<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-26556
CNS BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 43-1738315
- --------------------------------------------- -----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
427 Monroe Street, Jefferson City, Missouri 65101
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (573) 634-3336
-----------------
Securities registered under
Section 12(b) of the Exchange Act: None
-----------------
Securities registered under
Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
The Registrant's revenues for the fiscal year under report were
$7,450,820.
As of March 1, 1999, there were issued and outstanding 1,443,046 shares of
the Registrant's Common Stock. The Common Stock is listed for trading on the
Nasdaq SmallCap Market under the symbol "CNSB." Based on the closing price per
share, the aggregate market value of the Common Stock outstanding held by the
nonaffiliates of the Registrant on March 1, 1999 was $13,338,022 (1,185,602
shares at $11.25 per share).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III).
<PAGE>
PART I
Item 1. Business
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General
CNS Bancorp, Inc. ("Company"), a Delaware corporation, was organized in
January 1996 for the purpose of becoming the holding company for City National
Savings Bank, FSB ("Savings Bank") upon its conversion from a federal mutual
savings bank to a federal stock savings bank ("Conversion"). The Conversion was
completed on June 11, 1996 through the issuance of 1,653,125 shares of common
stock by the Company at a price of $10.00 per share.
The Savings Bank, founded in 1921, is a federally chartered savings
bank located in Jefferson City, Missouri. The Savings Bank is regulated by the
Office of Thrift Supervision ("OTS"), its primary federal regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The
Savings Bank's deposits are federally insured by the FDIC under the Savings
Association Insurance Fund ("SAIF"). The Savings Bank is a member of the Federal
Home Loan Bank ("FHLB") System. The Savings Bank is a community oriented
financial institution that engages primarily in the business of attracting
deposits from the general public and using these funds to originate one- to
four-family residential mortgage loans within the Savings Bank's market area. To
a lesser extent, the Savings Bank's lending activities include the origination
and purchase of multi-family, commercial real estate, construction, land,
commercial and consumer and other loans.
Market Area
The Company conducts operations in central Missouri through its main
office in Jefferson City, Missouri (Cole County) and branch offices located in
the cities of Jefferson City (Cole County), California (Moniteau County), Tipton
(Moniteau County) and St. Robert (Pulaski County). Jefferson City is the state
capital of Missouri, resulting in a significant concentration of government
employment and an historically stable economy for the region. Moniteau County is
a more rural county with a much lower population base and overall smaller
economy. The Company's St. Robert branch is strategically located near Fort
Leonard Wood, a major military installation in south-central Missouri. The
counties of Cole, Moniteau and Pulaski represent the Company's market area for
deposit generation and lending activity as most of its depositors live in these
areas and the majority of the Company's loans are secured by property in these
counties. Approximately two-thirds of the Company's deposits are located in
Jefferson City.
In general, the Company serves a limited growth market area with a
relatively small population base. The Cole County economy is based primarily on
the presence of the state capital and government, which has resulted in a high
level of state government employees. Manufacturing and services also constitute
a significant portion of the Cole County economy, with wholesale/retail trade,
finance, insurance, real estate and agriculture also contributing. Conversely,
Moniteau County is a much more rural county containing a number of small towns
with an agriculture base, although a large percentage of residents also commute
into Jefferson City or nearby Columbia or Sedalia for employment. Pulaski
County's economy is dominated by the operations of Fort Leonard Wood, a major
military installation and training center for all branches of the military. In
general, the economy of the Company's market area has been relatively stable
over the past decade.
