 14,138 8.90% 13,855 8.11% 20,067 10.84% 15,814 7.93% -10.00% Cash and Investment Securities 33,765 21.33% 32,469 20.44% 28,468 16.66% 20,383 11.01% 17,497 8.77% -15.16% Deposits 142,529 90.03% 141,017 88.77% 139,595 81.69% 157,008 84.79% 151,246 75.83% 1.50% FHLB Advances, Other Borrowed Funds 0 0.00% 0 0.00% 4,000 2.34% 0 0.00% 18,151 9.10% N/M Stockholders Equity 14,517 9.17% 16,563 10.43% 26,044 15.24% 26,586 14.36% 27,490 13.78% 17.31% AFS Adjustment N/A N/A N/A N/A 1,127 0.66% 1,259 0.68% 2,058 1.03% End of Period Shares Outstanding N/A N/A 3,125,000 3,125,000 3,125,000 Wghtd Avg Shrs for EPS Calculations(2) N/A N/A 3,125,000 3,125,933 3,149,062 Book Value/Share N/A N/A $8.33 $8.51 $8.80 Offices Open 3 3 3 4 4
(1) Ratios are as a percent of ending assets. (2) The Bank's minority sale of stock was completed in April 1995. Source: Guaranty audited financial statements. RP Financial, LC. Page 1.7 of June 30, 1997, consumer loans totaled $5.2 million, or 3.1 percent of loans receivable, representing an increase of $3.6 million from the prior year period. This increase has primarily been in the area of home equity loans, automobile and personal loans MBS totaled $15.8 million at June 30, 1997, the third largest component of interest-earning assets. Similar to cash and investments, the decline of the MBS balance since fiscal year end 1993 highlights the Bank's strategy of investing funds into whole loans receivable in order to improve asset yields, as funds from the repayment and pre-payment of MBS have been utilized for lending activities. The balance of MBS increased in fiscal 1996 as additional MBS were purchased from available liquidity, while the balance declined in fiscal 1997 due to repayments and amortization. No MBS were purchased in fiscal 1997. The MBS portfolio consists of FNMA, FHLMC and GNMA pass-through certificates, of which approximately 52 percent carried adjustable rates. The entire MBS portfolio was classified as "held-to-maturity" ("HTM") at June 30, 1997, and is carried on the balance sheet at historical cost. There was an unrealized pre-tax gain of $277,000 as of June 30, 1997 in the MBS portfolio. The Bank utilizes a portion of its MBS portfolio to satisfy regulatory liquidity requirements, preferring to maintain such funds in MBS instead of lower yielding cash and investments. Going forward, the Bank intends to continue a focus on investment into whole loans, although MBS may be purchased with available funds. The portfolio of cash and investment securities totaled $17.5 million, or 8.8 percent of assets, at June 30, 1997 (see Exhibit I-4). The cash and investments portfolio consisted of cash and equivalents, including interest-earning deposits in other financial institutions ($3.8 million), U.S. Government and agency securities ($8.6 million), FHLB stock ($1.7 million) and FHLMC stock ($3.4 million). During the most recent fiscal years, the Bank has used cash flow from maturing investments or sales of investment securities to fund loan originations, and the cash and investments portfolio declined to current levels from $33.8 million at June 30, 1993. Management utilizes the portfolio of cash and investments for liquidity purposes and as part of the asset-liability management strategy, as the investments portfolio consists of short- to intermediate-term instruments. The Bank classifies the FHLMC stock as "available-for-sale", and as of June 30, 1997, an unrealized pretax gain of $3.3 million was tax adjusted and added to stated equity on the Bank's audited financial statements. Going forward, the Bank intends to continue to purchase generally low risk investments and the composition of the cash and investments portfolio is not anticipated to change significantly, although the level will initially increase on a post-conversion basis. Going forward, the Bank intends to continue a focus on investment into whole loans, although MBS may be purchased with available funds. As noted previously, deposits have traditionally met most of the Bank's funding needs, and all of the Bank's deposits are generated through its four office locations. In the last several years, the Bank achieved growth in deposits by attempting to be more visible in the local market area through advertising and other RP Financial, LC. Page 1.8 marketing efforts and by offering competitive rates. This strategy facilitated deposit growth, but also increased funding costs. During fiscal 1997, the Bank became slightly less aggressive in the pricing of certain certificates of deposit ("CD") accounts and changed pricing strategies in an attempt to lower the overall cost of funds. As a result, deposits declined by $5.8 million during fiscal 1997 as primarily of higher costing CDs were withdrawn. Currently, savings rates offered by Guaranty are generally in line with the local competition, with certificates of deposits ("CDs") accounting for the majority of deposits. The Bank has a portfolio of core deposits totaling approximately 19 percent of deposits, providing a base of stable lower costing deposits for operations. As stated previously, borrowings have also been used by the Bank in recent periods for the purpose of funding certain loan originations. As of June 30, 1997, the Bank had borrowed funds of approximately $18.2 million in short- to intermediate-term advances from the FHLB of Des Moines to meet the demand for loans, and the borrowings mature between 1998 and the year 2002. Going forward, the Bank intends to continue using borrowings to support operations, although deposits are expected to continue to comprise the majority of funding liabilities. Positive earnings from fiscal 1993 to fiscal 1997, the minority stock offering in 1995 and a positive adjustment for FAS 122 resulted in an increase in the Bank's capital to $27.5 million, or 13.8 percent of assets, as of June 30, 1997. The Bank has also paid dividends to shareholders (including the MHC shares) since fiscal 1996. The Bank's capital ratio declined from 15.2 percent as of June 30, 1995, due to the expansion of the asset base. Guaranty is currently in compliance with respect to all of its fully phased-in capital requirements. The addition of conversion proceeds will enhance the Bank's capital position and strengthen Guaranty's competitive posture within its market area. Income and Expense Trends - ------------------------- Table 1.2 displays the Bank's earnings over the past five fiscal years and reveals that earnings for the past five fiscal years have fluctuated between 0.60 and 1.28 percent of average assets, and totaled 0.60 percent for fiscal 1997, a decrease from the level in fiscal 1996. The more recent lower earnings have been attributable to non-operating items, primarily the one-time SAIF assessment fee booked in the September 30, 1996 quarter, while the higher income in fiscal 1996 was due in part to a recovery on the Bank's loan loss provision. Earnings have also been affected by a changing net interest margin. The reinvestment of offering proceeds is expected to improve net income in future periods. RP Financial, LC. Table 1.2 Guaranty Federal Savings Bank Historical Income Statements (Amount and Percent of Assets)(1)
For the Fiscal Year Ended June 30, -------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------------ ------------------- ------------------ ----------------- ------------------ Amount Pct Amount Pct Amount Pct Amount Pct Amount Pct ------ --- ------ --- ------ --- ------ --- ------ --- ($000) (%) ($000) (%) ($000) (%) ($000) (%) ($000) (%) Interest Income $11,480 7.34% $10,858 6.82% $11,637 7.09% $13,702 7.50% $14,711 7.60% Interest Expense (6,657) -4.26% (5,924) -3.72% (6,595) -4.02% (8,239) -4.51% (8,310) -4.29% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net Interest Income $4,823 3.08% $4,934 3.10% $5,042 3.07% $5,463 2.99% $6,401 3.31% Provision for Loan Losses 98 0.06% (14) -0.01% (16) -0.01% 1,212 0.66% 0 0.00% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net Interest Income after Provisions $4,921 3.15% $4,920 3.09% $5,026 3.06% $6,675 3.65% $6,401 3.31% Other Income $191 0.12% $160 0.10% $158 0.10% $178 0.10% $450 0.23% Operating Expense (2,514) -1.61% (2,815) -1.77% (3,077) -1.87% (4,117) -2.25% (4,173) -2.15% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net Operating Income $2,598 1.66% $2,265 1.42% $2,107 1.28% $2,736 1.50% $2,679 1.38% Gain(Loss) on Sale of Inv. Sec.\MBS $36 0.02% ($226) -0.14% ($103) -0.06% $43 0.02% $61 0.03% Income on Foreclosed Assets 42 0.03% 16 0.01% 17 0.01% 0 0.00% 18 0.01% SAIF Special Assessment 0 0.00% 0 0.00% 0 0.00% 0 0.00% (932) -0.48% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Non-Operating Inc.\Exp. $77 0.05% ($210) -0.13% ($87) -0.05% $43 0.02% ($853) -0.44% Net Income Before Tax $2,676 1.71% $2,055 1.29% $2,020 1.23% $2,779 1.52% $1,826 0.94% Income Taxes (815) -0.52% (637) -0.40% (690) -0.42% (1,026) -0.56% (665) -0.34% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net Inc(Loss) Before Extraordinary Items $1,861 1.19% $1,418 0.89% $1,330 0.81% $1,753 0.96% $1,162 0.60% Cumulative Effect of Change in Accounting For Income Taxes $0 0.00% $628 0.39% $0 0.00% $0 0.00% 0 0.00% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net Income (Loss) $1,861 1.19% $2,046 1.28% $1,330 0.81% $1,753 0.96% $1,162 0.60% Earnings Excluding Non- Operating and Extraord. Items: - ---------------- Pre-Tax Net Inc. Before Extraordinary Items $2,676 1.71% $2,055 1.29% $2,020 1.23% $2,779 1.52% $1,826 0.94% Addback(Deduct): Non-Recurring (Inc)/Exp (77) -0.05% 210 0.13% 87 0.05% (43) -0.02% 853 0.44% Tax Effect (34.00%) (883) -0.57% (770) -0.48% (716) -0.44% (930) -0.51% (911) -0.47% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Earnings Excl. Non-Op. /Extraord Items: $1,715 1.10% $1,495 0.94% $1,390 0.85% $1,806 0.99% $1,768 0.91% Earnings Per Share: Reported N/A N/A N/A $0.56 $0.37 Earnings Excl. Non-Op. /Extraord Items: N/A N/A N/A 0.58 0.56 Dividends: Amount N/A N/A N/A $0.32 $0.38 Payout Ratio N/A N/A N/A 57.14% 102.70% Efficiency Ratio 49.17% 55.42% 59.36% 60.07% 60.90%
(1) Ratios are as a percent of average assets. Average assets calculated based on annual average. Source: Guaranty's audited financial statements. RP Financial, LC. Page 1.10 The Bank's net interest income is the major source of income, and increased from 2.99 percent of average assets for fiscal 1996 to 3.31 percent for fiscal 1997, as shown in Table 1.2. The source of this increase in income is highlighted in Exhibit I-5, which shows the changes in the Bank's asset yields and cost of funds over the past three fiscal years, which have influenced the level of net interest income. Spreads widened by 39 basis points between fiscal 1996 and 1997, as higher yields on loans and MBS (and a greater proportion of loans in the earning asset base), increased the Bank's overall asset yields by 26 basis points. The cost of funds declined by 13 basis points, as Guaranty became less aggressive in the pricing of certain CD accounts, and allowed higher cost CDs to be withdrawn. These trends indicate that the Bank has been successful improving the net interest margin. Despite balance sheet repositioning, however, the Bank's net interest income is still influenced by changes in interest rates. Guaranty has historically derived income from non-interest sources, which has provided some protection from changes in the net interest margin due to interest rate fluctuations. For the most recent twelve month period, non-interest operating income totaled $450,000, or 0.23 percent of average assets, a 0.13 percent of average assets improvement from fiscal 1996. A majority of this income results from the Bank's deposit base in the form of various fees and charges on deposit accounts and transactions, which increased during fiscal 1997 due to the Bank's recent emphasis on checking accounts. A smaller portion of this income is obtained from other sources such as the Bank's loan servicing operation and various fees and charges. Going forward, the Bank anticipates that non-interest income will remain primarily related to the deposit base, as other significant income sources are not expected to be developed. Guaranty's operating expenses have increased in the time period shown in Table 1.2 due to the growth in the asset base and related operations, including the new headquarters office opened in 1995. The Bank's overall larger asset and deposit base has also resulted in higher data processing expenses. Despite the asset growth and utilization of FHLB advances to partially fund such growth, the operating expense ratio has increased to a higher level as a percent of average assets. The Bank's operating expenses are expected to initially increase following the conversion as a result of the following items. The ESOP and RSP purchases in the offering and in the year following conversion, respectively, will increase annual expenses. In addition, as a full stock institution, the Bank will incur additional legal, accounting, printing/mailing and related costs. The Bank's efficiency ratio defined as operating expenses divided by net interest income and non-interest operating income has increased to approximately 61 percent in 1997 form earlier lower levels in part due to the increase in operating expenses. Provisions for loan losses have generally had a small impact on earnings in recent years, as the improvement in asset quality since the early 1990s has resulted in an allowance for loan and lease losses balance in excess of requirements as calculated by the Bank. In fiscal 1996, the Bank recorded a recovery of $1.2 RP Financial, LC. Page 1.11 million on a commercial loan which was previously partially charged off, and the recovery reflects amounts recovered in excess of the carrying balance of the loan. The Bank determined that the allowance for loan losses was sufficient prior to the recovery and credited the provision for loan losses. During fiscal 1997, the Bank reviewed the allowance for loan and lease loss balance and determined that no provision was necessary in the current fiscal year. As of June 30, 1997 the allowance for loan and lease loss balance was equal to $2,177,000, or 1.38 percent of net loans receivable and 304.48 percent of non-accruing loans (see Exhibit I-6). Historically, non-operating gains and losses have been limited to gains or losses on the sale of investment securities and/or MBS that were sold to fund loan originations, and income from property held as REO (see Table 1.2). Similar to all SAIF-insured financial institutions, the Bank incurred a pre-tax charge for the special SAIF insurance premium assessment fee at September 30, 1996 equal to $932,000. During the most recent twelve month period, Guaranty reported net gains of $61,000 from the sale of interest-earning assets, REO income of $18,000, and the SAIF assessment charge. The Bank's effective tax rate was approximately 36 percent for fiscal 1997. Dividends paid to shareholders (including shares held by the MHC), totaled $0.32 per share for fiscal 1996 and $0.38 for fiscal 1997. Interest Rate Risk Management - ------------------------------ Guaranty attempts to manage exposure to interest rate fluctuations on both the asset and liability side of the balance sheet, and has attempted to enhance the interest sensitivity of its operations through several means, including: (1) increasing the portfolio of ARMs held in the loan portfolio (both residential and commercial real estate-related); (2) originating shorter-term fixed-rate residential mortgages (10 to 15 year terms) and short-term construction loans for portfolio; (3) holding short-term or adjustable investment securities and MBS; (4) increasing the balance of short-term to maturity consumer loans; (5) extending whenever possible the term to maturity of the CD base; (6) utilizing borrowed funds which are maturity-matched to a certain extent with earning assets; and, (7) increasing the proportion of transaction accounts in the deposit base which are considered to be less interest rate sensitive funds. Exhibit I-7 displays the distribution of the Bank's fixed and adjustable rate loans. Guaranty monitors its exposure to interest rate risk using an OTS calculation of the change in net portfolio value of the Bank's equity. As shown in Exhibit I-8, according to the most recent calculation, the Bank's net portfolio value would decline by 11 percent in the event of a 200 basis point increase in interest rates, indicating a level of interest rate risk. Although this measure is within the Board-established limits of the RP Financial, LC. Page 1.12 Bank, Guaranty is seeking to reduce exposure to interest rate risk, and the reinvestment of conversion proceeds is expected to contribute to reduced exposure. Lending Activities and Strategy - -------------------------------- The Bank's recent lending activities emphasize the origination of 1-4 family mortgage loans (see Exhibits I-9 and I-10, loan composition and maturity). Guaranty also maintains a level of loan portfolio diversification with a portfolio of commercial real estate loans, commercial business loans and non-mortgage loans in an effort to enhance overall portfolio yields and expand the Bank's products and services offered. Gross loans increased from $144.9 million at June 30, 1996 to $171.0 million at June 30, 1997, with the proportion of 1-4 family loans remaining relatively constant at 68 percent. Consumer loans showed the greatest percentage increase over that time frame, while all loan categories except non-residential real estate reported increases in outstanding balances. As of June 30, 1997, residential mortgage loans secured by 1-4 family properties totaled $116.4 million, or 68.1 percent of total loans receivable. The Bank originates both ARMs and fixed-rate residential mortgages with essentially all loans underwritten to secondary market guidelines. Residential loans made by the Bank are generally originated with maximum loan-to-value ("LTV") ratios of 80 percent, with loans with LTV ratios in excess of 80 percent requiring private mortgage insurance ("PMI") coverage. Fixed-rate mortgages are offered with maturities of up to 30 years, with essentially all loans with maturities in excess of 15 years sold in the secondary market, and loans with shorter terms held in portfolio. Approximately 86 percent of the Bank's 1-4 family residential mortgages consisted of ARMs at June 30, 1997, which are retained for portfolio as part of asset/liability management strategy. Guaranty offers ARMs that are fixed for one-, three- or five year periods and adjust annually thereafter and are indexed to the weekly average rate on the corresponding U.S. Treasury securities, adjusted to a constant maturity. The majority of ARMs are originated with annual adjustment caps of 2.0 percent, lifetime adjustment caps of up to 5.0 percentage points, and are originated at discounted rates. Construction loans have been an area of emphasis for the Bank in recent years, and totaled $25.1 million, or 14.7 percent of gross loans outstanding, at June 30, 1997, primarily for residential property. A majority of the construction loans are speculative loans, loan to builders who intend to locate a purchaser for the home prior to or shortly after construction is completed. Other construction loans are made on "pre-sold" homes with are structured to become permanent loans upon completion of the construction. Construction loans are structured as interest-only during the construction period, which generally equals six months to one RP Financial, LC. Page 1.13 year. Pre-sold construction/permanent loans have maximum LTV ratios of up to 95 percent, while speculative construction loans typically have maximum LTV ratios of 80 percent Guaranty maintains a balance of commercial real estate loans in portfolio in an effort to diversify the loan portfolio and increase overall asset yields. As of June 30, 1997, multi-family loans totaled 15.5 million, or 9.0 percent of the loan portfolio, while non-residential mortgage loans totaled $8.3 million, or 4.9 percent of the loan portfolio. The Bank's multi-family portfolio consists primarily of loans secured by apartment buildings in the local market area. Non-residential mortgage loans are generally secured by land under development for residential purposes, office buildings, retail stores, small shopping centers, medical offices churches and other non-residential buildings primarily in the local market area. Commercial real estate loans originated by Guaranty are predominantly adjustable rate loans that generally have terms of up to 20 years, and are indexed to the prime rate of interest or the U.S. Treasury rate of a similar term as the adjustment period. LTVs on income property loans typically do not exceed 75 percent. The Bank seeks to manage credit risk on