Lending Activities
General. The principal lending activity of the Company is the
origination and purchase of conventional mortgage loans for the purpose of
purchasing, constructing or refinancing owner-occupied, one- to four-family
residential property. To a lesser extent, the Company also originates and
purchases multi-family, commercial real estate, construction, land, commercial
and consumer and other loans. The Company's net loans receivable totaled $61.7
million at December 31, 1998, representing 64.7% of total assets.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Company's loan portfolio by type of loan at the dates indicated. The
Company had no concentration of loans exceeding 10% of total loans other than as
disclosed below.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- -------- -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............ $45,495 70.68% $52,266 76.63% $48,318 76.57%
Multi-family................... 5,460 8.48 5,234 7.68 3,617 5.73
Commercial real estate......... 7,548 11.73 7,034 10.31 5,642 8.94
Construction................... 3,087 4.80 1,620 2.38 2,685 4.26
Land........................... 69 0.11 109 0.16 135 0.21
------- ------ ------- ------- ------- ------
Total mortgage loans.......... 61,659 95.80 66,263 97.16 60,397 95.71
Commercial loans................ 1,157 1.80 425 0.62 1,206 1.91
Consumer and other loans........ 1,543 2.60 1,513 2.22 1,498 2.38
------- ------ ------- ------ ------- ------
Total loans................... 64,359 100.00% 68,201 100.00% 63,101 100.00%
------- ====== ------- ====== ------- ======
Less:
Loans in process............... 2,239 1,287 1,728
Deferred loan fees and
discounts.................... 10 14 10
Allowance for loan losses...... 410 388 382
------- ------- -------
Total loans receivable, net... $61,700 $66,512 $60,981
======= ======= =======
</TABLE>
The following table sets forth certain information at December 31, 1998
regarding the dollar amount of principal repayments becoming due during the
periods indicated. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as becoming due within one
year. The table does not include any estimate of prepayments which significantly
shorten the average life of all loans and may cause the Company's actual
repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
After After After
1 Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
------------ ------------ ----------- ----------- ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.................. $1,039 $ 743 $1,918 $6,115 $35,680 $45,495
Multi-family......................... 1,622 78 -- 91 3,669 5,460
Commercial........................... 500 405 874 1,545 4,224 7,548
Construction......................... 1,627 278 -- -- 1,182 3,087
Land................................. -- 23 46 -- -- 69
Commercial loans...................... 54 756 117 217 13 1,157
Consumer and other loans.............. 891 276 267 74 35 1,543
------ ------ ------ ------ ------- -------
Total loans......................... $5,733 $2,559 $3,222 $8,042 $44,803 $64,359
====== ====== ====== ====== ======= =======
</TABLE>
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have fixed interest rates and which have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed- Floating or
Rates Adjustable-Rates
---------------- -----------------
(In Thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family............. $8,273 $36,183
Multi-family.................... 556 3,282
Commercial...................... 2,194 4,854
Construction.................... 1,460 --
Land............................ 7 62
Commercial loans.................... 1,103 --
Consumer and other loans............ 616 36
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Total loans..................... $14,209 $44,417
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</TABLE>
Residential Real Estate Lending. The primary lending activity of the
Company is the origination of mortgage loans to enable borrowers to purchase
existing one- to four-family homes. The Company also originates home equity
loans and second mortgages secured by one- to four-family homes. At December 31,
1998, $45.5 million, or 70.7% of the Company's total loan portfolio, consisted
of loans secured by one- to four-family residences. Of this amount, $4.1 million
were home equity or second mortgage loans.
The Company presently originates both adjustable rate mortgage ("ARM")
loans and fixed-rate mortgage loans. The Company's loans are generally
underwritten and documented in accordance with the guidelines established by
Freddie Mac. The Company generally retains in its portfolio all of the ARM loans
that it originates and may sell to Freddie Mac the fixed-rate mortgage loans
that it originates. Generally, the Company sells whole loans on a
servicing-retained basis. All loans are sold without recourse. The Company's
decision to hold or sell loans is based on its asset/liability management
policies and goals and the market conditions for mortgages. Currently,
fixed-rate residential loans with yields greater than 7.25% and terms of 30
years or less are retained in the Company's loan portfolio to meet the Company's
asset/liability management objectives. See "-- Lending Activities -- Loan
Originations, Sales and Purchases." At December 31, 1998, $47.5 million, or
77.1%, of the Company's total loans were subject to periodic interest rate
adjustments.
The Company offers ARM loans at rates and terms competitive with market
conditions. Substantially all of the ARM loans originated by the Company meet
the underwriting standards of Freddie Mac even though the Company originates ARM
loans primarily for its own portfolio. The Company offers several ARM products
that adjust annually after an initial period ranging from one to five years.
Certain ARM loans are originated with an option to convert the loan to a 30-year
fixed-rate loan at the then prevailing market interest rate. These ARM products
utilize the weekly average yield on one-year or three-year U.S. Treasury
securities adjusted to a constant maturity ("CMT") of one or three years plus a
margin of 2.75% to 3.0%. ARM loans held in the Company's portfolio do not permit
negative amortization
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of principal and carry no prepayment restrictions. Prior to March 1, 1995, when
the Savings Bank switched from a state mutual charter to a federal mutual
charter, the Savings Bank offered ARM loans that were based on the Savings
Bank's cost of funds. The Company currently offers ARM loans with initial rates
below those which would prevail under the foregoing computations, determined by
the Company based on market factors and competitive rates for loans having
similar features offered by other lenders for such initial periods. The periodic
interest rate cap (the maximum amount by which the interest rate may be
increased or decreased in a given period) on the Company's ARM loans is
generally 1.0% to 2.0% per adjustment period and the lifetime interest rate cap
is generally 5.0% to 6.0% over the initial interest rate of the loan. Borrower
demand for ARM loans versus fixed-rate mortgage loans is a function of the level
of interest rates, the expectations of changes in the level of interest rates
and the difference between the initial interest rates and fees charged for each
type of loan. The relative amount of fixed-rate mortgage loans and ARM loans
that can be originated at any time is largely determined by the demand for each
in a competitive environment.
The Company also offers ARM loans for non-owner-occupied one- to
four-family homes. The rates on such loans are generally 25 to 125 basis points
higher than for a comparable loan for an owner-occupied residence and adjust to
a rate equal to 2.875% to 3.125% above the one-year or three-year CMT index.
Loans secured by non-owner-occupied residences generally involve greater risks
than loans secured by owner-occupied residences. Payments on loans secured by
such properties are often dependent on successful operation or management of the
properties. In addition, repayment of such loans may be subject to a greater
extent to adverse conditions in the real estate market or the economy. The
Company requires that borrowers with loans secured by non-owner-occupied homes
submit annual financial statements.
The terms and conditions of the ARM loans offered by the Company,
including the index for interest rates, may vary from time to time. The Company
believes that the adjustment features of its ARM loans provide flexibility to
meet competitive conditions as to initial rate concessions while preserving the
Company's objectives by limiting the duration of the initial rate concession.
The retention of ARM loans in the Company's loan portfolio helps reduce
the Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased payments required by the borrower.
Furthermore, because the ARM loans originated by the Company currently provide,
as a marketing incentive, for initial rates of interest below the rates which
would apply were the adjustment index used for pricing initially (discounting),
these loans are subject to increased risks of default or delinquency. To lessen
this risk, borrowers are approved based on the lower of the fully indexed rate
or 2.0% above the initial rate. Another consideration is that although ARM loans
allow the Company to increase the sensitivity of its asset base to changes in
the interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, the Company has no assurance that yields on ARM loans will be
sufficient to offset increases in the Company's cost of funds.
While single-family residential real estate loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the
Company's loan portfolio contain due-on-sale clauses providing that the Company
may declare the unpaid amount due and payable upon the sale of the property
securing the loan. Typically, the Company enforces these due-on-sale clauses to
the extent permitted by law and as business judgment dictates. Thus, average
loan maturity is a function of, among other factors, the level of purchase and
sale activity in the real estate market, prevailing interest rates and the
interest rates payable on outstanding loans.
The Company generally requires title insurance insuring the status of
its lien or a title abstract and acceptable attorney's opinion on all loans
where real estate is the primary source of security. The Company also requires
that fire and casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the outstanding loan balance.
4
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The Company's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
95% of the lesser of the appraised value or the purchase price, with the
condition that private mortgage insurance is generally required on loans with
loan-to-value ratios greater than 80%. The maximum loan-to-value ratio on
mortgage loans secured by non-owner-occupied properties is generally 80%.
Multi-Family Residential and Commercial Real Estate Lending. The
Company engages in a moderate amount of multi-family residential and commercial
real estate lending primarily in the local Jefferson City market area. As market
conditions permit, the Company intends to sell participation interests in the
larger multi-family loans that it originates. The Company also participates in
multi-family and commercial real estate loans with other Missouri financial
institutions on in-state properties. At December 31, 1998, the Company's loan
portfolio included $5.5 million in multi-family real estate loans and $7.5
million in commercial real estate loans.