such loans by lending primarily on local property, to borrowers with whom management is familiar, and obtaining personal guarantees. Guaranty also offers consumer and commercial business loans, including home equity loans, which totaled $5.6 million, or 3.3 percent of gross loans receivable, at June 30, 1997. The Bank offers a variety of types of consumer loans, including loans secured by deposit accounts, automobile, home equity loans and secured and unsecured personal loans. Consumer loans are generally offered for terms of up to five years at fixed interest rates, and Guaranty will lend up to 90 percent of the depositor's savings account balance. Home equity loans represent an area of growth for Guaranty in recent years, and usually consist of equity loans for typically up to 80 percent of the appraised value of a home, less the amount of the first mortgage. Home equity loans are offered at both fixed and adjustable rates of interest, with the adjustable rate based on the prime rate of interest. The Bank has a small balance of commercial business loans consisting of loans to a number of local area businesses. Commercial business loans are not expected to be a growth area in the future. As shown in Exhibit I-11, Guaranty's overall loan origination volume increased from $50.8 million in 1995 to $87.0 million for the most recent twelve months. The table highlights the Bank's emphasis on residential real estate and construction lending, with originations of these loan types ranging from $48.9 million, or 96 percent of loan originations in fiscal 1995, to $76.8, or 88 percent of loan originations in fiscal 1997. Guaranty has not historically purchased loans, and has sold a portion of loans originated in the secondary market. RP Financial, LC. Page 1.14 Asset Quality - ------------- Exhibit I-12 displays Guaranty's delinquent loans from fiscal 1995 to 1997, and shows that the level of delinquent loans (consisting of non-accruing loans and loans greater than 90 days past due and still accruing) has declined in each year since 1993, from 2.42 to 0.52 percent of total loans. REO totaled $210,000 as of June 30, 1997, and the Bank had minimal balances of REO at prior fiscal year ends. As of June 30, 1997, NPAs (defined as delinquent loans plus REO) equaled $1,038,000, or 0.53 percent of assets and consisted of residential, multi-family and construction loans on non-accrual status and a balance of construction loans over 90 days delinquent, and a balance of REO. As of the same date, the Bank maintained valuation allowances of $2,177,000, equal to 1.38 percent of loans receivable and 209.73 percent of NPAs. Guaranty had classified assets of $2.2 at June 30, 1997, all of which were classified as substandard (see Exhibit I-13). Funding Composition and Strategy - ---------------------------------- Exhibits I-14 and I-15 provide data pertaining to Guaranty's deposit composition at fiscal year ends 1995 through 1997. Guaranty's deposits consist of CD accounts, which totaled $122.6 million, or 81.1 percent of total deposits, and a base of core deposits (passbook accounts, NOW accounts, non-interest checking accounts, and MMDAs) which totaled $28.6 million, or 18.9 percent of total deposits. NOW accounts were the largest component of core deposits and totaled $9.4 million, or 6.2 percent of total deposits, at June 30, 1997, followed by passbook accounts totaling $8.6 million, money market deposits totaling $8.3 million and non-interest bearing accounts totaling $2.3 million. Going forward, the Bank intends to try to increase the base of transaction accounts in order to lower the overall cost of funds and assist in funding anticipated increases in lending operations. CDs accounted for approximately 81.1 percent of Guaranty's deposit base at June 30, 1997. Approximately 66 percent of the CD portfolio was scheduled to mature in one year or less. Jumbo CDs, which tend to be more rate sensitive than lower balance CDs, accounted for $8.0 million, or 5.3 percent of deposits, at June 30, 1997. The level of jumbo CDs in the Bank's CD portfolio is significant in that jumbo CDs tend to be more rate sensitive than smaller denomination CDs, increasing the Bank's interest rate risk to a degree. Due to recent lending activity, the Bank has utilized borrowings from the FHLB of Des Moines. These advances are secured by the Bank's stock in the FHLB and a portion of Guaranty's mortgage loans, and are generally maturity-matched with real estate loans. As of June 30, 1997, the Bank had FHLB advances of $18.2 million outstanding with maturities primarily between 1998 and the year 2002, and an average interest rate of 6.12 percent. RP Financial, LC. Page 1.15 Subsidiary Operations - --------------------- The Bank currently has one subsidiary, Guaranty Financial Services of Springfield, Inc. The Bank had an investment of $643,000 in this subsidiary as of June 30, 1997. Guaranty Financial sells mutual funds, fixed and variable rate annuities, unit investment trusts, individual stocks and bonds and life insurance. Such sales are completed through an agreement with "INVEST" for providing brokerage services. In addition, the subsidiary acts as a real estate broker for properties owned by the Bank. Legal Proceedings - ------------------ Other than the routine legal proceedings that occur in the Bank's ordinary course of business, Guaranty is not involved in litigation which is expected to have a material impact on Guaranty's financial condition or operations. RP Financial, LC. Page 2.1 II. MARKET AREA Introduction - ------------ Guaranty conducts operations out of a headquarters office in the city of Springfield, Greene County, Missouri, and three branch offices in Springfield (see Exhibit II-1). Greene County, part of the Springfield, MO metropolitan statistical area ("MSA"), is located in southwestern Missouri. Springfield is the largest city in southwest Missouri and serves as an economic hub to the southwest portion of Missouri and proximate areas in southeast Kansas, northeast Oklahoma and northwest Arkansas. Located along the major transportation route of Interstate 44 (and the location of the old U.S. Route 66), Springfield also operates as an access point for the Missouri resort areas of Branson (to the south) and Lake of the Ozarks (to the northeast). The Springfield MSA population, which includes the counties of Greene, Christian and Webster, was estimated at 300,000 in 1997, with 75 percent of the population residing in Greene County. The Springfield economy exhibits many characteristics of an urban market, with employment diversified into industries such as services, manufacturing, and retail trade. Springfield is also a regional agribusiness center given the role of agriculture in the economies of the more outlying areas of Greene County and the MSA (dairy farming and livestock industries form the historical basis of the area's economy). Greene County represents the Bank's primary market area for deposit generation as most of Guaranty's depositors live in this county. Lending activities are concentrated in Greene County and in the surrounding counties of Christian and Webster, and to a lesser extent, other outlying counties. Christian County, Missouri is a growing suburban and rural area to the south of Springfield. The Bank's offices operate in a market area with rising levels of population and households. The Greene County economy, historically based on agriculture, has gradually diversified into most economic sectors, and currently maintains an employment sector cross-section that mirrors the national averages. Major employment sectors include health care/clinics, health services, government agencies, schools and manufacturing. The region has recorded demographic and economic growth for a number of years, with lower than average unemployment levels, and historically has experienced relatively steady growth, avoiding periods of rapid growth or contraction in the economy. Competition from other financial institutions operating in Greene County includes approximately 17 commercial banks and five other savings institutions, with four of the commercial banks and one of the savings institutions having a larger presence than Guaranty. A number of de novo financial institutions have begun operations in the market area in recent periods, reflecting the attractiveness of the market area for financial services firms. The Bank maintains a market share of approximately five percent of overall financial institution RP Financial, LC. Page 2.2 deposits in Greene County. Similar to the Bank, a number of the other financial institutions are locally-owned community-oriented banks and savings institutions. Guaranty has experienced growth in deposits and market share in recent years due in part to an increased emphasis on marketing the Bank's products and services. However, competition remains high in the marketplace. Future business and growth opportunities for Guaranty will be partially influenced by economic and demographic characteristics of the market served, particularly the future growth and stability of the regional economy, demographic growth trends, and the nature and intensity of the competitive environment for financial institutions. These factors have been briefly examined in the following pages to help determine the growth potential that exists for the Bank and the relative economic health of the market area, and the related impact on the value. National Economic Factors - ------------------------- Over the past year, national economic growth has been mixed. The third quarter of 1996 started with a continuation of second quarter trends, although mid-July Congressional testimony by the Federal Reserve Chairman hinted of expectations that the economy would taper off slightly in the second half of 1996. However, much of the economic data released during July and August continued to indicate a fairly robust pace of economic growth. Such economic data included a stronger than expected increase in July durable goods orders, the consumer confidence index hitting a six year high and a decline in the August unemployment rate. Comparatively, for the balance of the third quarter, economic data, such as a decline in August durable goods orders and smaller than expected increases in August retail sales and consumer prices, suggested that the economy was cooling off. A slight increase in the September unemployment rate further signaled a slowing economy. Economic data released at the beginning of the fourth quarter generally confirmed that the national economy was slowing. October unemployment remained at 5.2 percent, although the number of new jobs being added to the economy was lower compared to job growth recorded during the late-spring and the summer. Third quarter GDP growth fell to a 2.2 percent annual rate, versus a comparative 4.7 percent rate in the second quarter. Wage data also indicated that inflation was under control, as wages remained flat for production and nonsupervisory workers in October, despite a $0.50 increase in the minimum wage rate that became effective on October 1, 1996. While the November unemployment rate climbed to 5.4 percent from 5.2 percent in October, inflation concerns were heightened somewhat by an unexpectedly sharp $0.09 jump in average hourly earnings. However, most of the economic data released at the close of 1996, which included jobless claims rising to a five RP Financial, LC. Page 2.3 month high in November and a decline in November durable goods orders, suggested that the economy was sluggish and non-inflationary. While fourth quarter GDP growth came in at a stronger than expected 4.7 percent annual growth rate (subsequently revised to 3.9 percent), most of the economic data released during the beginning of the first quarter of 1997 indicated a continuation of moderate economic growth. Such measures as a 1.9 percent decline in December durable goods orders and a modest uptick in the January 1997 unemployment rate to 5.4 percent, versus 5.3 percent in December 1996, eased concerns that the economy was overheating. However, the increase in the unemployment rate was attributable to more people who entered the job force, and some markets have been experiencing labor shortages. In congressional testimony at the end of February 1997, the Federal Reserve Chairman indicated that he anticipated recent signs of lower job insecurity among workers would lead to upward pressure in wages, which could possibly trigger the Federal Reserve to boost interest rates. Signs of inflation became more notable during March and April, with most economic indicators posting month-to-month increases from January to February. Most notably, during February industrial production increased 0.5 percent, housing starts rose 12.2 percent and the sale of existing homes jumped 9.0 percent. Accelerating economic growth was further indicated by a decline in the March unemployment rate to 5.2 percent, versus 5.3 percent for February, and a higher than expected rise in the March "core" producer price index, which posted its largest increase in 18 months. The revised first quarter GDP growth rate, released in late May 1997, was an annual rate of 5.9 percent, far exceeding analysts' projections, and gave more evidence of the strong economy. The unemployment rate for April 1997 declined to 4.9 percent, also an indicator of a strong economy. More recent economic data released in the second quarter of 1997 indicates a continued expanding economy, as retail sales have increased modestly from the prior quarter's level, and business inventories have also increased, which added to the first quarter GDP growth figures. New home sales also remained steady based on the latest data available. Automobile sales for May increased from April levels, but remained below year-earlier levels. Overall, GDP growth for the second quarter of 1997 is estimated at 2.0 to 2.5 percent, a significant drop from the first quarter 1997 results. Consistent with recent economic activity, interest rate trends have been varied as well over the past year. In early-July 1996, the release of a strong June employment report had a more severe effect on bond prices, as the large drop in unemployment provided for one of the largest one day declines in bond prices with the yield on the 30-year benchmark bond increasing from 6.93 percent to 7.18 percent. After trending lower for a brief period during early- and mid-August, interest rates moved higher in late-August and early-September as inflation concerns were raised by the stronger than expected economic growth. RP Financial, LC. Page 2.4 The Federal Reserve's decision not to raise interest rates at its September and October 1996 meetings, along with economic data providing indications of a cooling economy, translated into a declining interest rate environment during late-September and through most of October. Interest rates continued to edge lower through November, as the October economic data suggested that inflationary pressures were non-threatening. Bond prices declined slightly in early-December, as investors focused on weakness in the dollar and rising oil prices. Concern over Japanese investors slowing their buying of U.S. Treasury notes caused bond prices to slide in mid-December, despite economic data which continued to indicate mild inflation. Interest rates were somewhat trendless at the close of 1996, as the Federal Reserve elected not to change interest rates at its December meeting. With few inflationary signs, interest rates held steady at the beginning of 1997, which was followed by a mild easing in interest rates during the first half of February. Indications of slowing economic growth and the Federal Reserve's decision to leave rates unchanged at its early-February meeting spurred the downward trend in interest rates. However, interest rates edged higher in late-February, following renewed concerns by the Federal Reserve Chairman over the sharp rise in the stock market during the past two years. After stabilizing briefly, the strengthening economy and growing expectations of a rate increase by the Federal Reserve propelled interest rates higher in late-March 1997. The Federal Reserve increased short-term interest rates by 0.25 percent in late-March 1997, which was followed by a sharp sell-off in the bond market. For the first time in six months, the rate on the 30-year benchmark bond moved above 7.0 percent. Inflation concerns pushed interest rates higher during the first half of April 1997, which was followed by a slight decline in interest rates on rumors of a national budget accord. Throughout the end of April and the month of May 1997, interest rates continued to fluctuate in a moderately narrow range as various economic indicators showed various signs of growth and/or stability in the economy. The most recent revision to the inflation rate in May 1997 showed a 2.2 percent annual rate. Confidence in the nation's economy was relatively strong through August 1997, reflecting little signs of inflation, continued strong stock market performance and an overall positive business outlook, and as of mid-September 1997 one- and thirty-year U.S. Government bonds were yielding 5.59 percent and 6.69 percent, respectively (see Exhibit II-2 for historical interest rate information). RP Financial, LC. Page 2.5 Market Area Demographics - ------------------------ Demographic growth trends in the Bank's primary market area of Greene County have been measured by changes in population, number of households and median household income and other data, with trends in those areas summarized by the data presented in Exhibit II-3. Missouri and U.S. data is provided for comparative purposes, and trends in this data provide some indication of future levels of business activities for financial institutions. The Bank's offices are located within the Springfield MSA, which has reported relatively higher growth in population and households during the 1990s in comparison to statewide and national averages. Greene County recorded demographic growth at a rate less than the MSA and in line with the state and national averages, indicating that the outlying MSA counties of Christian and Webster have increased in population and households at a higher rate. Overall growth of the MSA is an indication of the area's attractiveness to new residents and businesses, which include a relatively low cost of living, lower housing costs, and a well diversified economy and employment base. The growth in Christian County reflects the increasing influence of the Branson area to the south. The respective growth trends for Greene County and the MSA as a whole are projected to continue through the year 2002. Although the Springfield MSA is the third largest metropolitan area in the state of Missouri, the MSA's location in rural southwestern Missouri results in lower income levels in comparison to statewide and national averages. Estimated per capita annual income for 1997 in the MSA is approximately $16,300, 8 percent less than the statewide average. Greene County, which contains the majority of the MSA population and income, reported per capita income slightly higher than the MSA level. Median household income levels follow a similar relationship, with the MSA and Greene County levels moderately below the state averages. Income distribution levels are also similar to per capita income figures, revealing that the Springfield area has a higher proportion of lower income households (below $50,000 annually), reflecting the more rural nature of the area. The median age for the Springfield MSA is slightly lower than the state averages, indicating a certain attractiveness of the area to younger residents. Based on the rising population trends and comparable income levels, growth opportunities in the primary market area counties for financial institution deposits can be expected to be available, although limited by the size of the overall population base and by the level of competition. RP Financial, LC. Page 2.6 Economy - ------- Employment in the Springfield MSA and Greene County is generally diversified, containing employment primarily in services (28 percent of the labor force), retail/wholesale trade (27 percent) and manufacturing (15 percent). Similar to most areas of the country, the Springfield area has evolved from a manufacturing and agricultural economy to a more service-based economy, with a history of steady growth, with few large expansions or contractions in the market area economy. In particular, Springfield has developed into a regional employment center for medical care, agribusiness, and for financial institutions. Table 2.1 displays a list of major employers in the Springfield MSA, and Exhibit II-4 presents additional data concerning sources of personal income and employment sectors.
Table 2.1 Major Employers Employer Industry Employees -------- -------- --------- Springfield Area St. John's Health System Health Care 6,100 Cox Health System Health Care 4,934 Bass Pro Shops Sporting Goods Retail/Wholesale 3,500 Springfield Public Schools Education 3,000 State of Missouri Government 2,000 City of Springfield Government 1,700 Southwest MO State University Education 1,700 Aarons Automotive Products Automotive Parts 1,500 Hudson Foods Food 1,200 MCI Telecommunications 1,200 Gen. Council Assemblies of God Religious Organization 1,200 Kraft Foods Food Distribution 1,100 Sweethart Cup Company Plastic Dinnerware 1,100 O'Reilly Auto Parts Automotive Parts 1,000 General Electric Company Manufacturing 1,000 Associated Wholesale Grocers Food Wholesale 1,000
Source: Local Area Chamber of Commerce. The level of, and recent trends in, unemployment in a given market area is another indication of the economic health of the market area. Table 2.2 displays unemployment data in the local market area as of May 1997 and May 1996. The labor force unemployment rates for Greene County and the city of Springfield remain below state and national averages, and the employment situation has improved in the most recent twelve month period for all areas examined. This data, which indicates a relatively positive economic situation for Guaranty's RP Financial, LC. Page 2.7 market area, reflects in part the attractiveness of the Springfield MSA for employers, providing a sufficient number of employment opportunities in the market area. Table 2.2 Market Area Unemployment Trends Region May 1996 May 1997 ------ -------- -------- United States 5.4% 4.7% Missouri 4.2 3.8 Greene County 3.1 2.8 City of Springfield 3.5 3.1 Source: U.S. Bureau of Labor Statistics. Deposit Trends and Competition - ------------------------------ Guaranty's market area (defined as Greene County for deposits), is characterized by the presence of a number of both locally-based and regional financial institutions, including commercial banks and savings institutions. Table 2.3 displays deposit market trends for the state of Missouri and the primary market area from June 30, 1994 to June 30, 1996. Overall, financial institution deposits showed an increase statewide, with commercial banks showing growth while savings institutions lost deposits. This trend of moderate increases in overall deposits, similar to the rest of the nation, reflects in part disintermediation whereby banking customers have also placed available funds into other types of financial intermediaries such as mutual funds, investment firms, brokerage houses, and insurance companies. The shrinkage in SAIF-insured thrift deposits in Missouri was due to a number of thrift acquisitions by commercial banks during this time period coupled with the impact of disintermediation. Deposit trends in Greene County exhibited a stronger rate of deposit increase, as total deposits increased by 4.6 percent annually over the two year period. Similar to the statewide trends, commercial banks recorded an increase in deposits, while savings institutions lost deposits. The relatively strong deposit growth in Greene County is believed to be attributable to the continued growth of the population base and economy in the Springfield MSA, along with the reduction in unemployment rates in recent years as more people were working. Guaranty, similar to the other local commercial banks, has recorded increases in deposits over the time period shown in Table 2.3, and recorded higher rates of deposit growth than the market area overall. Notably, Guaranty gained deposits while savings institutions lost deposits as a whole. This has resulted in an increase in deposit market share in Greene County for the Bank since June 30, 1994. -------------------------------------- Table 2.3 Guaranty Federal Savings Bank Deposit Summary --------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- As of June 30, ----------------------------------------------------------------------------- 1994 1996 Deposit ------------------------------------- ------------------------------------- Market Number of Market Number of Growth Rate Deposits Share Branches Deposits Share Branches 1994-1996 -------- ----- -------- -------- ----- -------- --------- (Dollars In Thousands) (%) A. Deposit Summary - ------------------ State of Missouri $65,690,283 100.0% 1,848 $70,084,895 100.0% 1,877 3.3% Commercial Banks 54,410,515 82.8% 1,541 59,988,569 85.6% 1,612 5.0% Savings Institutions 11,279,768 17.2% 307 10,096,326 14.4% 265 -5.4% Greene County $2,743,809 100.0% 75 $3,003,859 100.0% 80 4.6% Commercial Banks 1,939,327 70.7% 51 2,259,693 75.2% 57 7.9% Savings Institutions 804,482 29.3% 24 744,166 24.8% 23 -3.8% Guaranty 141,087 5.1% 3 156,897 5.2% 4 5.5% - --------------------------------------------------------------------------------------------------------------------------------
Source: FDIC; OTS. RP Financial, LC. Page 2.9 Summary - ------- The overall condition of the Bank's market area can be characterized as positive, with a growing population, household and deposit base. The local Springfield MSA economy is relatively diversified and unemployment rates remain below state and national averages, notwithstanding the population increases. The size of the MSA and the nature of the local economy and demographic characteristics has resulted in a number of competitors for the Bank's loan and deposit customers. Going forward, in view of the local demographic and economic trends and the numbers and types of competitors in the market area, the competition for deposits is expected to remain substantial, which will result in Guaranty having to pay competitive deposit rates to maintain and/or increase local market share. The Bank's current deposit market share in the range of five percent indicates that some gains in deposit market share may be achievable. The reinvestment of stock proceeds from the conversion may mitigate to some extent the potentially higher funding costs to attract deposits through anticipated loyalty of local shareholders and referrals from local shareholders. RP Financial, LC. Page 3.1 III. PEER GROUP ANALYSIS This chapter presents an analysis of Guaranty's operations versus a group of comparable public companies (the "Peer Group") selected from the universe of all publicly-traded savings institutions. The primary basis of the pro forma market valuation of the Bank is provided by these public companies. Factors affecting Guaranty's pro forma market value such as financial condition, credit risk, interest rate risk, and recent operating results can be readily assessed in relation to the Peer Group. Current market pricing of the Peer Group, subject to appropriate adjustments to account for differences between the Guaranty and the Peer Group, will then be used as a basis for the valuation of the Bank's to-be-issued common stock. Selection of Peer Group - ----------------------- We consider the appropriate Peer Group to be comprised of only those publicly-traded savings institutions whose common stock is either listed on a national exchange or is NASDAQ listed, since the market for companies trading in this fashion is regular and reported. We believe non-listed institutions are inappropriate since the trading activity for thinly-traded stocks is typically highly irregular in terms of frequency and price and may not be a reliable indicator of market value. We have excluded from the Peer Group all publicly-traded subsidiary institutions of mutual holding companies, because their pricing ratios are distorted by the minority issuance of their shares. We have also excluded from the Peer Group those companies under acquisition and/or companies whose market prices appear to be distorted by speculative factors or unusual operating conditions, and recently converted companies whose stock does not have sufficient seasoning as a public company. The universe of all publicly-traded institutions is included as Exhibit III-1. Pricing characteristics of all thrift institutions are included as Exhibit IV-1 (institutions excluded from the calculation of averages are denoted with a footnote (8)). Under ideal circumstances, the Peer Group would be comprised of a minimum of ten similarly sized publicly-traded Missouri thrifts with capital, earnings, asset sizes, balance sheet composition, risk profiles, operating strategies and market areas comparable to the Bank. We were able to select a group of 10 Missouri institutions with certain similarities in various financial and operating characteristics. In the selection process we applied one "screen" to the universe of all public companies as follows: o Screen #1. Missouri institutions with assets between $50 and $250 million. Ten companies met the criteria for this screen and all ten were included in the Peer Group (see Exhibit III-2). RP FINANCIAL, LC. ---------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 3.1 Peer Group of Publicly-Traded Thrifts September 17, 1997(1)
Primary Operating Total Fiscal Conv. Stock Market Ticker Financial Institution Exchg. Market Strat.(2) Assets Offices Year Date Price Value ------ --------------------- ------ ------- --------- ------ ------- ---- ---- ----- ----- ($) ($Mil) CAPS Capital Savings Bancorp of MO OTC Central MO Thrift 243 7 06-30 12/93 15.75 30 MBLF MBLA Financial Corp. of MO OTC Northeast MO Thrift 235 2 06-30 06/93 23.25 30 CMRN Cameron Fin. Corp. of MO OTC Northwest MO Thrift 208 3 09-30 04/95 17.75 47 SMBC Southern Missouri Bncrp of MO OTC Southeast MO Thrift 166 M 8 06-30 04/94 17.12 28 FBSI First Bancshares of MO OTC Southcentral MO Thrift 164 6 06-30 12/93 23.75 26 HFSA Hardin Bancorp of Hardin MO OTC Western MO Thrift 108 3 03-31 09/95 16.50 14 CNSB CNS Bancorp of MO OTC Central MO Thrift 98 5 12-31 06/96 17.00 28 PCBC Perry Co. Fin. Corp. of MO OTC EastCentral MO Thrift 81 1 09-30 02/95 21.25 18 NSLB NS&L Bancorp of Neosho MO OTC Southwest MO Thrift 60 2 09-30 06/95 18.75 13 LXMO Lexington B&L Fin. Corp. of MO OTC West Central MO Thrift 59 1 09-30 06/96 16.00 18
NOTES: (1) Or most recent date available (M=March, S=September, D=December, J=June, E=Estimated, and P=Pro Forma) (2) Operating strategies are: Thrift=Traditional Thrift, M.B.=Mortgage Banker, R.E.=Real Estate Developer, Div.=Diversified, and Ret.=Retail Banking. (3) FDIC savings bank institution. Source: Corporate offering circulars, data derived from information published in SNL Securities Quarterly Thrift Report, and financial reports of publicly-traded thrifts. Date of Last Update: 09/17/97 RP Financial, LC. Page 3.3 Table 3.1 lists key characteristics of the Peer Group companies. In general, the Peer Group is comprised of relatively seasoned publicly-traded institutions operating in Missouri with a moderately lower average asset size. While the Peer Group is not exactly comparable to the Bank, we believe that it provides a reasonable representation of publicly-traded thrifts with operations comparable to those of the Bank and thus forms a sound basis for valuation. A summary description of the key characteristics of each of the Peer Group companies selected is detailed below. o Capital Savings Bancorp of Jefferson City, Missouri. Capital Savings, a $243 million company operating seven offices in and around Jefferson City, was chosen due to its relatively similar asset size and Missouri operations. Capital Savings follows a traditional thrift operating strategy of 1-4 family residential lending, and has a relatively high loans/asset ratio. Capital Savings' equity position is the lowest of the Peer Group. o MBLA Financial Corp of Macon, Missouri. MBLA is a $235 million institution operating two offices in a primarily rural market area in northeastern Missouri. While MBLA was selected for the Peer Group on the basis of its market area and size, MBLA is unique in that it has engaged in substantial arbitrage, funding investments with borrowed funds, to leverage the high equity position. o Cameron Financial Corporation of Cameron, Missouri. Cameron Financial is a $208 million thrift operating three branches in a rural market in the northeastern part of the state. Cameron Financial maintains a high proportion of assets in loans receivable, and in particular, construction lending, thus resulting in the highest risk-weighted assets ratio of the Peer Group. Cameron Financial also reported the highest net income and net interest margin of the Peer Group, resulting from high yields on interest earning assets. o Southern Missouri Bancorp of Poplar Bluff, Missouri. Southern Missouri is a $166 million thrift operating eight branches in a rural market in the southern part of the state. Southern Missouri maintains a high proportion of assets in cash and investments and MBS, due to limited local lending opportunities. Southern Missouri also has pursued loan diversification in recent years. o First Bancshares of Mountain Grove, Missouri. First Bancshares operates six offices in a rural market in southern Missouri, approximately 60 miles east of Springfield. While lending is dominated by 1-4 family residential mortgages, however, First Bancshares has pursued loan diversification in recent years. o Hardin Bancorp of Hardin, Missouri. Hardin Bancorp operates in the western portion of Missouri out of three office locations. Hardin Bancorp maintains a relatively high investment in cash and investments and MBS, with loan diversification into commercial business loans. o CNS Bancorp of Jefferson City, Missouri. CNS Bancorp is a $98 million thrift operating from five offices in central Missouri, with a concentration in commercial real estate lending, primarily in Jefferson City. CNS Bancorp also maintains investments in cash and investments and MBS, although reserve coverage ratios are low relative to other Peer Group members. o Perry County Financial Corp. of Perryville, Missouri. Perry County operates with $81 million of assets out of a single office location in eastern Missouri. Perry County maintains high levels of investment in cash and investments and MBS, and the lowest investment in loans receivable of the Peer Group members. Perry County also operates with the lowest operating expense level and lowest risk-weighted assets ratio of the Peer Group members. RP Financial, LC. Page 3.4 o NS&L Bancorp of Neosho, Missouri. NS&L Bancorp, with $60 million in assets, operates in a primarily rural market outside of Springfield. NS&L Bancorp maintains a high proportion of assets in investments and MBS, due to limited loan opportunities. o Lexington B&L Financial Corp. of Lexington, Missouri. Lexington is the smallest member of the Peer Group with $59 million in assets and operates in Lexington, Missouri, approximately 60 miles east of Kansas City. Lexington maintains relatively high investment in loans receivable (primarily residential loans), funded with deposits and equity. Reserve coverage ratios are lower than Peer Group averages. In aggregate, the Peer Group companies have an average capital ratio that is higher than the industry average (17.63 percent of assets versus 12.88 percent for the all SAIF average), and higher core profitability (0.96 percent versus 0.75 percent for all SAIF-insured publicly-traded institutions). The Peer Group's higher capital ratio results in a lower core ROE of 5.70 percent versus 7.52 percent for the all SAIF average. In terms of pricing, the Peer Group on average trades at a lower price/book ("P/B") multiple and a higher price/earnings ("P/E") multiple relative to the industry (see the following table). As of September 5, 1997 ----------------------- Peer All SAIF Group Insured ----- ------- Equity-to-Assets 17.63% 12.88% Return on Assets ("ROA")-Core 0.96% 0.75% Return on Equity ("ROE")-Core 5.70% 7.52% Market Capitalization ($Mil) $25.20 $156.65 Price-to-Tangible Book Ratio ("P/TB") 112.89% 146.01% Price-to-Earnings Multiple ("P/E")-Core 19.91x 18.61x Price-to-Assets Ratio ("P/A") 19.67% 17.73% Source: Chapter IV tables. The following sections present a comparison of the Bank's financial condition, income and expense trends, loan composition, interest rate risk and credit risk versus the Peer Group. The conclusions drawn from the comparative analysis are then factored into the valuation analysis discussed in the final chapter. Financial Condition - -------------------- Table 3.2 shows comparative balance sheet measures for the Bank and the Peer Group, reflecting the expected similarities and some differences given the selection procedures outlined above. Information for Guaranty is as of June 30, 1997, and as of the latest available (June 30 or March 31) for the Peer Group. The Bank's pre-conversion net worth of 13.8 percent was below the Peer Group's average net worth ratio of 17.6 percent, although the Bank's capital level can be expected to exceed the Peer Group average on a pro forma RP FINANCIAL, LC. ------------------------------------------ Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 3.2 Balance Sheet Composition and Growth Rates Comparable Institution Analysis As of June 30, 1997
Balance Sheet as a Percent of Assets ---------------------------------------------------------------------------------------- Cash and Borrowed Subd. Net Goodwill Tng Net MEMO: Investments Loans MBS Deposits Funds Debt Worth & Intang Worth Pref.Stock ----------- ------ ------ -------- -------- ------- -------- -------- ------- ---------- Guaranty FSB of Springfield MO ------------------------------ June 30, 1997 8.8 79.3 7.9 75.8 9.1 0.0 13.8 0.0 13.8 0.0 SAIF-Insured Thrifts 18.2 67.1 11.4 70.9 14.8 0.2 12.5 0.2 12.3 0.0 Comparable Group Average 24.2 62.8 10.6 68.3 13.1 0.0 17.6 0.0 17.6 0.0 Mid-West Companies 24.2 62.8 10.6 68.3 13.1 0.0 17.6 0.0 17.6 0.0 Comparable Group ---------------- Mid-West Companies ------------------ CNSB CNS Bancorp of MO 18.9 66.0 11.4 74.5 0.0 0.0 24.9 0.0 24.9 0.0 CMRN Cameron Fin. Corp. of MO 11.4 84.0 0.0 60.0 16.9 0.0 21.7 0.0 21.7 0.0 CAPS Capital Savings Bancorp of MO 10.2 78.4 9.7 70.5 19.2 0.0 8.8 0.0 8.8 0.0 FBSI First Bancshares of MO 14.9 81.8 0.5 71.8 14.4 0.0 13.5 0.0 13.5 0.0 HFSA Hardin Bancorp of Hardin MO 29.5 51.6 17.2 68.7 17.6 0.0 12.5 0.0 12.5 0.0 LXMO Lexington B&L Fin. Corp. of MO 18.5 76.3 3.0 71.0 0.0 0.0 28.3 0.0 28.3 0.0 MBLF MBLA Financial Corp. of MO 37.8 53.8 7.5 43.4 43.8 0.0 12.2 0.0 12.2 0.0 NSLB NS&L Bancorp of Neosho MO 33.6 55.7 8.0 73.7 5.0 0.0 19.6 0.0 19.6 0.0 PCBC Perry Co. Fin. Corp. of MO 47.6 16.4 34.5 74.8 5.5 0.0 19.2 0.0 19.2 0.0 SMBC Southern Missouri Bncrp of MO(1) 19.8 63.6 14.6 75.0 8.2 0.0 15.7 0.0 15.7 0.0
Table 3.2 Balance Sheet Composition and Growth Rates Comparable Institution Analysis As of June 30, 1997 Balance Sheet Annual Growth Rates Regulatory Capital ------------------------------------------------------------ ------------------------- Cash and Loans Borrows. Net Tng Net Assets Investments & MBS Deposits &Subdebt Worth Worth Tangible Core Reg.Cap. ------ ----------- ------ -------- -------- -------- ------- -------- -------- -------- Guaranty FSB of Springfield MO ------------------------------ June 30, 1997 7.72 -14.16 17.11 -3.67 0.00 3.40 3.40 13.00 13.00 23.30 SAIF-Insured Thrifts 12.09 8.90 13.03 8.39 16.80 0.45 -0.07 10.92 10.98 22.49 Comparable Group Average 8.88 0.30 9.22 5.49 40.51 -3.36 -3.36 14.86 14.86 35.49 Mid-West Companies 8.88 0.30 9.22 5.49 40.51 -3.36 -3.36 14.86 14.86 35.49 Comparable Group ---------------- Mid-West Companies ------------------ CNSB CNS Bancorp of MO 0.03 -33.44 12.96 -0.70 NM 1.38 1.38 19.70 19.70 41.27 CMRN Cameron Fin. Corp. of MO 18.35 2.30 18.47 1.28 NM -2.59 -2.59 17.11 17.11 25.59 CAPS Capital Savings Bancorp of MO 11.27 29.69 9.59 12.27 10.71 4.19 4.19 7.89 7.89 16.60 FBSI First Bancshares of MO 14.13 21.34 12.70 11.07 73.77 -6.41 -6.38 NM NM NM HFSA Hardin Bancorp of Hardin MO 24.23 NM 6.21 12.22 NM -9.75 -9.75 10.73 10.73 27.53 LXMO Lexington B&L Fin. Corp. of MO -3.36 -36.11 9.25 -0.25 NM -10.48 -10.48 23.30 23.30 44.10 MBLF MBLA Financial Corp. of MO 16.81 23.79 12.79 17.58 20.90 1.67 1.67 11.19 11.19 31.65 NSLB NS&L Bancorp of Neosho MO 4.23 -2.54 7.55 2.37 NM -12.52 -12.52 15.00 15.00 35.10 PCBC Perry Co. Fin. Corp. of MO 0.88 5.42 -2.93 -2.93 80.00 3.19 3.19 16.20 16.20 72.60 SMBC Southern Missouri Bncrp of MO(1) 2.28 -7.76 5.62 1.99 17.18 -2.31 -2.31 12.61 12.61 25.01