Multi-family and commercial real estate loans originated by the Company
have either fixed or adjustable interest rates and are generally for terms of 15
years. The maximum loan-to-value ratio for multi-family and commercial real
estate loans is generally 75%. Multi-family loans generally are secured by small
to medium sized projects. The Company's commercial real estate loan portfolio
generally consists of loans secured by small office buildings and small
commercial properties, most of which are located in central Missouri. Appraisals
on properties which secure multi-family and commercial real estate loans are
performed by an independent appraiser engaged by the Company before the loan is
made. Underwriting of multi-family and commercial real estate loans includes a
thorough analysis of the cash flows generated by the real estate to support the
debt service and the financial resources, experience, and income level of the
borrowers. Annual operating statements on each multi-family and commercial real
estate loan are required and reviewed by management. Multi-family and commercial
real estate loans and loan participations that are purchased by the Company are
underwritten to the Company's standards.
Multi-family and commercial real estate lending affords the Company an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
and commercial properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Company seeks to
minimize these risks by limiting the maximum loan-to-value ratio to 75% and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan. The Company
also obtains loan guarantees from financially capable parties based on a review
of personal financial statements.
Construction Lending. The Company originates residential construction
loans to individuals and, occasionally, to builders, to construct one- to
four-family homes. In addition, from time to time the Company originates or
participates in construction loans for multi-family or commercial properties. At
December 31, 1998, the Company's construction loan portfolio totaled $3.1
million, or 4.8% of total loans. At such date, the Company's construction loan
portfolio consisted of 22 residential construction loans totaling $2.2 million
and 2 commercial construction loans totaling $850,000.
Construction loans are generally made in connection with permanent
financing. Construction loans that are not made in connection with the granting
of permanent financing on the property are for terms of six to 12 months.
Construction lending is considered to involve a higher level of risk as
compared to one- to four-family residential lending because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost of the project. The nature of these loans is such that
they are more difficult to evaluate and monitor. If the estimate of value proves
to be inaccurate, the Company may be confronted at, or prior to, the maturity of
the loan, with a project the value of which is insufficient to assure full
repayment. The Company attempts to minimize these risks by limiting the maximum
loan-to-value ratio on construction loans to 85% for residential construction
loans and 80% for non-residential construction loans and by conditioning
disbursements on the presentation
5
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of itemized bills and an inspection of the construction site. For
non-residential construction loans, the Company generally obtains personal
guarantees and requires borrowers to submit annual financial statements.
Land Lending. The Company occasionally originates loans for the
acquisition of land upon which the purchaser can then build or upon which the
purchaser makes improvements necessary to build upon or to sell as improved
lots. At December 31, 1998, the Company's land loan portfolio totaled $69,000
and consisted of 5 loans. Land loans originated by the Company have a term to
maturity of up to three years and are based on a ten-year amortization schedule.
Loans secured by undeveloped land or improved lots involve greater
risks than one- to four-family residential mortgage loans because such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate, in
the event of default and foreclosure the Company may be confronted with a
property the value of which is insufficient to assure full repayment. The
Company attempts to minimize this risk by limiting the maximum loan-to-value
ratio on loans secured by undeveloped land to 65% and by improved lots to 85%.
Commercial Lending. The Company engages in a small amount of commercial
business lending. At December 31, 1998, the Company's loan portfolio included
$1.2 million in commercial loans.
Commercial loans originated by the Company have both fixed and
adjustable rates and are generally for terms of five to 10 years. These loans
are typically secured by equipment, inventory or other available assets.
Commercial loans generally have shorter terms and higher interest rates than
mortgage loans. The security on these loans is usually more difficult to
evaluate and monitor and often depreciates rapidly. Because the repayment on
these loans is often dependent on successful operation and management of a
business, repayment may be adversely affected by changes in the economy or the
specific industry of the business. The Company attempts to minimize risks by
scrutinizing the financial condition and creditworthiness of the borrower and
the quality of the collateral. The Company also obtains personal guarantees on
commercial loans from financially capable parties based on a review of personal
financial statements.