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Page 3.6 basis. The increase in the Bank's capital on a pro forma basis can also be expected to reduce its ROE. Neither the Bank or the Peer Group had goodwill or other intangible assets. The Bank and all of the Peer Group companies were in compliance with all fully phased-in regulatory capital requirements and were considered to be well-capitalized by FDICIA standards. In terms of asset composition, the Bank's ratio of loans to assets exceeded the Peer Group's ratio (79.3 percent of assets versus 62.8 percent for the Peer Group), while the Peer Group recorded a higher level of MBS (10.6 percent versus 7.9 percent for the Bank). The Bank maintains a lower balance of cash and investments as part of its operating strategy, and the portfolio totaled 8.8 percent of total assets. In contrast, the Peer Group maintained a higher ratio of cash and investments (24.2 percent of assets). Following the conversion, the Bank's level of cash and investments is expected to initially increase, pending the Bank's deployment of the proceeds into loans. Overall, the Bank's IEA totaled 96.0 percent of assets, which was lower than the Peer Group's ratio of 97.6 percent. While both the Bank and the Peer Group have relied on deposits as the primary source of funds, the Peer Group on average has utilized borrowings to a greater extent as reflected in the current deposits to assets ratios of 75.8 percent and 68.3 percent, respectively, and borrowings to assets ratios of 9.1 percent and 13.1 percent, respectively. Total interest-bearing liabilities ("IBL") maintained by the Bank and the Peer Group equaled 84.9 percent and 81.4 percent, respectively, with the Peer Group's lower ratio attributable to its higher capital ratio. On a pro forma basis, the Bank's IBL ratio is expected to decline as a result of the Bank's enhanced capital base and potential deposit withdrawals to fund stock purchases. The growth rate section of Table 3.2 shows growth rates for key balance sheet items. The growth rates for the Bank are for the year ended June 30, 1997 while growth rates for the Peer Group are for the latest trailing twelve months available. The Bank reported an increase in assets of 7.72 percent since June 30, 1996, while the Peer Group reported asset growth equal to 8.88 percent. The Bank's balance sheet expansion occurred in the area of loans receivable, with cash and investments declining to fund additional increases in loans receivable. Asset growth was support by growth in borrowings (the "NM" indicates that borrowings growth was above 100 percent) and equity, while deposits declined due to less aggressive deposit pricing by the Bank. The Peer Group funded asset growth through a combination of deposits and borrowings. Capital growth rates for the Bank and the Peer Group were generally comparable with the Bank increasing the net worth account, while the Peer Group's capital ratio declined due to stock repurchases and dividends. RP Financial, LC. Page 3.7 Income and Expense Components - ----------------------------- For the twelve months ended June 30, 1997, the Bank's net income amounted to 0.60 percent of average assets, below the 0.74 percent average return posted by the Peer Group (see Table 3.3). Net interest income was the primary component of the Bank's and the Peer Group's earnings. The ratio of net interest income was similar for the Bank and Peer Group, 3.31 and 3.17 percent of average assets, respectively, with Guaranty reporting higher levels of both interest income and interest expense. The Bank's interest income was supported by the greater loan portfolio diversification into higher yielding construction, commercial real estate and consumer loans. Interest expense was elevated for Guaranty, in part due to previous deposit pricing strategies which resulted in a balance of higher costing CDs and a relatively high balance of CDs in portfolio in comparison to savings/transaction accounts. The reinvestment of the net conversion proceeds may serve to initially dilute the Bank's asset yields due to current market rates on short- to intermediate-term investment securities but the net interest margin should increase with an increase in the IEA/IBL ratio. In another key area of core earnings strength, the Bank operates with a higher operating expense ratio than the Peer Group (2.15 percent versus 1.82 percent of assets for the Peer Group), which is attributable to its recent office expansion and additional personnel hired to support operations and the overall higher asset base. These features have inflated the Bank's staffing requirements and compensation expenses, as evidenced by the Bank's lower assets per employee ratio relative to the Peer Group median ($2.977 million and $4.655 million, respectively). Going forward, Guaranty's operating expenses will be subject to increase related to operations as a publicly-held company, stock plan expenses the expected growth in operations. Non-interest operating income made a similar contribution to both the Bank's and Peer Group's earnings. For the trailing twelve months ended June 30, 1997, the Bank and Peer Group recorded non-interest operating income of 0.23 percent of average assets. This level is only approximately one-half of the industry average, indicating a lower level of earnings diversification for the Bank and Peer Group. Going forward, the Bank anticipates that non-interest operating income will continue to contribute similar levels to overall revenues. When viewed together, net interest income, other operating income and operating expenses provide insight into an institution's earnings strength, since those sources of income and expense are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities. In this regard, the Bank's efficiency ratio of 60.90 percent compares less favorably to the Peer Group's ratio of 53.53 percent. RP FINANCIAL, LC. ---------------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700
Table 3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads Comparable Institution Analysis For the Twelve Months Ended June 30, 1997 Net Interest Income Other Income ------------------- ------------ Loss NII Total Net Provis. After Loan R.E. Other Other Income Income Expense NII on IEA Provis. Fees Oper. Income Income ------ -------------- --- ------ ------- ---- ----- ------ ------ Guaranty FSB of Springfield MO ------------------------------ June 30, 1997 0.60 7.60 4.29 3.31 0.00 3.31 0.00 0.00 0.23 0.23 SAIF-Insured Thrifts 0.55 7.38 4.10 3.28 0.14 3.15 0.12 0.01 0.31 0.43 Comparable Group Average 0.74 7.22 4.06 3.17 0.06 3.11 0.03 0.01 0.19 0.23 Mid-West Companies 0.74 7.22 4.06 3.17 0.06 3.11 0.03 0.01 0.19 0.23 Comparable Group ---------------- Mid-West Companies ------------------ CNSB CNS Bancorp of MO 0.42 7.11 3.70 3.41 0.06 3.36 0.05 0.01 0.11 0.17 CMRN Cameron Fin. Corp. of MO 1.06 8.01 3.99 4.03 0.24 3.78 0.08 0.00 0.02 0.10 CAPS Capital Savings Bancorp of MO 0.67 7.62 4.45 3.17 0.05 3.12 0.08 0.00 0.43 0.51 FBSI First Bancshares of MO 0.91 7.51 4.17 3.34 0.05 3.29 0.01 0.04 0.29 0.34 HFSA Hardin Bancorp of Hardin MO 0.52 7.31 4.37 2.94 0.07 2.87 0.04 0.01 0.21 0.25 LXMO Lexington B&L Fin. Corp. of MO 1.02 7.45 3.78 3.66 0.03 3.63 0.00 0.00 0.15 0.15 MBLF MBLA Financial Corp. of MO 0.67 6.95 4.82 2.13 0.04 2.08 0.00 0.00 0.01 0.00 NSLB NS&L Bancorp of Neosho MO 0.49 6.45 3.39 3.05 0.00 3.05 0.01 0.00 0.32 0.33 PCBC Perry Co. Fin. Corp. of MO 0.93 6.82 3.97 2.85 0.02 2.83 0.00 0.00 0.04 0.04 SMBC Southern Missouri Bncrp of MO(1) 0.71 7.03 3.91 3.12 0.05 3.07 0.03 0.05 0.33 0.41
Table 3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads Comparable Institution Analysis For the Twelve Months Ended June 30, 1997 G&A/Other Exp. Non-Op. Items Yields, Costs, and Spreads -------------- ------------- -------------------------- MEMO: MEMO: G&A Goodwill Net Extrao. Yield Cost Yld-Cost Assets/ Effective Expense Amort. Gains Items On Assets Of Funds Spread FTE Emp. Tax Rate ------- ------ ----- ----- ------------------------- ----------------- Guaranty FSB of Springfield MO ------------------------------ June 30, 1997 2.15 0.00 -0.44 0.00 8.10 5.23 2.87 2,977 36.42 SAIF-Insured Thrifts 2.33 0.03 -0.31 0.00 7.44 4.67 2.77 4,572 37.03 Comparable Group Average 1.82 0.00 -0.34 0.00 7.39 5.04 2.35 6,324 37.23 Mid-West Companies 1.82 0.00 -0.34 0.00 7.39 5.04 2.35 6,324 37.23 Comparable Group ---------------- Mid-West Companies ------------------ CNSB CNS Bancorp of MO 2.19 0.00 -0.53 0.00 7.36 4.95 2.41 3,643 47.38 CMRN Cameron Fin. Corp. of MO 1.78 0.00 -0.41 0.00 8.33 5.36 2.97 4,002 37.23 CAPS Capital Savings Bancorp of MO 2.13 0.00 -0.40 0.00 7.75 4.95 2.80 3,150 39.57 FBSI First Bancshares of MO 1.92 0.01 -0.29 0.00 7.72 4.91 2.81 2,645 35.69 HFSA Hardin Bancorp of Hardin MO 1.90 0.00 -0.41 0.00 7.45 5.19 2.26 5,685 37.03 LXMO Lexington B&L Fin. Corp. of MO 1.75 0.00 -0.46 0.00 7.60 5.44 2.16 5,924 34.49 MBLF MBLA Financial Corp. of MO 0.68 0.00 -0.29 0.00 7.01 5.59 1.42 21,348 40.63 NSLB NS&L Bancorp of Neosho MO 2.26 0.00 -0.42 0.00 6.62 4.37 2.26 3,981 30.62 PCBC Perry Co. Fin. Corp. of MO 1.13 0.00 -0.22 0.00 6.92 4.92 2.00 9,012 39.37 SMBC Southern Missouri Bncrp of MO(1) 2.48 0.00 0.02 0.00 7.18 4.73 2.45 3,853 30.28
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Page 3.9 During the most recent fiscal year, Guaranty recorded non-operating expense of 0.44 percent of average assets, while the Peer Group as a whole recorded net non-operating expense of 0.34 percent of average assets. Like Guaranty, all of the Peer Group companies were affected by the SAIF assessment charge to income during the quarter ended September 30, 1996. The Bank recorded non-operating income in the form of gains on the sale of interest-earning assets. Loan loss provisions for the Peer Group and Guaranty were similar at zero and 0.06 percent of average assets, respectively. Loan Composition - ----------------- Table 3.4 presents data related to the loan composition of the Bank and the Peer Group. The Peer Group exhibited a greater emphasis on residential lending than the Bank, with 1-4 family permanent mortgage loans and MBS accounting for 86.08 percent and 71.96 percent of the Peer Group's and the Bank's total loan and MBS portfolios, respectively. Similar to the Bank, most of the Peer Group members are not active sellers of loans in the secondary market with servicing retained and maintaining minimal balances of loans serviced for others. The Bank's loan portfolio exhibited greater diversification into higher risk weight loans than the Peer Group's loan portfolio. Construction/land lending is the Bank's primary method of lending diversification, and such loans comprised 15.3 percent of the total loan and MBS portfolio at June 30, 1997, with commercial real estate comprising an additional 11.4 percent. The Peer Group's loan portfolio diversification was relatively constant in the areas of construction/land, commercial real estate and commercial business lending. Overall, however, the Bank's loan portfolio diversification was above that of the Peer Group, as Guaranty's commercial real estate, construction, consumer and commercial business loans totaled 29.7 percent of total loans and MBS, while the Peer Group's combined level of these loan categories totaled only 15.8 percent. The Bank's risk-weighted assets ratio was higher than the Peer Group, measured at 57.8 and 46.2 percent, respectively, reflecting the greater loan portfolio diversification into higher risk earning assets. Credit Risk - ----------- Guaranty's credit risk exposure appears to be comparable to the Peer Group's based on the Bank's higher reserve coverage ratios, offset by a similar level of NPAs and higher risk-weighted assets ratio. As shown in Table 3.5, as of June 30, 1997, the Bank recorded NPAs of 0.52 percent of assets, comparable to the Peer Group average of 0.45 percent, and maintained a similar ratio of non-performing loans ("NPLs") to loans of 0.45 percent versus 0.46 percent for the Peer Group. Both the Bank and Peer Group reported a minor level of real estate owned. The Bank maintained a higher level of loss reserves as a percent of loans receivable (1.38 RP FINANCIAL, LC. ---------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700
Table 3.4 Loan Portfolio Composition and Related Information Comparable Institution Analysis As of June 30, 1997 Portfolio Composition as a Percent of MBS and Loans --------------------------------------------------- 1-4 Constr. 5+Unit Commerc. RWA/ Serviced Servicing Institution MBS Family & Land Comm RE Business Consumer Assets For Others Assets ----------- --- ------ ------ ------- -------- -------- ------ ---------- ------ (%) (%) (%) (%) (%) (%) (%) ($000) ($000) Guaranty FSB of Springfield MO 8.60 63.36 15.27 11.35 0.21 2.84 57.77 14,163 39 SAIF-Insured Thrifts 15.44 61.51 5.27 11.71 6.49 1.71 51.91 403,354 2,908 Comparable Group Average 19.00 67.08 5.66 5.14 4.36 0.65 46.15 7,107 2 Comparable Group ________________ CNSB CNS Bancorp of MO 17.52 64.60 2.79 13.62 1.61 1.03 46.31 21,342 23 CMRN Cameron Fin. Corp. of MO 0.01 71.13 32.92 4.64 3.98 0.36 65.32 0 0 CAPS Capital Savings Bancorp of MO 13.50 75.52 1.38 3.76 6.24 0.00 49.12 41,016 0 FBSI First Bancshares of MO 0.76 77.27 8.25 7.29 5.58 2.39 61.61 18 0 HFSA Hardin Bancorp of Hardin MO 29.12 61.57 1.83 1.28 6.97 0.00 39.01 8,691 0 LXMO Lexington B&L Fin. Corp. of MO 4.36 85.12 2.31 2.35 6.38 0.00 50.03 0 0 MBLF MBLA Financial Corp. of MO 15.56 78.14 0.00 5.74 0.24 0.31 36.10 0 0 NSLB NS&L Bancorp of Neosho MO 14.76 77.63 1.78 0.21 6.35 0.00 41.47 0 0 PCBC Perry Co. Fin. Corp. of MO 70.93 25.13 1.94 0.80 0.95 0.86 21.62 0 0 SMBC Southern Missouri Bncrp of MO(1) 23.44 54.63 3.41 11.71 5.36 1.52 50.88 0 0
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Page 3.12 percent versus 0.46 percent for the Peer Group), and higher ratios of reserves as a percent of NPLs and total NPAs. Interest Rate Risk - ------------------ Table 3.6 reflects the relative interest rate risk exposure of Guaranty and the Peer Group. The Bank's lower capital level was the key factor contributing to its lower IEA/IBL ratio relative to the Peer Group (113.1 percent versus 120.5 percent, respectively). The Bank's lower capital and IEA/IBL ratios increases its funding costs relative to the Peer Group. However, the Bank's capital ratio and IEA/IBL ratio will increase on a post-conversion basis. The Bank maintained a higher ratio of non-interest earning assets, which is less favorable from an interest rate risk perspective as it decreases the proportion of assets repricing upward in a rising rate environment. In the absence of available or comparable gap and rate shock analyses for the Peer Group, the change in the quarterly net interest income ratio to average assets for the Bank and the Peer Group has been examined in relation to the change in market interest rates. As shown in Table 3.6, the Bank's net interest margin has recently shown more sensitivity to changing market interest rates than the Peer Group's average net interest margin. On a pro forma basis, the Bank's higher capital position and reinvestment of proceeds in short- to intermediate-term securities can be expected to lower exposure to changes in interest rates. Summary - ------- Based on the above analysis and the criteria employed by in the Peer Group selection process, the Peer Group appears to form a reasonable basis for determining the pro forma market value of the Bank, subject to the adjustments noted in the following section. RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700
Table 3.5 Credit Risk Measures and Related Information Comparable Institution Analysis As of June 30, 1997 or Most Recent Date Available NPAs & Rsrves/ REO/ 90+Del/ NPLs/ Rsrves/ Rsrves/ NPAs & Net Loan NLCs/ Institution Assets Assets Loans Loans NPLs 90+Del Chargoffs Loans - ----------- ------ ------ ----- ----- ---- ------ --------- ----- (%) (%) (%) (%) (%) (%) ($000) (%) Guaranty FSB of Springfield MO 0.11 0.52 0.45 1.38 304.48 209.73 63 0.04 SAIF-Insured Thrifts 0.28 0.79 0.84 0.82 176.81 130.83 392 0.16 Comparable Group Average 0.02 0.45 0.46 0.46 261.68 105.34 4 0.03 Comparable Group - ---------------- CNSB CNS Bancorp of MO 0.00 0.53 0.80 0.58 72.14 72.14 0 0.00 CMRN Cameron Fin. Corp. of MO 0.00 0.73 0.28 0.97 347.55 111.82 0 0.00 CAPS Capital Savings Bancorp of MO 0.03 0.31 0.18 0.39 216.08 97.24 2 0.00 FBSI First Bancshares of MO 0.07 0.56 0.04 0.36 845.61 52.51 7 -0.01 HFSA Hardin Bancorp of Hardin MO 0.00 0.09 0.18 0.32 179.21 179.21 13 0.10 LXMO Lexington B&L Fin. Corp. of MO 0.00 0.48 0.62 0.49 78.37 78.37 20 0.18 MBLF MBLA Financial Corp. of MO 0.00 0.25 0.45 0.50 109.19 109.19 0 0.00 NSLB NS&L Bancorp of Neosho MO 0.00 0.03 0.03 0.13 466.67 210.00 0 0.00 PCBC Perry Co. Fin. Corp. of MO 0.00 NA NA 0.19 NA NA 0 0.00 SMBC Southern Missouri Bncrp of MO(1) 0.07 1.10 1.60 0.64 40.26 37.60 0 0.00
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700
Table 3.6 Interest Rate Risk Measures and Net Interest Income Volatility Comparable Institution Analysis As of June 30, 1997 or Most Recent Date Available Balance Sheet Measures ---------------------- Non-Earn. Quarterly Change in Net Interest Income --------- --------------------------------------- Equity/ IEA/ Assets/ Institution Assets IBL Assets 06/30/97 03/31/97 12/31/96 09/30/96 06/30/96 03/31/96 - ----------- ------ --- ------ -------- -------- -------- -------- -------- -------- (%) (%) (%) (change in net interest income is annualized in basis points) Guaranty FSB of Springfield MO 13.8 113.1 4.0 21 -8 17 25 0 0 SAIF-Insured Thrifts 12.2 112.8 3.3 0 0 -0 -1 8 7 Comparable Group Average 17.6 120.5 2.4 6 -7 8 1 9 7 Comparable Group - ---------------- CNSB CNS Bancorp of MO 24.9 129.3 3.7 5 12 5 53 24 14 CMRN Cameron Fin. Corp. of MO 21.7 124.0 4.6 -2 -24 4 -6 6 10 CAPS Capital Savings Bancorp of MO 8.8 109.6 1.7 4 -3 -1 -12 1 -7 FBSI First Bancshares of MO 13.5 112.8 2.8 -9 14 -5 -10 17 16 HFSA Hardin Bancorp of Hardin MO 12.5 113.9 1.7 8 -40 2 -5 6 19 LXMO Lexington B&L Fin. Corp. of MO 28.3 137.7 2.2 12 3 59 -4 9 -4 MBLF MBLA Financial Corp. of MO 12.2 113.7 0.9 22 -38 31 -7 12 14 NSLB NS&L Bancorp of Neosho MO 19.6 123.4 2.8 7 8 0 -19 13 -36 PCBC Perry Co. Fin. Corp. of MO 19.2 122.5 1.5 3 20 -10 3 3 8 SMBC Southern Missouri Bncrp of MO(1) 15.7 117.8 2.0 NA -22 -2 14 -4 36
(1) Financial information is for the quarter ending March 31, 1997. NA=Change is greater than 100 basis points during the quarter. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Page 4.1 IV. VALUATION ANALYSIS Introduction This chapter presents the valuation analysis, prepared pursuant to the approved valuation methodology promulgated by the OTS, and valuation factors used to determine the estimated pro forma market value of the common stock to be issued in conjunction with the conversion of the MHC. The MHC is converting to a Delaware stock corporation pursuant to the Plan. The pro forma valuation methodology has been modified to reflect the unique characteristics of the conversion of the MHC, specifically the fact that the MHC will be selling only a partial ownership interest in the Subscription and Community offerings, instead of a 100 percent ownership interest as would be the case in a standard conversion. Appraisal Guidelines - --------- ---------- The OTS appraisal guidelines, originally released in October 1983, specify the methodology for estimating the pro forma market value of an institution. The methodology included: (1) selection of a peer group of comparable seasoned publicly-traded institutions whose pricing is not distorted due to a variety of factors; (2) a fundamental analysis of the subject company to the peer group; and (3) a pro forma valuation analysis of the subject company based on the market pricing of the peer group as of the date of valuation. The amended valuation guidelines also limit the amount of a new issue discount which may be incorporated into the valuation and thereby curtail the potential price appreciation in the after-market. RP Financial's valuation analysis complies with the October 1983 OTS appraisal guidelines as revised on October 21, 1994, incorporating a "fundamental analysis" relative to the Peer Group and a "technical analysis" of final conversion pricing and trading levels of recently completed conversions (given the emphasis of limiting after-market appreciation). It should be noted that such analysis cannot possibly fully account for all the market forces which impact after-market trading activity and pricing characteristics of a stock on a given day. The pro forma market value determined herein is a preliminary value for the Holding Company's to-be-issued stock. Throughout the conversion process, RP Financial will: (1) review changes in the Bank's operations and financial condition; (2) monitor the Bank's operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks; and (4) monitor pending initial and second step conversion offerings (including those in the offering phase) both regionally and nationally. If material changes should occur during RP Financial, LC. Page 4.2 the conversion process, RP Financial will prepare updated valuation reports reflecting such changes and their related impact on value, if any, over the course of the conversion process. RP Financial will also prepare a final valuation update at the closing of the conversion offering to determine if the preliminary range of value continues to be appropriate. The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts. Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability), may materially impact the market value of all savings institution stocks, including Guaranty, or Guaranty's value alone. To the extent a change in factors impacting the Bank's value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into its analysis. Valuation Analysis - ------------------ A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize such differences between the Bank and the Peer Group and how those differences affect the pro forma valuation. Emphasis is placed on the specific strengths and weaknesses of the Bank relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the issue, marketing of the issue, management, and the effect of government regulations and/or regulatory reform. We have also considered the market for savings institution stocks, and in particular new issues, including second step conversions, to assess the impact on value of Guaranty coming to market at this time. 1. Financial Condition ------------------- The financial strength of an institution is an important determinant in pro forma market value, because investors typically look to such factors as liquidity, capital, asset composition and quality, and funding sources in assessing investment attractiveness. The similarities and differences in the Bank's financial strength can be summarized as follows: o Overall A/L Composition. Permanent residential mortgage loans funded by retail deposits were the primary components of both Guaranty's and the Peer Group's balance sheets. The Bank maintains a higher proportion of overall loans receivable than the Peer Group, offset by a lower level of cash and investments and investment in MBS. Guaranty reported a higher level of diversification into higher credit risk types of loans relative to the Peer Group, and the Bank intends to continue loan portfolio diversification. The Peer Group relied on borrowed RP Financial, LC. Page 4.3 funds to a greater extent than the Bank, although retail deposits comprised the major portion of the respective funding needs. o Credit Risk. Guaranty maintains comparable levels of NPAs/assets and NPLs/loans ratios, a higher credit risk profile and a higher risk-weighted assets ratio. Further, the Bank has a higher loans/assets ratio than the Peer Group. The Bank maintains a relatively higher proportion of construction and commercial real estate loans in portfolio in comparison to the Peer Group. The Bank's reserve coverage ratios are higher than the Peer Group. o Liquidity. Guaranty maintained a lower level of cash and investments and MBS than the Peer Group. The Bank's proportion of cash and investments is likely to initially increase on a pro forma basis. Borrowings were utilized to a higher degree by the Peer Group, and both maintain ample borrowings capacity. The Bank's loans meet secondary market standards for sale. Overall, Guaranty appears to have less balance sheet liquidity than the Peer Group. o Capital. While the Bank maintains a lower capital position in relation to the Peer Group, following the infusion of conversion proceeds, the Bank's capital position is expected to exceed the Peer Group average. As a result, the Bank is expected to have more leverage capacity than the Peer Group. The Bank's pro forma return on equity ("ROE") is not expected to exceed the Peer Group average due to lower profitability. On balance, RP Financial applied a moderate downward adjustment for financial condition. 2. Profitability, Growth and Viability of Earnings ----------------------------------------------- Earnings are an important factor in determining pro forma market value, as the level and risk characteristics of an institution's earnings stream and the prospects and ability to generate future earnings are typically heavily factored into an investment decision. The historical income statements of Guaranty and the Peer Group were generally reflective of traditional savings institution operating strategies, with net interest income and operating expenses being the major determinants of their respective core earnings. The specific factors considered in the valuation include: o Reported Earnings. The Bank reported net income of 0.60 percent of average assets for the most recent twelve month period versus earnings of 0.74 percent for the Peer Group. The differential in reported earnings is due to the Bank's higher operating expenses, offset by a higher level of net interest income. o Core Earnings. The Bank maintains a slightly less favorable core earnings posture relative to the Peer Group, as both the Bank and Peer Group's earnings were affected by the payment of the SAIF assessment fee in the September 30, 1996 period. The Bank operated with a higher level of net interest income, a similar level of non-interest operating income and less favorable operating expenses than the Peer Group, along with a comparable effective tax rate. While redeployment of conversion proceeds into interest-earning assets should enhance Guaranty's net interest income, operating expenses for the Bank are expected to increase as well. On a pro forma basis, Guaranty's core profitability is expected to exceed that of the Peer Group. RP Financial, LC. Page 4.4 o Interest Rate Risk. Guaranty's NPV analysis measures indicated moderate exposure to rising interest rates. Although gap data was not available for the Peer Group, other analyses indicated a comparable advantage for the Peer Group. The pro forma increase in the IEA/IBL ratio can be expected to reduce the Bank's interest rate risk exposure. o Credit Risk. Loss provisions had a lower impact on the earnings of the Bank in comparison to the Peer Group. In terms of credit quality related losses, the Bank maintained higher reserve coverage ratios as a percent of loans receivable, non-accruing loans and total NPAs. The Bank's concentration on lending in the areas of construction and commercial real estate exposes it to potentially greater credit risk than the Peer Group, which adds a higher risk of earnings volatility relative to the Peer Group. The Bank's loan portfolio has increased in recent fiscal years, adding a level of unseasoned loans to the portfolio. o Earnings Growth Potential. Several factors were considered in assessing earnings growth potential. Guaranty's recent loan demand has been in excess of available funds, requiring the third party borrowings and a liquidity reduction. Although the higher expected pro forma capital position is expected to enable the Bank to continue on a growth pattern, expectations of continued growth in operating expenses and the uncertain cost of acquiring new deposit funds for lending result in the Bank's earnings appearing to have less upside potential than the Peer Group. o Return on Equity. On a pro forma basis the Bank's pro forma return on equity will be lower to the Peer Group average, as the pro forma profitability is measured against a comparatively higher capital position. Overall, RP Financial made a slight downward adjustment for profitability, growth and viability of earnings. 3. Asset Growth ------------ The Bank's asset growth in recent periods, which has been achieved by utilizing borrowed funds as deposits have declined, has been less favorable than the Peer Group's. The Bank has been able to improve the net interest margin in recent periods, although there remains upward pressure on funding costs due to the need to raise additional funds for lending operations. The Bank intends to continue to grow in future periods, and is expected to have adequate capital post-conversion to support such growth. We concluded that no adjustment was warranted for the Bank's asset growth potential. 4. Primary Market Area ------------------- The general condition of a financial institution's market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local market area. Summary demographic and deposit market share data for the Bank and the Peer Group is included in Table 4.1. The Bank's market area of Springfield and Greene County, Missouri is an urban and rural market that has been experiencing increases in population and households in recent years, while the Peer Group companies operate Table 4.1 Peer Group Market Area Comparative Analysis
Per Capita Income ----------------- Population Proj. Deposit ------------- Pop. 1990-97 1997-2002 % State Market Institution County 1990 1997 2002 % Change % Change Median Age Amount Average Share(1) - ----------- ------ ---- ---- ---- -------- -------- ---------- ------ ------- -------- (000) (000) Cameron Fin. Corp. of MO Clinton 17 18 20 10.8% 6.7% 36.8 15,721 89.0% 39.4% Capital Savings Bancorp of MO Cole 64 69 72 8.3% 5.3% 35.5 19,705 111.6% 5.8% CNS Bancorp of MO Cole 64 69 72 8.3% 5.3% 35.5 19,705 111.6% 4.0% First Bancshares of MO Wright 17 20 22 18.4% 10.7% 36.9 10,145 57.4% 30.0% Hardin Bancorp of Hardin, MO Ray 22 23 23 4.1% 2.7% 36.5 15,618 88.4% 22.0% Lexington B&L Fin. Corp. of MO Lafayette 31 32 33 4.4% 2.9% 36.8 14,300 81.0% 9.4% MBLA Financial Corp. of MO Macon 15 15 15 -1.2% -0.8% 40.2 13,799 78.1% 25.7% NS&L Bancorp of Neosho, MO Newton 44 48 51 8.6% 5.4% 36.5 14,804 83.8% 15.4% Perry Co. Fin. Corp. of MO Perry 17 18 18 5.4% 3.6% 35.9 16,145 91.4% 22.0% Southern Missouri Bncrp of MO Butler 39 40 41 4.0% 2.6% 38.0 12,411 70.3% 14.1% -- -- -- --- --- ---- ------ ---- ---- Averages: 33 35 37 7.1% 4.4% 36.9 15,235 86.3% 18.8% Medians: 27 28 28 6.9% 4.4% 36.7 14,959 86.1% 18.7% Guaranty FS&LA of MO Greene 208 225 237 8.3% 5.3% 34.7 $16,955 96.0% 5.2%
(1) Total institution deposits in headquarters county as percent of total county deposits, excluding Credit Unions. Sources: CACI, Inc, SNL Securities RP Financial, LC. Page 4.5 on average in smaller and slower growing markets. The per capita income in the Bank's market is above the average of the primary markets of the Peer Group members and the median age in Guaranty's market is lower. The Bank's share of market area deposits is considerably lower than the average position of the Peer Group institutions in their primary market areas, which indicates a potential for the Bank to increase deposits and market share. This also indicates that a number of larger competitors also operate in the market area. On balance, RP Financial concluded that a slight upward adjustment was warranted for market area. 5. Dividends --------- As stated in the Holding Company's offering circular, the Holding Company intends to implement a cash dividend policy during the first full quarter following consummation of the conversion at an estimated annual rate of 3.0 percent, or $0.30 annually on an estimated $10.00 share price, to be paid semi-annually. The ability to pay a dividend will be based on numerous factors including growth objectives, financial condition, the amount of net proceeds retained by the Holding Company in the conversion, investment opportunities available to the Holding Company and the Bank, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions. Historically, savings institutions typically have not established dividend policies at the time of their conversion to stock ownership. Newly converted institutions, in general, have preferred to gain market seasoning, establish an earnings track record and more fully invest the conversion proceeds before establishing a dividend policy. However, during the late 1980s and early 1990s, with negative publicity surrounding savings institutions, there was a tendency for more institutions to initiate moderate dividend policies concurrent with their conversion as a means of increasing the attractiveness of the stock offering. Today, fewer institutions are compelled to initially establish dividend policies at the time of their conversion offering to increase the attractiveness of the stock issue as: (1) industry profitability has improved, (2) the number of problem thrift institutions has declined, and (3) the stock market cycle for thrift stocks is generally more favorable than in the early 1990s. At the same time, with ROE ratios under pressure, due to high equity levels, well-capitalized institutions are subject to increased competitive pressures to offer dividends and a number of institutions have instituted special dividends. As publicly-traded savings institution's capital levels and profitability have improved and as weakened institutions have been resolved, the proportion of institutions with cash dividend policies has increased. All 10 institutions in the Peer Group presently pay regular cash dividends, with implied dividend yields ranging from 0.83 percent to 2.85 percent. The average dividend yield on the stocks of the Peer Group institutions was 1.93 percent as of September 5, 1997, representing an average earnings payout ratio of 38.89 percent. As of September 5, 1997, approximately 84 percent of all SAIF-insured savings institutions had adopted cash RP Financial, LC. Page 4.7 dividend policies (see Exhibit IV-1), exhibiting an average yield of 1.98 percent and an average payout ratio of 41.26 percent. The dividend paying institutions generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends, which supports a market pricing premium on average relative to non-dividend paying institutions. The Holding Company's ability following the completion of the conversion to pay a dividend would appear to be similar relative to the Peer Group based on higher pro forma capital and earnings. The Company's stated intention to implement a dividend shortly after completion of the conversion is a favorable comparison to the Peer Group companies and thus no adjustment is warranted for this valuation factor. 6. Liquidity of the Shares ----------------------- The Peer Group is by definition composed of companies that are traded in the public markets, all of which trade on the NASDAQ system. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies ranged from $13.3 million to $46.6 million as of September 5, 1997, with an average market value of $25.2 million. The shares outstanding of the Peer Group members ranged from 0.7 million to 2.6 million, with average shares outstanding of approximately 1.4 million. The Bank's pro forma market value is expected to exceed the comparative Peer Group averages, and shares outstanding will also be higher. The Bank's stock is expected to be listed on the NASDAQ National Market System, and accordingly, we anticipate the liquidity of the Bank's shares will be similar to that of the Peer Group on average, and thus there has been no valuation adjustment applied for this factor. 7. Marketing of the Issue ---------------------- We believe that five separate markets exists for savings institution stocks coming to market such as Guaranty: (A) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE and dividends; (B) the new issue market in which converting thrifts are evaluated on the basis of the same factors but on a pro forma basis without the benefit of a stock trading history and reporting quarterly operating results as a publicly-held company; (C) the market for second step conversions by MHCs; (D) the acquisition market for savings institution franchises in Missouri; and (E) the market for the public stock of Guaranty. All of these markets were considered in the valuation of the Bank's second step conversion. RP Financial, LC. Page 4.8 A. Public Market ------------- The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays historical stock price indices for thrifts only. In terms of assessing general stock market conditions, the stock market has generally trended higher over the past year. The stock market rose in early-September 1996, as investors reacted positively to the inflation data contained in the August employment report. Oil stocks sustained the upward trend in the stock market in early-September 1996, as renewed tension between the U.S. and Iraq pushed crude oil prices to their highest level in five years. Both bond and stock prices surged higher as most of the economic data for August 1996 indicated that the economy was slowing down and investors became more optimistic that the Federal Reserve would not raise interest rates in September 1996. The Federal Reserve's decision not to raise interest rates at its September 1996 meeting, and generally healthy third quarter earnings results sustained the upward momentum in the stock market during the beginning of the fourth quarter. Favorable inflation data and lower interest rates further spurred the upward trend in the stock market prior to the election. Investors were cheered by the "status quo" election results, as stocks rallied strongly immediately following the election with the DJIA posting ten consecutive advances through mid-November. Economic stability and a rising bond market sustained the stock market rally through the end of November. For the entire month of November, the DJIA increased 492.3 points, or 8.2 percent. Following the rapid rise in the stock market during November, stocks retreated during the first half of December. Profit taking, concern about speculative excesses in the stock market and higher interest rates all contributed to the decline in the stock market. The stock market resumed an upward trend during the end of 1996 and the first three weeks of 1997, with the DJIA establishing several new highs in the process. Factors contributing to the rally in the stock market included the Federal Reserve's decision to leave rates unchanged at its December meeting, economic data which reflected moderate growth and low inflation, and favorable fourth quarter earnings particularly in the technology sector. However, a disappointing fourth quarter earnings report by IBM ignited a sell-off in the stock market in late-January. Higher interest rates extended the downturn, as the 30-year bond approached 7.0 percent at the end of January. A high degree of market volatility was evident throughout most of February 1997, reflecting concern over speculative excesses in the stock market; particularly, as the DJIA RP Financial, LC. Page 4.9 closed above the 7000 mark in mid-February. Profit taking, growing expectations of a correction and comments by the Federal Reserve Chairman pulled the market lower in late-February. Following a downturn in late-February 1997, the market recovered in early-March. Despite increasing expectations of an interest rate hike by the Federal Reserve, the Dow Jones Industrial Average ("DJIA") closed to a new record high of 7085.16 on March 11, 1997. However, an upward revision to the January retail sales figure triggered a one day sell-off in stocks and bonds on March 13, 1997, as the stronger than expected growth heightened expectations of an interest rate increase by the Federal Reserve. Unease over higher interest rates, profitability concerns in the technology sector and litigation concerns for tobacco stocks pulled the stock market lower in mid-March. As expected, the Federal Reserve increased the rate on short-term funds by 0.25 percent at its late-March meeting. Following the rate increase, the sell-off in the stock market became more severe amid further signs of an accelerating economy. Stocks bottomed-out on news of a stronger than expected rise in core producer prices for March, with the DJIA closing at 6391.69 on April 11, 1997, or 9.8 percent below its all-time high recorded a month ago. Some favorable first quarter earnings reports and news of a possible settlement by tobacco companies to resolve the threat of liability lawsuits provided for a modest recovery in the stock market in mid-April 1997. In late-April, the release of economic data which indicated mild inflationary pressures furthered the rally in bond and stock prices. News of a budget agreement and a favorable ruling for tobacco companies sent the stock market soaring to record highs in early-May. Mixed economic data and the Federal Reserve's decision to leave its target for the federal-funds rate unchanged at its May meeting sustained a positive trend in the stock market through the end of May. Profit worries caused a sell-off in high-technology stocks in early-June, while declining interest rates served to stabilize the broader market. The stock market rose during late June, July and early August based on positive consumer confidence, little sign of inflation with continued low unemployment rates, and continued strong second quarter earnings reports. After reaching an all time high of 8259.31 on August 6, 1997, the DJIA suffered declines of 157 points on August 8, 101 points on August 12, and 247 points on August 15, 1997 to close at 7694.66 as of that date, a decline of 6.8 percent in less than two weeks. Through September 5, 1997, the stock market has followed a fluctuating trend, as the market has reacted to investor fears of inflation, public statements regarding the health of the economy by regional federal reserve bank presidents, and an overall perception that the market had reached excessive levels, leading to certain profit-taking. On September 5, 1997, the DJIA closed at 7822.41, an increase of 38.2 percent from one year ago. Similar to the overall stock market, the market for thrift stocks has generally been favorable during the past twelve months, as a bullish outlook on the financial institution sector in general served to bolster prices. Thrift stocks settled into a narrow trading range in late-August 1996 and early-September 1996, RP Financial, LC. Page 4.10 as higher interest rates dampened interest in the thrift sector. For the balance of September, trading activity in thrift stocks was somewhat mixed. Higher thrift prices were recorded in mid-September, as the yield on the 30-year U.S. Treasury bond briefly dropped below 7.0 percent. However, the rally in financial services stocks faltered in late-September, reflecting renewed fears about higher interest rates and rising bad debt on credit cards. Thrift prices generally moved higher during October and November 1996. The upward trend in thrift prices was supported by lower interest rates, with the slow down in economic growth pushing the 30-year U.S. bond rate below 6.5 percent during the second half of November. Investors also reacted positively to the SAIF rescue legislation, in light of the reduction in deposit insurance premiums to be paid by SAIF-insured thrifts following the one time special assessment. Similar to the overall stock market, thrift prices traded lower in early-December. Profit taking and expectations of higher interest rates were factors contributing to the pull back in thrift issues. Bullish sentiment for thrift stocks heightened at the beginning of 1997, as investors reacted positively to the favorable inflation data and generally strong fourth quarter earnings. The rally in thrift issues was driven by the large California institutions, reflecting expectations that there would be further consolidation among the large California thrifts. The acquisition speculation for the large California thrifts became a reality in mid-February, as H.F. Ahamanson's unsolicited offer to acquire Great Western Financial sent the SNL Index soaring in mid-February. Stable interest rates and acquisition activity supported higher thrift prices in early-March, with the SNL Index posting a new high of 579.1 on March 11, 1997. Like the stock market in general, the peak in thrift prices was followed by a sharp sell-off in mid-March. In fact, interest-rate sensitive issues were among the sectors hardest hit by the revised January retail sales report, as the 30-year bond approached 7.0 percent. Interest-rate sensitive issues continued to experience selling pressure in late-March and early-April, as signs of a strengthening economy pushed interest rates higher. The sell-off in thrift stocks culminated on April 11, 1997, as interest rates increased sharply on news of the higher than expected rise in core producer prices for March. Thrift prices edged modestly higher in mid-April, reflecting generally favorable first quarter earnings and a slight decline in interest rates following the release of economic data which showed that inflation was low. Favorable inflation data and the budget agreement provided for a more substantial rally in thrift stocks in late-April and early-May, as interest-rate sensitive issues were bolstered by a decline in interest rates. Thrift stocks continued to trend higher through the second and third quarters of 1997, based on the improved interest-rate outlook, consumer confidence and the overall rise in the stock market. The SNL Index for all publicly-traded thrifts closed at 692.6 on September 5, 1997, an increase of 68.6 percent from one year ago. RP Financial, LC. Page 4.11 B. The New Issue Market -------------------- In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Bank's pro forma market value. There was generally strong interest in converting issues during the second half of 1996, as most offerings experienced oversubscriptions. Fewer offerings, more attractive pricing, lower interest rates, and the general positive trend in thrift prices were among the most prominent factors contributing to the investor interest shown for converting thrift issues. The favorable market environment for converting thrift issues has generally been sustained during the first three quarters of 1997 and there has been an increase in the number of conversion offerings completed during the past three months in comparison to previous periods. As shown in Table 4.2, the median one week change in price for offerings completed during the latest three months equaled positive 46.3 percent. In examining the current pricing characteristics of institutions completing their conversions during the last three months (see Table 4.3), we note there exists a considerable difference in pricing ratios compared to the universe of all publicly-traded thrifts. Specifically, the current average P/B ratio of the conversions completed in the most recent three month period of 117.29 percent reflects a discount of 19.67 percent from the average P/B ratio of all publicly-traded savings institutions (equal to 146.01 percent), and the average core P/E ratio of 32.83 times reflects a premium of 76.4 percent from the all public average core P/E ratio of 18.61 times. The pricing ratios of the better capitalized but lower earning recently converted savings institutions (based on return on equity measures) suggest that the investment community has determined to discount their stocks on a book basis until the earnings improve through redeployment and leveraging of the proceeds over the longer term. In determining our valuation adjustment for marketing of the issue, we considered trends in both the overall savings institution market and the new issue market. The overall market for savings institution stocks is considered to be positive, as savings institution stocks are currently exhibiting pricing ratios that are in the range of historically high levels. Investor interest in the new issue market has been favorable, as most of the recently completed offerings have been oversubscribed and have recorded price increases in initial post-conversion trading activity. RP Financial, LC. September 5, 1997 --------------------------------------------------------------- Table 4.2 Recent Conversions (Last Three Months) Conversion Pricing Characteristics: Sorted Chronologically ---------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Institutional Information Pre-Conversion Data ---------------------------------- Offering Insider Purchases Financial Info. Asset Quality Information - --------------------------------------------------------------------------- -------------- -------------------- ------------------ Benefit Plans ----------- Conversion Equity/ NPAs/ Res. Gross % of Exp./ Recog. Mgmt. Institution State Date Ticker Assets Assets Assets Cov. Proc. Mid. Proc. ESOP Plans & Dirs. - ----------- ----- ---- ------ ------ ------ ------ ---- ----- ---- ----- ---- ----- ------- ($Mil) (%) (%)(2) (%) ($Mil) (%) (%) (%) (%) (%)(3) - ------------------------------------------------------------------------------------------------------------------------------------ WSB Holding Company PA 08/29/97 WSBH $33 6.04% 2.34% 26% $3.3 132% 8.5% 8.0% 4.0% 31.0% Bayonne Bancshares (8) NJ 08/22/97 FSNJ 577 8.33% 0.81% 53% 48.7 132% 3.8% 8.0% 4.0% 10.0% FirstSpartan Fin. Corp. SC * 07/09/97 FSPT 388 11.81% 0.75% 44% 88.6 132% 1.6% 8.0% 4.0% 1.5% GSB Financial Corp. NY 07/09/97 GOSB 96 12.68% 0.07% 188% 22.5 132% 4.1% 8.0% 4.0% 2.6% FirstBank Corp. ID * 07/02/97 FBNW 138 8.00% 0.99% 68% 19.8 132% 3.5% 8.0% 4.0% 8.2% Montgomery Fin. Corp.(8) IN 07/01/97 MONT 94 9.83% 0.91% 20% 11.9 132% 4.5% 8.0% 4.0% 4.6% Community First Bankg. Corp. GA 07/01/97 CFBC 366 7.02% 1.68% 40% 48.3 132% 2.9% 8.0% 4.0% 1.0% First Robinson Fin. Corp.(9) IL 06/30/97 FRFC 72 6.78% 0.63% 89% 8.6 132% 4.7% 8.0% 4.0% 9.8% Security Bancorp TN 06/30/97 P./Sheet 46 5.46% 0.06% NM 4.4 132% 6.9% 8.0% 4.0% 2.0% Sistersville Bancorp WV 06/30/97 P./Sheet 27 17.91% 0.31% 198% 6.6 110% 6.8% 8.0% 4.0% 5.4% Averages:$184 9.39% 0.86% 81% $26.3 130% 4.7% 8.q% 7.6% Medians: 95 8.17% 0.78% 53% $15.9 132% 4.3% 8.0% 4.0% 5.0% Averages, Excluding 2nd Steps $146 9.46% 0.85% 93% 25.3 130% 4.9% 8.0% 4.0% 7.7% Medians, Excluding 2nd Steps $84 7.51% 0.69% 68% $14.2 132% 4.4% 8.0% 4.0% 4.0%
--------------------------------------------------------------- Table 4.2 Recent Conversions (Last Three Months) Conversion Pricing Characteristics: Sorted Chronologically ---------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------- Institutional Information Pro Forma Data ------------------------------------------- Pricing Ratios(4) Fin. Characteristics - ---------------------------------------------------------------------------------- -------------------- Conversion IPO Institution State Date Ticker P/TB P/E(5) P/A ROA TE/A ROE Price - ----------- ----- ---- ------ ---- ------ --- --- ---- --- ----- (%) (x) (%) (%) (%) (%) ($) - -------------------------------------------------------------------------------------------------------------- WSB Holding Company PA 08/29/97 WSBH 71.4% 16.6 9.2% 0.6% 12.9% 4.3% $10.00 Bayonne Bancshares (8) NJ 08/22/97 FSNJ 100.9% NM 14.6% NM 14.4% NM 10.00 FirstSpartan Fin. Corp. SC * 07/09/97 FSPT 72.4% 17.3 19.1% 1.1% 26.3% 4.2% 20.00 GSB Financial Corp. NY 07/09/97 GOSB 72.5% 22.5 19.6% 0.9% 27.1% 3.2% 10.00 FirstBank Corp. ID * 07/02/97 FBNW 71.4% 22.8 12.9% 0.6% 18.0% 3.1% 10.00 Montgomery Fin. Corp.(8) IN 07/01/97 MONT 89.1% 24.1 16.0% 0.7% 17.9% 3.7% 10.00 Community First Bankg. Corp. GA 07/01/97 CFBC 72.3% 24.5 11.9% 0.5% 16.4% 2.9% 20.00 First Robinson Fin. Corp.(9) IL 06/30/97 FRFC 71.4% 16.7 10.9% 0.7% 15.2% 4.3% 10.00 Security Bancorp TN 06/30/97 P./Sheet 72.0% 14.1 8.8% 0.6% 12.2% 5.1% 10.00 Sistersville Bancorp WV 06/30/97 P./Sheet 65.0% 18.9 20.6% 1.1% 31.6% 3.4% 10.00 Average 75.8% 19.7 14.3% 0.7% 19.2% 3.8% $12.00 Median 72.1% 18.9 13.7% 0.7% 17.2% 3.6% $10.00 Averages, Excluding 2nd Steps 71.1% 19.2 14.1% 0.7% 20.0% 3.8% $11.25 Medians, Excluding 2nd Steps 71.7% 18.1 12.4% 0.6% 17.2% 3.8% $10.00
--------------------------------------------------------------- Table 4.2 Recent Conversions (Last Three Months) Conversion Pricing Characteristics: Sorted Chronologically ---------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------- Institutional Information Post-IPO Pricing Trends --------------------------------------------- Closing Price: - ------------------------------------------------------------- --------------------------------------------- First After After Conversion Trading % First % First % Institution State Date Ticker Day Chg. Week(6) Chg. Month(7) Chg. - ----------- ----- ---- ------ --- ---- ------- ---- -------- ---- ($) (%) ($) (%) ($) (%) - ----------------------------------------------------------------------------------------------------------- WSB Holding Company PA 08/29/97 WSBH $13.50 35.0% $14.50 45.0% $14.50 45.0% Bayonne Bancshares (8) NJ 08/22/97 FSNJ 11.75 17.5% 11.88 18.8% 12.50 25.0% FirstSpartan Fin. Corp. SC * 07/09/97 FSPT 36.69 83.4% 36.62 83.1% 35.63 78.1% GSB Financial Corp. NY 07/09/97 GOSB 14.63 46.3% 14.75 47.5% 14.38 43.8% FirstBank Corp. ID * 07/02/97 FBNW 15.81 58.1% 15.56 55.6% 17.88 78.8% Montgomery Fin. Corp.(8) IN 07/01/97 MONT 11.13 11.2% 11.25 12.5% 11.75 17.5% Community First Bankg. Corp. GA 07/01/97 CFBC 31.88 59.4% 33.00 65.0% 34.25 71.3% First Robinson Fin. Corp.(9) IL 06/30/97 FRFC 14.50 45.0% 14.38 43.8% 16.50 65.0% Security Bancorp TN 06/30/97 P./Sheet 14.50 45.0% 15.00 50.0% 15.25 52.5% Sistersville Bancorp WV 06/30/97 P./Sheet 13.75 37.5% 13.88 38.8% 14.00 40.0% Averages: $17.81 43.8% $18.08 46.0% $18.66 51.7% Medians: $14.50 45.0% $14.63 46.3% $14.88 48.8% Averages, Excluding 2nd Steps $19.41 51.2% $19.71 53.6% $20.30 59.3% Medians, Excluding 2nd Steps $14.56 45.6% $14.88 48.8% $15.88 58.8% Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not Applicable, Not Available. (1) Non-OTS regulated thrifts. September 5, 1997 (2) As reported in summary pages of prospectus. (3) As reported in prospectus. (4) Does not take into account the adoption of SOP 93-6. (5) Excludes impact of special SAIF assessment on earnings (6) Latest price if offering less than one week old. (7) Latest price if offering more than one week but less than one month old. (8) Second-step conversions. (9) Simultaneously converted to commercial bank charter. - ------------------------------------------------------------------------------------------------------------------------------------
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 4.3 Market Pricing Comparatives Prices As of September 5, 1997
Per Share Data Market --------------- Capitalization Core Book Pricing Ratios(3) --------------- --------------------------------------- Price/ Market 12-Mth Value/ Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE --------------------- -------- ----- ------ ----- --- --- --- ---- ------ ($) ($Mil) ($) ($) (X) (%) (%) (%) (x) SAIF-Insured Thrifts 22.42 156.65 1.15 15.71 21.17 141.84 17.73 146.01 18.61 Special Selection Grouping(8) 22.77 65.54 0.70 19.07 27.88 116.96 24.47 117.29 28.57 Comparable Group ---------------- Special Comparative Group(8) ---------------------------- CFBC Community First Bnkg Co. of GA 34.38 82.99 1.06 28.74 NM 119.62 18.42 121.27 NM FBNW FirstBank Corp of Clarkston WA 17.37 34.46 0.44 14.00 NM 124.07 22.38 124.07 NM FSPT FirstSpartan Fin. Corp. of SC 35.62 157.80 1.16 27.63 NM 128.92 33.93 128.92 NM GOSB GSB Financial Corp. of NY 14.50 32.60 0.44 13.78 27.88 105.22 28.48 105.22 NM MONT Montgomery Fin. Corp. of IN 12.00 19.84 0.42 11.22 NM 106.95 19.16 106.95 28.57
Dividends(4) Financial Characteristics(6) ----------------------- ------------------------------------------------------- Amount/ Payout Total Equity/ NPAs/ Reported Core ________________ _______________ Financial Institution Share Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE --------------------- ----- ----- -------- ------ ------ ------ --- --- --- --- ($) (%) (%) ($Mil) (%) (%) (%) (%) (%) (%) SAIF-Insured Thrifts 0.37 1.71 29.68 1,156 12.88 0.79 0.53 5.46 0.75 7.52 Special Selection Grouping(8) 0.00 0.00 0.00 258 20.95 1.67 0.73 3.44 0.75 3.59 Comparable Group ---------------- Special Comparative Group(8) ---------------------------- CFBC Community First Bnkg Co. o 0.00 0.00 0.00 451 15.40 2.02 0.56 3.65 0.57 3.69 FBNW FirstBank Corp of Clarksto 0.00 0.00 0.00 154 18.04 2.07 0.70 3.86 0.57 3.14 FSPT FirstSpartan Fin. Corp. of 0.00 0.00 0.00 465 26.32 NA 0.95 3.62 1.11 4.20 GOSB GSB Financial Corp. of NY 0.00 0.00 0.00 114 27.06 NA 1.02 3.77 0.86 3.19 MONT Montgomery Fin. Corp. of I 0.00 0.00 0.00 104 17.91 0.91 0.42 2.32 0.67 3.74
(1) Average of High/Low or Bid/Ask price per share. (2) EPS (estimate core basis) is based on actual trailing twelve month data, adjusted to omit non-operating items (including the SAIF assessment) on a tax effected basis. (3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/CORE = Price to estimated core earnings. (4) Indicated twelve month dividend, based on last quarterly dividend declared. (5) Indicated dividend as a percent of trailing twelve month estimated core earnings. (6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month earnings and average equity and assets balances. (7) Excludes from averages those companies the subject of actual or rumored acquisition activities or unusual operating characteristics. (8) Includes Converted Last 3 Mths (no MHC); Source: Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Page 4.14 C. Secondary Step Conversion Market -------------------------------- There is a pronounced difference in the pricing of second step conversions relative to full conversion offerings in which 100 percent of the shares are issued. As noted in Table 4.4, during the past 12 months, the median pro forma price/tangible book ratios of second step conversions exceeded 82 percent, as compared to the median price/tangible book of conversions over the last three months which just exceeds 71 percent, perhaps reflecting the smaller offering and some seasoning as a public company for second steps. Furthermore, as shown in Table 4.5, assuming the publicly-traded MHCs completed second step conversions (utilizing standard assumptions for each MHC) at their current market prices, the implied median price/tangible book is computed at approximately 103.45 percent. D. Acquisition Market ------------------ Also considered in the valuation was the potential impact on Guaranty's stock price of recently completed and pending acquisitions of other thrifts operating in Guaranty's market area. As shown in Exhibit IV-4, there were 7 Missouri savings institutions acquired or under acquisition since the beginning of 1996. The recent acquisition activity involving Missouri savings institutions may imply a certain degree of acquisition speculation for the Bank's stock. To the extent that acquisition speculation may impact the Bank's offering, we have largely taken this into account in selecting Missouri savings institutions that also experience a degree of acquisition speculation. E. Trading in Guaranty's Stock --------------------------- Since Guaranty's minority stock currently trades under the symbol "GFED" on the NASDAQ National Market system, RP Financial also considered the recent trading activity in its valuation analysis. Guaranty had a total of 3,125,000 shares issued and outstanding at June 30, 1997, of which 972,365 were held by Public Stockholders and were traded as public securities. As of September 5, 1997, the Bank's stock price was $19.12 per share. Prior to the announcement of the second step conversion, the shares were trading in the range of $15.625 to $15.75 per share. The day the second step was announced, the shares increased to a range of $15.75 to $17.25 on heavy volume and closed at $17.00. We attribute the price increase to some speculation and the current pricing has placed it at a slight premium to the average P/TB of other MHCs. There are significant differences between the Bank's minority stock (currently being traded) and the conversion stock that will be issued by the Holding Company. Such differences include different liquidity characteristics (the new conversion stock will be significantly more liquid owing to greater public shares available to trade), a lower return on equity for the Holding Company's conversion stock, and the anticipated difference in dividend for the conversion stock. Since the pro forma impact has not been publicly disseminated to date, it is appropriate to RP Financial, LC. August 29, 1997 ------------------------------------------------------------------------------- Table 4.4 Pricing Characteristics and After-Market Trends Second Step Conversions -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Institutional Information Pre-Conversion Data ---------------------------------------- Offering Financial Info. Asset Quality Information - ----------------------------------------------------------- --------------------- ------------------- --------------------------- Conversion Equity/ NPAs/ Res. Gross % of Exp./ Institution State Date Ticker Assets Assets Assets Cov. Proc. Mid. Proc. - ----------- ----- ---- ------ ------ ------ ------ ---- ----- ---- ----- ($Mil) (%) (%)(2) (%) ($Mil) (%) (%) - ----------------------------------------------------------- ----------------------------------------- ---------------------------- Bayonne Bancshares NJ 08/22/97 FSNJ $577 8.33% 0.81% 53% $48.7 132% 3.8% Montgomery Fin. Corp. IN 07/01/97 MONT 94 9.83% 0.91% 20% 11.9 132% 4.5% Cumberland Mtn. Bncshrs. KY * 04/01/97 P.Sheet 92 5.14% 1.31% 19% 4.4 132% 8.0% Kenwood Bancorp OH * 07/01/96 P.Sheet 48 6.88% 0.00% NM 1.6 102% 22.2% Commonwealth Bancorp PA * 06/17/96 CMSB 2,054 6.71% 0.51% 109% 98.7 110% 1.9% Westwood Financial Corp. NJ 06/07/96 WWFC 85 7.05% 0.00% NM 3.9 99% 9.9% Jacksonville Bancorp TX 04/01/96 JXVL 198 10.47% 1.41% 36% 16.2 106% 4.4% North Central Bancshares IA 03/21/96 FFFD 180 16.47% 0.17% 562% 26 106% 3.5% Fidelity Financial of Ohio OH * 03/04/96 FFOH 227 13.23% 0.50% 69% 22.8 132% 3.2% First Colorado Bancorp CO * 01/02/96 FFBA 1,400 12.71% 0.31% 20% 134.1 105% 1.9% Charter Financial IL * 12/29/95 CBSB 293 12.17% 0.27% 281% 29.2 116% 3.4% American Nat'l Bancorp MD * 11/03/95 ANBK 426 6.80% 2.23% 67% 21.8 132% 3.3% First Defiance Fin. Corp. OH * 10/02/95 FDEF 476 15.27% 0.24% 135% 64.8 132% 2.3% Community Bank Shares IN * 04/10/95 CBIN 205 7.00% 0.33% 80% 10.1 132% 4.4% Fed One Bancorp WV * 01/19/95 FOBC 305 9.2% 0.32% 142% 16.1 85% 7.7% Home Financial Corp. FL * 10/25/94 HOFL 1,005 13.4% 0.91% 44% 175.6 112% 3.1% Jefferson Bancorp LA * 08/18/94 JEBC 257 6.3% 0.9% 25% 16.1 107% 3.9% Averages: $440 9.28% 0.62% 104% $39.0 110% 5.1% Medians: 257 9.25% 0.50% 67% $21.8 112% 3.8%
- ------------------------------------------------------------------------------------------------------------------------------------ Institutional Information Insider Purchases Pro Forma Data ----------------------------------------------------- Pricing Ratios(4) Fin. Characteristics - ------------------------------------------------------- --------------------- ------------------------------ --------------------- Benefits Plan Conversion Recog. Mgmt. Institution State Date Ticker ESOP Plans & Dirs. P/TB P/E(7) P/Core P/A ROA TE/A ROE - ----------- ----- ---- ------ ---- ----- ------- ---- ----- ----- --- --- ---- --- (%) (%) (%)(3) (%) (x) (x) (%) (%) (%) (%) - ------------------------------------------------------- --------------------- ------------------------------ -------------------- Bayonne Bancshares NJ 08/22/97 FSNJ 8.0% 4.0% 10.0% 100.9% NM NM 14.6% -0.5% 14.4% -6.6% Montgomery Fin. Corp. IN 07/01/97 MONT 8.0% 4.0% 4.6% 89.1% 24.1 24.1 16.0% 0.7% 17.9% 3.7% Cumberland Mtn. Bncshrs. KY * 04/01/97 P.Sheet 6.2% 4.0% 4.5% 81.2% 13.8 13.8 7.1% 0.5% 8.8% 5.9% Kenwood Bancorp OH * 07/01/96 P.Sheet 8.0% 4.0% 6.4% 67.6% NM NM 6.0% 0.1% 8.8% 1.7% Commonwealth Bancorp PA * 06/17/96 CMSB 8.0% 4.0% 0.1% 109.3% 12.1 12.5 8.4% 0.7% 6.7% 10.4% Westwood Financial Corp. NJ 06/07/96 WWFC 0.0% 0.0% 2.5% 80.0% 10.1 10.1 7.3% 0.7% 9.2% 7.9% Jacksonville Bancorp TX 04/01/96 JXVL 8.0% 4.0% 2.0% 77.7% 14.9 14.9 12.6% 0.8% 16.2% 5.2% North Central Bancshares IA 03/21/96 FFFD 3.2% 0.0% 0.5% 74.2% 12.1 12.5 19.7% 1.6% 26.5% 6.1% Fidelity Financial of Ohio OH * 03/04/96 FFOH 8.0% 4.0% 5.6% 82.6% 18.1 18.1 16.6% 0.9% 20.0% 4.6% First Colorado Bancorp CO * 01/02/96 FFBA 10.0% 2.0% 2.0% 87.0% 12.7 13.4 13.2% 1.0% 15.2% 6.9% Charter Financial IL * 12/29/95 CBSB 3.3% 0.0% 0.1% 81.4% 12.3 12.3 15.5% 1.3% 19.1% 6.6% American Nat'l Bancorp MD * 11/03/95 ANBK 8.0% 4.0% 0.6% 83.9% 17.7 17.7 9.0% 0.5% 10.7% 4.7% First Defiance Fin. Corp. OH * 10/02/95 FDEF 8.0% 4.0% 0.9% 85.6% 18.2 18.2 20.6% 1.1% 24.1% 4.7% Community Bank Shares IN * 04/10/95 CBIN 8.0% 0.0% 17.9% 85.5% 10.3 9.0 9.3% 0.9% 10.9% 8.3% Fed One Bancorp WV * 01/19/95 FOBC 7.0% 4.0% 0.9% 67.9% 9.0 9.0 8.8% 1.0% 13.0% 7.6% Home Financial Corp. FL * 10/25/94 HOFL 8.0% 4.0% 0.6% 86.4% 10.6 12.4 21.3% 2.0% 24.6% 8.2% Jefferson Bancorp LA * 08/18/94 JEBC 7.0% 3.0% 1.5% 71.7% 10.2 10.2 7.9% 0.8% 11.1% 7.0% Averages: 6.5% 2.7% 3.4% 78.4% 12.9 13.0 11.9% 0.9% 14.3% 5.9% Medians: 8.0% 4.0% 2.0% 82.6% 12.3 12.5 12.6% 0.8% 14.4% 6.1% - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- Institutional Information Post-IPO Pricing Trends ------------------------------------------------------ Closing Price: - ----------------------------------------------------------------- ------------------------------------------------------ First After After Conversion IPO Trading % First % First % Institution State Date Ticker Price Day Chg. Week(5) Chg. Month(6) Chg. - ----------- ----- ---- ------ ----- --- ---- ------- ---- ------- ---- ($) ($) (%) ($) (%) ($) (%) Bayonne Bancshares NJ 08/22/97 FSNJ $10.00 $11.75 17.5% $11.94 19.4% $11.94 19.4% Montgomery Fin. Corp. IN 07/01/97 MONT 10.00 11.13 11.2% 11.25 12.5% 12.13 21.3% Cumberland Mtn. Bncshrs. KY * 04/01/97 P.Sheet 10.00 11.88 18.8% 12.25 22.5% 12.63 26.3% Kenwood Bancorp OH * 07/01/96 P.Sheet 10.00 NT NA NT NA NT NA Commonwealth Bancorp PA * 06/17/96 CMSB 10.00 10.50 5.0% 10.75 7.5% 10.00 0.0% Westwood Financial Corp. NJ 06/07/96 WWFC 10.00 10.75 7.5% 10.38 3.8% 10.62 6.2% Jacksonville Bancorp TX 04/01/96 JXVL 10.00 9.75 -2.5% 9.63 -3.8% 9.88 -1.2% North Central Bancshares IA 03/21/96 FFFD 10.00 10.88 8.7% 10.69 6.9% 10.44 4.4% Fidelity Financial of Ohio OH * 03/04/96 FFOH 10.00 10.50 5.0% 10.00 0.0% 10.13 1.3% First Colorado Bancorp CO * 01/02/96 FFBA 10.00 11.44 14.4% 11.63 16.3% 12.00 20.0% Charter Financial IL * 12/29/95 CBSB 10.00 10.81 8.1% 10.88 8.7% 11.38 13.8% American Nat'l Bancorp MD * 11/03/95 ANBK 10.00 9.38 -6.3% 9.75 -2.5% 9.88 -1.2% First Defiance Fin. Corp. OH * 10/02/95 FDEF 10.00 10.38 3.8% 10.31 3.1% 10.13 1.3% Community Bank Shares IN * 04/10/95 CBIN 10.00 12.00 20.0% 12.75 27.5% 12.25 22.5% Fed One Bancorp WV * 01/19/95 FOBC 10.00 11.00 10.0% 11.00 10.0% 11.62 16.2% Home Financial Corp. FL * 10/25/94 HOFL 10.00 9.59 -4.1% 10.00 0.0% 10.31 3.1% Jefferson Bancorp LA * 08/18/94 JEBC 10.00 13.00 30.0% 14.25 42.5% 14.25 42.5% Averages: $9.44 10.28 7.3% 10.43 8.9% $10.48 11.0% Medians: $10.00 $10.84 7.8% $10.81 7.2% $10.62 6.2% - -----------------------------------------------------------------------------------------------------------------------------------
Note: "NT" - Not Traded; "NA" - Not Applicable, Not Available. (1) Non-OTS regulated thrifts. August 29, 1997 (2) As reported in summary pages of prospectus. (3) As reported in prospectus. (4) Does not take into account the adoption of SOP 93-6. (5) Latest price if offering less than one week old. (6) Latest price if offering more than one week but less than one month old. (7) Price to core earnings if converted after 9/30/96 due to impact of SAIF assessment. - -------------------------------------------------------------------------------- Table 4.5 MHC INSTITUTIONS -- IMPLIED PRICING RATIOS FULL CONVERISON BASIS Comparable Institution Analysis As of September 5, 1997
Fully Converted Implied Value Per Share(8) ---------------- --------------- Pricing Ratios(3) Dividends(4) --------------------------------------- ---------------------- Implied Core Book Price/ Market 12-Mth Value/ Amount/ Payout Share(1) Val(8) EPS(2) Share P/E P/B P/A P/TB P/CORE Share Yield Ratio(5) -------- ------ ------ ----- --- --- --- ---- ------ ----- ----- -------- ($) ($Mil) ($) ($) (X) (%) (%) (%) (X) ($) (%) (%) SAIF-Insured Thrifts(7) Averages 22.42 156.65 1.15 15.71 21.17 141.84 17.73 146.01 18.61 0.37 1.71 29.68 Medians --- --- --- --- 20.96 135.79 15.79 136.99 18.08 --- --- --- Publicly-Traded MHC Institutions, Full Conversion Basis Averages 26.03 228.57 1.22 25.31 25.05 102.25 21.31 103.04 22.33 0.57 2.17 40.30 Medians --- --- --- --- 26.37 103.25 20.10 103.45 21.82 --- --- --- Publicly-Traded MHC Institutions, Full Conversion Basis CMSV Commty. Savgs, MHC of FL (48.5) 32.75 166.70 1.47 29.62 29.50 110.57 21.60 110.57 22.28 0.90 2.75 61.22 FFFL Fidelity FSB, MHC of FL (47.7) 27.87 188.71 1.12 24.62 NM 113.20 17.44 113.62 24.88 0.90 3.23 NM SKBO First Carnegie, MHC of PA (45.0) 16.50 37.95 0.56 17.83 NM 92.54 22.65 92.54 29.46 0.30 1.82 53.57 FFSX First FS&LA, MHC of IA (46.1) 28.00 79.18 1.53 26.42 27.18 105.98 15.70 106.42 18.30 0.48 1.71 31.37 FSLA First SB SLA MHC of NJ (47.5) 31.00 225.18 1.62 27.23 26.50 113.85 19.87 120.25 19.14 0.48 1.55 29.63 GDVS Greater DV SB, MHC of PA (19.9) 24.50 80.16 0.87 25.13 NM 97.49 26.87 97.49 28.16 0.36 1.47 41.38 HARS Harris SB, MHC of PA (24.3) 44.25 496.62 1.75 42.74 28.55 103.53 21.04 108.16 25.29 0.58 1.31 33.14 JXSB Jcksnville SB, MHC of IL (45.6) 22.50 28.62 1.07 23.71 NM 94.90 16.28 94.90 21.03 0.40 1.78 37.38 LFED Leeds FSB, MHC of MD (36.3) 30.25 104.51 1.34 29.38 28.27 102.96 30.94 102.96 22.57 0.76 2.51 56.72 NWSB Northwest SB, MHC of PA (30.7) 25.87 604.74 1.23 23.55 26.13 109.85 24.75 112.19 21.03 0.32 1.24 26.02 PBCT Peoples Bank, MHC of CT (40.1) 29.19 1782.14 1.43 25.63 16.31 113.89 20.33 113.93 20.41 0.68 2.33 47.55 PFSL Pocahnts Fed, MHC of AR (47.0) 28.50 46.51 2.27 27.42 16.47 103.94 11.65 103.94 12.56 0.90 3.16 39.65 PHSB Ppls Home SB, MHC of PA (45.0) 16.37 45.18 0.87 21.92 NM 74.68 18.08 74.68 18.82 0.00 0.00 0.00 PULB Pulaski SB, MHC of MO (29.8) 26.50 55.49 1.24 26.67 26.24 99.36 26.36 99.36 21.37 1.00 3.77 NM PLSK Pulaski SB, MHC of NJ (46.0) 17.50 36.23 0.72 18.14 NM 96.47 18.69 96.47 24.31 0.30 1.71 41.67 SBFL SB Fngr Lakes MHC of NY (33.1) 25.00 44.63 0.89 25.69 NM 97.31 18.46 97.31 28.09 0.40 1.60 44.94 WAYN Wayne S&L Co. MHC of OH (47.8) 24.25 54.51 1.03 21.09 NM 114.98 19.60 114.98 23.54 0.62 2.56 60.19 WCFB Wbstr Cty FSB MHC of IA (45.2) 17.75 37.28 0.86 18.70 25.36 94.92 33.33 94.92 20.64 0.80 4.51 NM
Table 4.5 MHC INSTITUTIONS -- IMPLIED PRICING RATIOS FULL CONVERISON BASIS Comparable Institution Analysis As of September 5, 1997
Financial Characteristics(6) ------------------------------------------------- Reported Core Total Equity/ NPAs/ ----------- ----------- Assets Assets Assets ROA ROE ROA ROE ------ ------ ------ --- --- --- --- ($Mil) (%) (%) (%) (%) (%) (%) SAIF-Insured Thrifts(7) Averages 1,156 12.88 0.79 0.53 5.46 0.75 7.52 Medians --- --- --- --- --- --- --- Publicly-Traded MHC Institutions, Full Conversion Basis Averages 1,096 21.09 0.66 0.77 3.71 1.00 4.87 Medians --- --- --- --- --- --- --- Publicly-Traded MHC Institutions, Full Conversion Basis CMSV Commty. Savgs, MHC of FL (48.5) 772 19.53 0.55 0.77 3.81 1.02 5.04 FFFL Fidelity FSB, MHC of FL (47.7) 1,082 15.40 0.34 0.57 3.41 0.78 4.61 SKBO First Carnegie, MHC of PA (45.0) 168 24.47 NA 0.62 2.52 0.77 3.14 FFSX First FS&LA, MHC of IA (46.1) 504 14.81 0.11 0.59 3.97 0.88 5.90 FSLA First SB SLA MHC of NJ (47.5) 1,133 17.45 0.68 0.77 4.39 1.07 6.07 GDVS Greater DV SB, MHC of PA (19.9) 298 27.56 2.79 0.77 2.72 0.98 3.48 HARS Harris SB, MHC of PA (24.3) 2,360 20.32 0.65 0.82 3.71 0.93 4.18 JXSB Jcksnville SB, MHC of IL (45.6) 176 17.15 0.66 0.50 2.72 0.83 4.55 LFED Leeds FSB, MHC of MD (36.3) 338 30.05 0.02 1.12 3.68 1.40 4.61 NWSB Northwest SB, MHC of PA (30.7) 2,443 22.53 0.72 1.00 4.25 1.25 5.28 PBCT Peoples Bank, MHC of CT (40.1) 8,767 17.85 0.90 1.29 7.21 1.03 5.76 PFSL Pocahnts Fed, MHC of AR (47.0) 399 11.21 0.15 0.71 6.43 0.93 8.44 PHSB Ppls Home SB, MHC of PA (45.0) 250 24.21 NA 0.57 2.37 0.96 3.97 PULB Pulaski SB, MHC of MO (29.8) 211 26.52 NA 1.00 3.81 1.23 4.68 PLSK Pulaski SB, MHC of NJ (46.0) 194 19.38 0.65 0.46 2.80 0.79 4.80 SBFL SB Fngr Lakes MHC of NY (33.1) 242 18.97 0.69 0.41 2.08 0.69 3.50 WAYN Wayne S&L Co. MHC of OH (47.8) 278 17.05 0.73 0.52 3.07 0.84 4.94 WCFB Wbstr Cty FSB MHC of IA (45.2) 112 35.11 0.26 1.31 3.77 1.61 4.63
(1) Current stock price of minority stock. Average of High/Low or Bid/Ask price per share. (2) EPS (estimated core earnings) is based on reported trailing twelve month data, adjusted to omit non-operating gains and losses (including the SAIF assessment) on a tax effected basis. Public MHC data reflects additional earnings from reinvestment of proceeds of second step conversion. (3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB = Price to Tangible Book; and P/CORE = Price to Core Earnings. Ratios are pro forma assuming a second step conversion to full stock form. (4) Indicated twelve month dividend, based on last quarterly dividend declared. (5) Indicated twelve month dividend as a percent of trailing twelve month estimated core earnings (earnings adjusted to reflect second step conversion). (6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month earnings and average equity and assets balances. (7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics. (8) Figures estimated by RP Financial to reflect a second step conversion of the MHC to full stock form. Source: Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. Calculation of Implied Per Share Data -- Incorporating MHC Second Step Conversion Comparable Institution Analysis For the Twelve Months Ended June 30, 1997
Current Ownership Current Per Share Data (MHC Ratios) ---------------------------- ---------------------------------------------- Total Public MHC Core Book Tangible Shares Shares Shares EPS EPS Value Book Assets ------ ------ ------ --- --- ----- ---- ------ (000) (000) (000) ($) ($) ($) ($) ($) Publicly-Traded MHC Institutions - -------------------------------- CMSV Commty. Savgs, MHC of FL (48.5) 5,090 2,470 2,620 0.73 1.09 15.46 15.46 137.48 FFFL Fidelity FSB, MHC of FL (47.7) 6,771 3,224 3,547 0.50 0.79 12.36 12.27 147.58 FFSX First FS&LA, MHC of IA (46.1) 2,828 1,303 1,525 0.69 1.19 13.74 13.63 165.69 FSLA First SB SLA MHC of NJ (47.5) 7,264 3,404 3,860 0.80 1.25 13.39 11.94 142.18 GDVS Greater DV SB, MHC of PA (19.9) 3,272 650 2,622 0.23 0.42 8.64 8.64 74.69 HARS Harris SB, MHC of PA (24.3) 11,223 2,723 8,500 0.79 0.99 14.59 12.76 182.15 JXSB Jcksnville SB, MHC of IL (45.6) 1,272 580 692 0.36 0.79 13.43 13.43 127.94 LFED Leeds FSB, MHC of MD (36.3) 3,455 1,255 2,200 0.63 0.90 13.20 13.20 81.59 NWSB Northwest SB, MHC of PA (30.7) 23,376 7,176 16,200 0.58 0.82 8.49 8.00 89.47 PBCT Peoples Bank, MHC of CT (40.1) 61,053 24,453 36,600 1.39 1.03 10.93 10.92 128.90 PFSL Pocahnts Fed, MHC of AR (47.0) 1,632 769 863 1.39 1.93 14.76 14.76 232.05 PHSB Ppls Home SB, MHC of PA (45.0) 2,760 1,242 1,518 0.32 0.67 14.36 14.36 82.97 PLSK Pulaski SB, MHC of NJ (46.0) 2,070 952 1,118 0.21 0.51 10.20 10.20 85.68 PULB Pulaski SB, MHC of MO (29.8) 2,094 624 1,470 0.59 0.82 11.04 11.04 84.92 SBFL SB Fngr Lakes MHC of NY (33.1) 1,785 590 1,195 0.15 0.51 11.63 11.63 121.40 SKBO First Carnegie, MHC of PA (45.0) 2,300 1,035 1,265 0.24 0.35 10.21 10.21 65.23 WAYN Wayne S&L Co. MHC of OH (47.8) 2,248 1,075 1,173 0.35 0.74 10.46 10.46 113.09 WCFB Wbstr Cty FSB MHC of IA (45.2) 2,100 950 1,150 0.48 0.64 10.53 10.53 45.09
Calculation of Implied Per Share Data -- Incorporating MHC Second Step Conversion Comparable Institution Analysis For the Twelve Months Ended June 30, 1997
Impact of Second Step Conversion Pro Forma Per Share Data (Fully Converted) ---------------------------------------------- -------------------------------------------- Share Gross Net Incr. Net Incr. Core Book Tangible Price Procds(1) Capital(2) Income(3) EPS EPS Value Book Assets ----- --------- ---------- --------- --- --- ----- ---- ------ ($000) ($000) ($000) ($000) ($) ($) ($) ($) ($) Publicly-Traded MHC Institutions CMSV Commty. Savgs, MHC of FL (48.5) 32.75 85,805 72,076 1,948 1.11 1.47 29.62 29.62 151.64 FFFL Fidelity FSB, MHC of FL (47.7) 27.87 98,855 83,038 2,244 0.83 1.12 24.62 24.53 159.84 FFSX First FS&LA, MHC of IA (46.1) 28.00 42,700 35,868 969 1.03 1.53 26.42 26.31 178.37 FSLA First SB SLA MHC of NJ (47.5) 31.00 119,660 100,514 2,717 1.17 1.62 27.23 25.78 156.02 GDVS Greater DV SB, MHC of PA (19.9) 24.50 64,239 53,961 1,458 0.68 0.87 25.13 25.13 91.18 HARS Harris SB, MHC of PA (24.3) 44.25 376,125 315,945 8,540 1.55 1.75 42.74 40.91 210.30 JXSB Jcksnville SB, MHC of IL (45.6) 22.50 15,570 13,079 354 0.64 1.07 23.71 23.71 138.22 LFED Leeds FSB, MHC of MD (36.3) 30.25 66,550 55,902 1,511 1.07 1.34 29.38 29.38 97.77 NWSB Northwest SB, MHC of PA (30.7) 25.87 419,094 352,039 9.515 0.99 1.23 23.55 23.06 104.53 PBCT Peoples Bank, MHC of CT (40.1) 29.19 1,068,354 897,417 24,256 1.79 1.43 25.63 25.62 143.60 PFSL Pocahnts Fed, MHC of AR (47.0) 28.50 24,596 20,660 558 1.73 2.27 27.42 27.42 244.71 PHSB Ppls Home SB, MHC of PA (45.0) 16.37 24,850 20,874 564 0.52 0.87 21.92 21.92 90.53 PLSK Pulaski SB, MHC of NJ (46.0) 17.50 19,565 16,435 444 0.42 0.72 18.14 18.14 93.62 PULB Pulaski SB, MHC of MO (29.8) 26.50 38,955 32,722 884 1.01 1.24 26.67 26.67 100.55 SBFL SB Fngr Lakes MHC of NY (33.1) 25.00 29,875 25,095 678 0.53 0.89 25.69 25.69 135.46 SKBO First Carnegie, MHC of PA (45.0) 16.50 20,873 17,533 474 0.45 0.56 17.83 17.83 72.85 WAYN Wayne S&L Co. MHC of OH (47.8) 24.25 28,445 23,894 646 0.64 1.03 21.09 21.09 123.72 WCFB Wbstr Cty FSB MHC of IA (45.2) 17.75 20,413 17,147 463 0.70 0.86 18.70 18.70 53.26
(1) Gross proceeds calculated as stock price multiplied by the number of shares owned by the mutual holding company (i.e., non-public shares). (2) Net increase in capital reflects gross proceeds less offering expenses, contra-equity account for leveraged ESOP and deferred compensation account for restricted stock plan: Offering expense percent 4.00 ESOP percent purchase 8.00 Recognition plan percent 4.00 (3) Net increase in earnings reflects after-tax reinvestment income (assumes ESOP and recognition plan do not generate reinvestment income), less after-tax ESOP amortization and recognition plan vesting: After-tax reinvestment 3.96 ESOP loan term (years) 10 Recog. plan vesting (yrs) 5 Effective tx rate 34.00 Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Page 4.18 discount the current trading level. As the pro forma impact is made known publicly, the trading level will become more informative. Taking these factors and trends into account, RP Financial concluded that no adjustment was appropriate in the valuation analysis for purposes of marketing of the issue. 8. Management ---------- Guaranty's management team has experience and expertise in all of the key areas of the Bank's operations. Exhibit IV-5 lists Guaranty's Board of Directors and executive management with summary resumes. The Bank's operations to date indicates that Guaranty's management team, in conjunction with the Board, has developed and implemented an effective operating philosophy. Guaranty has no apparent senior management or Board vacancies and there appears to be a well-defined organizational structure. Similarly, the financial results of the Peer Group companies indicate that they have been effectively managed, as all of the Peer Group companies maintained capital positions in compliance with regulatory requirements, solid core earnings and favorable credit quality measures. We have therefore concluded that, in general, Guaranty is currently being operated at least as effectively as the Peer Group companies and no adjustment for this factor was necessary. 9. Effect of Government Regulation and Regulatory Reform ------------------------------------------------------- The Bank and the Peer Group members were similarly impacted by the 1996 recapitalization of the SAIF insurance fund, and their deposits will be assessed at the same rate going forward. As a fully-converted SAIF-insured institution, Guaranty will operate in substantially the same regulatory environment as the Peer Group members -- all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6 reflects the Bank's pro forma regulatory capital ratios. On balance, RP Financial concluded that no adjustment to the Bank's value was warranted for this factor. Summary of Adjustments - ---------------------- Overall, we believe the Bank's pro forma market value should take into account the valuation adjustments relative to the Peer Group: RP Financial, LC. Page 4.19
Key Valuation Parameters: Valuation Adjustment ------------------------- -------------------- Financial Condition Moderate Downward Profitability, Growth and Viability of Earnings Slight Downward Asset Growth No Adjustment Primary Market Area Slight Upward Dividends No Adjustment Liquidity of the Shares No Adjustment Marketing of the Issue No Adjustment Management No Adjustment Effect of Government Regulations and Regulatory Reform No Adjustment
Valuation Approaches - -------------------- In applying the accepted valuation methodology promulgated by the OTS and adopted by the FDIC, i.e., the pro forma market value approach, we considered the three key pricing ratios in valuing Guaranty's to-be-issued stock - -- the price/earnings ("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches -- all performed on a pro forma basis including the effects of the conversion proceeds from selling the MHCs interest to the public. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in Guaranty's prospectus for offering expenses, and the effective tax rate and stock benefit plan assumptions (summarized in Exhibits IV-7 and IV-8). We have utilized the reinvestment rate set forth in the prospectus, the arithmetic average of the Bank's yield on interest earning assets and cost of deposits for the fiscal year ended June 30, 1997. With regard to the employee stock ownership plan and stock reward plans, we have performed the valuation assuming the ESOP purchases an amount equal to 8.0 percent of the offering (10 year amortization) and the RSP acquires 4.0 percent of the offering. In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and the recent conversions. In addition to the three valuation methodologies specified by the OTS, RP Financial also considered the recent prices for trades of the Bank's stock. RP Financial's valuation placed emphasis on the following: o P/E Approach. The P/E approach is generally the best indicator of long-term value for a stock. Since the Bank and the Peer Group reported pro forma core profitability, the P/E approach was heavily considered in this valuation. In applying this approach, we took into account primarily estimated core earnings. o P/B Approach. P/B ratios have generally served as a useful benchmark in the valuation of savings institution stocks, with the greater determinant of long term value being earnings. We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or "P/TB"). RP Financial considered the P/TB approach to be a reliable indicator of value given current market conditions, particularly the market for new conversions, which often exhibit a willingness to pay premium P/E multiples in the expectation that such institutions will implement leveraging strategies to promote earnings growth. At the RP Financial, LC. Page 4.20 same time, with lower ROE ratios, new conversions are typically discounted on a book value basis relative to the market at least until there is partial realization of leveraging strategies. o P/A Approach. P/A ratios are generally a less reliable indicator of market value, as investors do not place exclusive weight simply on the size of total assets as a determinant of market value. Furthermore, this approach does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. Investors place significantly greater weight on book value and earnings -- which have received greater weight in our valuation analysis. At the same time, the P/A ratio is an indicator of franchise value and, in the case of a highly capitalized institution, a high P/A ratio limits the investment community's willingness to pay average market multiples for earnings and book value when ROE is low. o Trading of GFED Stock. Converting institutions generally do not have stock outstanding. Guaranty, however, has public shares outstanding due to the mutual holding company form of ownership. Because GFED stock is currently traded in the markets, it is an indicator of investor interest in the Bank's conversion stock and therefore received some weight in our valuation. Based on the September 5, 1997 stock price of $19.12 per share and the 3,125,000 shares of Bank stock issued and outstanding, the implied value of $59.75 million was considered in the valuation process. However, since the conversion stock will have different characteristics than the minority shares and since pro forma information has not been publicly disseminated to date, the current trading price of GFED stock was somewhat discounted herein but will become more important towards the closing of the offering. The current minority ownership percentage is 31.12 percent. However, pursuant to federal policy as established subsequent to February 1, 1995, the minority ownership interest is required to be adjusted pursuant to a two-step process to reflect both waived dividends and assets held by the MHC. Based upon estimated assets of $1.9 million at the MHC (inclusive of dividends to be paid to the MHC prior to completion of the second step conversion), and our estimated pro forma fully converted value of $47.0 million, the resulting pro forma ownership interest of the minority stockholders would be approximately 29.85 percent, based on this formula (see Exhibit IV-9). Our calculations for the exchange ratio and the size of the offering were based upon this figure. The Bank intends to adopt Statement of Position ("SOP" 93-6), which will cause earnings per share computations to be based on shares issued and outstanding excluding shares owned by an ESOP where there is not a commitment to release such shares. For the purpose of preparing the pro forma pricing tables and exhibits, we have reflected all shares issued in the offering including shares purchased by the ESOP as outstanding to capture the full dilutive impact of such stock to the Bank's shareholders. However, we have considered the impact of adoption of SOP 93-6 on the Bank in the determination of the Bank's pro forma value. RP Financial, LC. Page 4.21 Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above, and placing the greatest weight on the P/TB and P/E approaches, followed by the P/A approach, RP Financial concluded that the pro forma market value of the Bank's conversion stock is $47,043,645 at the midpoint at this time. 1. Price-to-Tangible Book ("P/TB"). The application of the P/TB valuation method requires calculating the Bank's pro forma market value by applying a valuation P/TB ratio to Guaranty's pro forma tangible book value. The pre-conversion book value for Guaranty of $27,490,000 was equal to the Bank's reported capital as of June 30, 1997, plus the mutual holding company assets which will be consolidated with the Holding Company as a result of the conversion. Based on the $47,043,645 midpoint valuation, Guaranty's pro forma P/TB ratio was 82.46 percent. In comparison to the average P/TB ratio for the Peer Group of 112.89 percent, Guaranty's valuation reflected a discount of 26.96 percent. RP Financial considered a discount under the P/TB approach to be reasonable in light of the valuation adjustments discussed previously. Given the historically high P/TB pricing for thrifts in today's market, a valuation discount under the P/TB approach could only be expected and is consistent with the aftermarket trading of new conversion issues. Given the emphasis on limiting near term aftermarket trading in the revised appraisal guidelines, RP Financial also considered the pro forma P/TB ratios of recent conversions in its valuation analysis. It is these companies that provide a proxy for aftermarket trading for new thrift issues. At the midpoint value of $47,043,645, Guaranty's pro forma P/TB ratio of 82.46 percent represented a discount of 29.7 percent from the 117.29 percent average P/TB ratio of the recently converted thrifts (see Table 4.3). At the super maximum of the valuation range, Guaranty's pro forma P/B ratio of 93.68 percent is discounted by approximately 20.1 percent from the new conversions. 2. Price-to-Earnings ("P/E"). The application of the P/E valuation method requires calculating the Bank's pro forma market value by applying a valuation P/E multiple times the pro forma earnings base. Ideally, the pro forma earnings base is composed principally of the Bank's recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of net conversion proceeds. Guaranty reported net income of $1,162,000 for fiscal 1997, which included net non-operating items such as the SAIF assessment fee, and other various gains on the sale of interest earning assets. As shown below, the Bank's core earnings were calculated to equal the following (Note: the adjustments applied to the Peer Group's earnings in the calculation of core earnings are shown in Exhibit IV-10, including the SAIF assessment): RP Financial, LC. Page 4.22 Amount ------ ($000) Pre-Tax Net Operating Income $1,826 Plus: Non-Operating Expense 853 Less: Tax Adjustment(1) (991) ---- Adjusted (Core) Income After Tax $1,688 (1) Tax rate equal to 37%. Based on Guaranty's trailing twelve month core earnings, and incorporating the impact of the pro forma assumptions previously discussed, the Bank's pro forma core P/E multiple at the $47,043,645 midpoint value equaled 18.61 times. Comparatively, the Peer Group posted an average core P/E multiple of 19.91 times, which indicates a discount of 6.53 percent in the Bank's pro forma earnings multiple. In reaching the valuation conclusion, we also evaluated the Bank's price/earnings multiple on the basis of projected earnings as reflected in the business plan. 3. Price-to-Assets ("P/A"). The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Bank's pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the midpoint of the valuation range, Guaranty's value equaled 20.54 percent of pro forma assets. Comparatively, the Peer Group companies exhibited an average P/A ratio of 19.67 percent, which implies a 4.42 percent premium being applied to the Bank's pro forma P/A ratio. Valuation Conclusion - -------------------- Based on the foregoing, it is our opinion that, as of September 5, 1997, the aggregate pro forma market value of the Bank, inclusive of the sale of the MHCs ownership interest in the Subscription and Community Offerings was $47,043,645 at the midpoint. Based on this valuation and the approximate 70.15 percent ownership interest being sold in the Subscription and Community Offerings, the midpoint value of the Holding Company's stock offering was $33,000,000 (i.e. 0.7015 x $47,043,645), equal to 3,300,000 shares offered at $10.00 per share. Pursuant to the conversion guidelines, the 15 percent offering range includes a minimum of $28,050,000 and a maximum of $37,950,000. Based on the $10.00 per share offering price, this valuation range equates to an offering of 2,805,000 shares at the minimum to 3,795,000 shares at the maximum. The Holding Company's offering also includes a provision for a super maximum, which would result in an offering size of $43,642,500, equal to 4,364,250 shares at the $10.00 per share offering price. The comparative pro forma RP Financial, LC. Page 4.23 valuation ratios relative to the Peer Group are shown in Table 4.7, and the key valuation assumptions are detailed in Exhibit IV-7. The pro forma calculations for the range are detailed in Exhibit IV-8. Establishment of Exchange Ratio ------------------------------- OTS regulations provide that in a conversion of a mutual holding company, the minority stockholders are entitled to exchange their shares of the Bank's common stock for common stock of the Company. The Board of Directors of the Mutual Holding Company has independently established a formula to determine the exchange ratio. The formula has been designed to preserve the current aggregate percentage ownership in the Bank represented by the Public Shares, which is an approximate 29.85 percent ownership interest (the original minority ownership percentage is adjusted for assets held at the Holding Company level). Pursuant to the formula, the Exchange Ratio will be determined at the end of the Holding Company's stock offering based on the total number of shares sold in the Subscription and Community offerings. Based upon this formula, and the valuation conclusion and offering range concluded above, the Exchange Ratio would be 1.2276 shares, 1.4443 shares, 1.6609 shares and 1.9101 shares of Holding Company stock issued for each Public Share, at the minimum, midpoint, maximum and supermaximum of the offering, respectively. The Exchange Ratio formula and share exchange procedures were determined independently by the Board of Directors. RP Financial expresses no opinion on the proposed exchange of the Holding Company shares for the Public Shares or on the proposed Exchange Ratio.
Table 4.6 Guaranty Federal Savings Bank Calculation of Exchange Ratios Shares Price/ Exchange Implied Offered Share Shares(1) Exch. Ratio(2) ------- ----- --------- -------------- ($000) Minimum 2,805,000 $10.00 1,193,709 1.2276 Midpoint 3,300,000 10.00 1,404,364 1.4443 Maximum 3,795,000 10.00 1,615,019 1.6609 Super Maximum 4,364,250 10.00 1,857,272 1.9101
(1) Calculated to preserve the Public Shares percentage ownership in the Holding Company at approximately 29.85 percent. (2) Calculated as pro forma exchange shares divided by 972,365 existing Public Shares outstanding. RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 4.7 Public Market Pricing Guaranty FSB of Springfield MO and the Comparables As of September 5, 1997
Per Share Data Market --------------- Capitalization Core Book Pricing Ratios(3) Dividends(4) --------------- -------------------------------------- ----------------------- Price/ Market 12-Mth Value/ Amount/ Payout Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE Share Yield Ratio(5) -------- ----- ------ ----- --- --- --- ---- ------ ----- -------------- ($) ($Mil) ($) ($) (X) (%) (%) (%) (X) ($) (%) (%) Guaranty FSB of Springfield MO ------------------------------ Superrange 10.00 62.22 0.37 10.68 27,22 93.68 26.10 93.68 22.13 0.30 3.00 81.7% Range Maximum 10.00 54.10 0.39 11.35 25.35 88.10 23.18 88.10 20.34 0.30 3.00 76.1% Range Midpoint 10.00 47,04 0.43 12.13 23.49 82.46 20.54 82.46 18.61 0.30 3.00 70.5% Range Minimum 10.00 39.99 0.47 13.18 21.38 75.89 17.80 75.89 16.69 0.30 3.00 64.1% SAIF-Insured Thrifts(7) ----------------------- Averages 22.42 156.65 1.15 15.71 21.17 141.84 17.73 146.01 18.61 0.37 1.71 29.68 Medians --- --- --- --- 20.96 135.79 15.79 136.99 18.08 --- --- --- All Non-MHC State of MO(7) -------------------------- Averages 21.35 46.30 1.13 16.65 21.79 129.69 20.65 133.31 19.02 0.39 1.94 36.22 Medians --- --- --- --- 22.76 113.27 19.50 113.27 18.54 --- --- --- Comparable Group Averages ------------------------- Averages 18.71 25.20 0.95 16.71 23.37 112.88 19.67 112.89 19.91 0.35 1.93 38.89 Medians --- --- --- --- 23.18 110.79 19.31 110.79 18.54 --- --- --- State of MO ----------- CBES CBES Bancorp of MO 17.75 18.19 0.86 17.08 25.72 103.92 19.11 103.92 20.64 0.40 2.25 46.51 CNSB CNS Bancorp of MO 17.00 28.10 0.46 14.84 NM 114.56 28.57 114.56 NM 0.24 1.41 52.17 CMRN Cameron Fin. Corp. of MO 17.75 46.63 0.97 17.18 22.76 103.32 22.41 103.32 18.30 0.28 1.58 28.87 CAPS Capital Savings Bancorp of MO 15.75 29.80 1.15 11.28 19.21 139.63 12.29 139.63 13.70 0.24 1.52 20.87 FBSI First Bancshares of MO 23.75 26.03 1.56 20.26 18.41 117.23 15.87 117.40 15.22 0.20 0.84 12.82 FTNB Fulton Bancorp of MO 21.00 36.10 0.58 14.47 NM 145.13 36.29 145.13 NM 0.20 0.95 34.48 GSBC Great Southern Bancorp of MO 17.37 140.78 1.30 7.45 15.10 233.15 19.89 233.15 13.36 0.40 2.30 30.77 HFSA Hardin Bancorp of Hardin MO 16.50 14.17 0.89 15.69 28.45 105.16 13.12 105.16 18.54 0.48 2.91 53.93 JSBA Jefferson Svgs Bancorp of MO 34.75 173.92 1.63 21.24 NM 163.61 13.41 214.77 21.32 0.40 1.15 24.54 JOAC Joachim Bancorp of MO 14.62 10.56 0.38 13.63 NM 107.26 30.21 107.26 NM 0.50 3.42 NM LXMO Lexington B&L Fin. Corp. of MO 16.00 18.21 0.71 14.74 29.09 108.55 30.74 108.55 22.54 0.30 1.88 42.25 MBLF MBLA Financial Corp. of MO 23.25 30.18 1.42 21.98 20.95 105.78 12.85 105.78 16.37 0.40 1.72 28.17 NSLB NS&L Bancorp of Neosho MO 18.75 13.26 0.64 16.52 NM 113.50 22.20 113.50 29.30 0.50 2.67 NM NASB North American SB of MO 49.00 109.22 3.86 25.37 11.95 193.14 14.83 199.84 12.69 0.80 1.63 20.73 PCBC Perry Co. Fin. Corp. of MO 21.25 17.60 1.04 18.80 23.61 113.03 21.69 113.03 20.43 0.40 1.88 38.46 SMFC Sho-Me Fin. Corp. of MO(7) 39.37 59.02 2.35 19.81 18.93 198.74 17.95 198.74 16.75 0.00 0.00 0.00 SMBC Southern Missouri Bncrp of MO 17.12 28.04 0.69 15.85 24.46 108.01 16.93 108.01 24.81 0.50 2.92 72.46 Comparable Group ---------------- CNSB CNS Bancorp of MO 17.00 28.10 0.46 14.84 NM 114.56 28.57 114.56 NM 0.24 1.41 52.17 CMRN Cameron Fin. Corp. of MO 17.75 46.63 0.97 17.18 22.76 103.32 22.41 103.32 18.30 0.28 1.58 28.87 CAPS Capital Savings Bancorp of Mo 15.75 29.80 1.15 11.28 19.21 139.63 12.29 139.63 13.70 0.24 1.52 20.87
Financial Characteristics(6) ------------------------------------------------------- Reported Core MEMO: MEMO: Total Equity/ NPAs/ _______________ _______________ Exchange Conversion Assets Assets Assets ROA ROE ROA ROE Ratio Proceeds ------ ------ ------ --- --- --- --- ----- -------- ($Mil) (%) (%) (%) (%) (%) (%) ($000) Guaranty FSB of Springfield MO ------------------------------ Superrange 238 27.86 0.44 0.96 3.44 1.18 4.23 1.9101 $43.64 Range Maximum 233 26.31 0.44 0.91 3.48 1.14 4.33 1.6609 87.95 Range Midpoint 229 24.91 0.45 0.87 3.51 1.10 4.43 1.4443 33.00 Range Minimum 225 23.45 0.46 0.83 3.55 1.07 4.55 1.2276 28.05 SAIF-Insured Thrifts(7) ----------------------- Averages 1,156 12.88 0.79 0.53 5.46 0.75 7.52 Medians --- --- --- --- --- --- --- All Non-MHC State of MO(7) -------------------------- Averages 275 17.02 0.76 0.77 5.64 0.99 7.10 Medians --- --- --- --- --- --- --- Comparable Group Averages ------------------------- Averages 142 17.63 0.45 0.74 4.37 0.96 5.70 Medians --- --- --- --- --- --- --- State of MO ----------- CBES CBES Bancorp of MO 95 18.39 0.77 0.77 5.22 0.96 6.51 CNSB CNS Bancorp of MO 98 24.94 0.53 0.42 1.70 0.77 3.13 CMRN Cameron Fin. Corp. of MO 208 21.69 0.73 1.07 4.43 1.33 5.51 CAPS Capital Savings Bancorp of MO 243 8.80 0.31 0.67 7.61 0.93 10.68 FBSI First Bancshares of MO 164 13.54 0.56 0.91 6.15 1.10 7.44 FTNB Fulton Bancorp of MO 99 25.01 0.81 0.74 3.81 1.05 5.39 GSBC Great Southern Bancorp of MO 708 8.53 1.91 1.38 14.76 1.56 16.69 HFSA Hardin Bancorp of Hardin MO 108 12.48 0.09 0.52 3.53 0.79 5.41 JSBA Jefferson Svgs Bancorp of MO 1,297 8.20 0.46 0.30 3.91 0.70 9.25 JOAC Joachim Bancorp of MO 35 28.17 0.20 0.47 1.59 0.77 2.62 LXMO Lexington B&L Fin. Corp. of MO 59 28.32 0.48 1.03 3.49 1.33 4.50 MBLF MBLA Financial Corp. of MO 235 12.15 0.25 0.67 5.10 0.85 6.52 NSLB NS&L Bancorp of Neosho MO 60 19.56 0.03 0.49 2.37 0.77 3.71 NASB North American SB of MO 737 7.68 3.11 1.26 17.18 1.19 16.18 PCBC Perry Co. Fin. Corp. of MO 81 19.19 NA 0.93 4.93 1.07 5.70 SMFC Sho-Me Fin. Corp. of MO(7) 329 9.03 0.14 1.04 10.44 1.17 11.79 SMBC Southern Missouri Bncrp of MO 166 15.67 1.10 0.71 4.42 0.70 4.35 Comparable Group ---------------- CNSB CNS Bancorp of MO 98 24.94 0.53 0.42 1.70 0.77 3.13 CMRN Cameron Fin. Corp. of MO 208 21.69 0.73 1.07 4.43 1.33 5.51 CAPS Capital Savings Bancorp of MO 243 8.80 0.31 0.67 7.61 0.93 10.68
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 4.7 Public Market Pricing Guaranty FSB of Springfield MO and the Comparables As of September 5, 1997
Per Share Data Market ---------------- Capitalization Core Book Pricing Ratios(3) Dividends(4) --------------- --------------------------------------- ------------------------- Price/ Market 12-Mth Value/ Amount/ Payout Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE Share Yield Ratio(5) -------- ----- ------ ----- --- --- --- ---- ------ ----- --------------- ($) ($Mil) ($) ($) (X) (%) (%) (%) (X) ($) (%) (%) FBSI First Bancshares of MO 23.75 26.03 1.56 20.26 18.41 117.23 15.87 117.40 15.22 0.20 0.84 12.82 HFSA Hardin Bancorp of Hardin MO 16.50 14.17 0.89 15.69 28.45 105.16 13.12 105.16 18.54 0.48 2.91 53.93 LXMO Lexington B&L Fin. Corp. of MO 16.00 18.21 0.71 14.74 29.09 108.55 30.74 108.55 22.54 0.30 1.88 42.25 MBLF MBLA Financial Corp. of MO 23.25 30.18 1.42 21.98 20.95 105.78 12.85 105.78 16.37 0.40 1.72 28.17 NSLB NS&L Bancorp of Neosho MO 18.75 13.26 0.64 16.52 NM 113.50 22.20 113.50 29.30 0.50 2.67 NM PCBC Perry Co. Fin. Corp. of MO 21.25 17.60 1.04 18.80 23.61 113.03 21.69 113.03 20.43 0.40 1.88 38.46 SMBC Southern Missouri Bncrp of MO 17.12 28.04 0.69 15.85 24.46 108.01 16.93 108.01 24.81 0.50 2.92 72.46
Financial Characteristics(6) -------------------------------------------------------- Reported Core Total Equity/ NPAs/ _______________ _______________ Assets Assets Assets ROA ROE ROA ROE ------- ------ ------ --- --- --- --- ($Mil) (%) (%) (%) (%) (%) (%) FBSI First Bancshares of MO 164 13.54 0.56 0.91 6.15 1.10 7.44 HFSA Hardin Bancorp of Hardin MO 108 12.48 0.09 0.52 3.53 0.79 5.41 LXMO Lexington B&L Fin. Corp. of MO 59 28.32 0.48 1.03 3.49 1.33 4.50 MBLF MBLA Financial Corp. of MO 235 12.15 0.25 0.67 5.10 0.85 6.52 NSLB NS&L Bancorp of Neosho MO 60 19.56 0.03 0.49 2.37 0.77 3.71 PCBC Perry Co. Fin. Corp. of MO 81 19.19 NA 0.93 4.93 1.07 5.70 SMBC Southern Missouri Bncrp of MO 166 15.67 1.10 0.71 4.42 0.70 4.35
(1) Average of high/low or bid/ask price per share. (2) EPS (core basis) is based on actual trailing twelve month data, adjusted to omit the impact of non-operating items (including the SAIF assessment) on a tax effected basis, and is shown on a pro forma basis where appropriate. (3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB = Price to Tangible Book; and P/CORE = Price to Core Earnings. (4) Indicated twelve month dividend, based on last quarterly dividend declared. (5) Indicated twelve month dividend as a percent of trailing twelve month estimated core earnings. (6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and total assets balances. (7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics. Source: Corporate reports, offering circulars, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. -----END PRIVACY-ENHANCED MESSAGE-----