Consumer and Other Lending. Consumer lending traditionally has been a
small part of the Company's business. Consumer loans generally have shorter
terms to maturity and higher interest rates than mortgage loans. The Company's
consumer and other loans consist primarily of deposit account loans, unsecured
loans and automobile loans. At December 31, 1998, the Company's consumer and
other loans totaled approximately $1.5 million, or 2.4%, of the Company's total
gross loans. The Company makes deposit account loans with the account pledged as
collateral to secure the loan. Loans may be made up to 90% of the account
balance. Deposit account loans are payable in monthly payments of principal and
interest or in a single payment. At December 31, 1998, total loans on deposit
accounts amounted to $614,000. The Company makes unsecured loans to individuals
for personal, family or household purposes. Generally, unsecured loans are made
to current customers with an established relationship with the Company. Such
loans may be for a term of up to 24 months. At December 31, 1998, unsecured
loans totaled $347,000.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that can
be recovered on such loans. At December 31, 1998, the Company had no material
delinquencies in its consumer loan portfolio.
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Loan Solicitation and Processing. Loan applicants come primarily
through existing customers, referrals by realtors, previous and present
customers of the Company and business acquaintances, and walk-ins. The Company
also uses radio and newspaper advertising to create awareness of its loan
products. Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate offered as collateral generally is undertaken by an
independent fee appraiser certified by the State of Missouri.
Mortgage loans up to $100,000 for owner-occupied residential properties
must be approved by the Savings Bank's Loan Committee, which consists of the
Chief Executive Officer and two officers, or by the Board of Directors' Loan
Committee, which consists of the Chief Executive Officer and three directors.
Loans of $100,000 to $250,000 must be approved by the Board of Director's Loan
Committee, and loans exceeding $250,000 must be approved by the Board of
Directors. Interest rates are subject to change if the approved loan is not
closed within the time of the commitment. The Company's loan approval process
allows mortgage loans to be approved in approximately 21 days and closed in 30
days.
Loan Originations, Sales and Purchases. While the Company originates
both adjustable-rate and fixed-rate loans, its ability to generate each type of
loan is dependent upon relative customer demand for loans in its market. Of the
$36.4 million of loans originated and purchased during 1998, 13.7% were
adjustable-rate loans and 86.3% were fixed-rate loans.
In recent periods, the Company has sold its 30-year and 20-year and a
portion of its 15-year fixed-rate single-family residential mortgage loans to
Freddie Mac. Currently, the Company is selling most of its fixed-rate mortgage
loans. Sales are made on a non-recourse basis. Sales of loans for the years
ended December 31, 1998, 1997, and 1996 totaled $18.9 million, $1.5 million and
$4.1 million, respectively. The Company generally sells loans on a
servicing-retained basis. See "-- Lending Activities -- Loan Servicing." At
December 31, 1998, the Company had $1.8 million in net loans held for sale.
The Company also purchases whole loans and loan participation
interests, primarily during periods of reduced loan demand in its market area.
It has been the practice of the Company in recent years only to purchase loans
secured by real estate located in Missouri. All purchases are made in
conformance with the Company's underwriting standards.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family.................................. $21,527 $14,555 $11,900
Multi-family......................................... 650 -- --
Commercial........................................... 612 1,315 2,622
Construction......................................... 2,627 1,148 2,861
Land................................................. 16 49 30
Commercial loans...................................... 1,133 415 1,237
Consumer and other loans.............................. 1,558 1,894 1,734
------- ------- -------
Total loans originated.............................. 28,123 19,376 20,384
------- ------- -------
Loans purchased:
Mortgage loans:
One- to four-family.................................. 5,035 3,140 1,547
Multi-family......................................... 518 551 2,604
Commercial........................................... 2,700 625 1,439
-------- -------- --------
Total loans purchased............................... 8,253 4,316 5,590
-------- -------- --------
Loans sold:
Total loans sold.................................... 18,900 1,524 4,081
------- ------- -------
Mortgage loan principal repayments.................... 22,289 16,636 13,524
------- ------- -------
Net increase in loans receivable, net................. $(4,813) $5,532 $8,369
======= ======= =======
</TABLE>
Loan Commitments. The Company issues commitments to originate loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 45 days from
the date of loan approval. The Company had outstanding net loan commitments of
approximately $2.6 million, including $336,000 in fixed rate loan commitments in
first mortgage loans, $31,000 in variable rate loan commitments in first
mortgage loans, and $2.2 million in unfunded portions of construction loans and
lines of credit of $784,000 at December 31, 1998.
Loan Origination and Other Fees. The Company, in some instances,
receives loan origination fees. Loan fees are a fixed dollar amount or a
percentage of the principal amount of the mortgage loan which is charged to the
borrower for funding the loan. The amount of fees charged by the Company is
currently $300 for loans secured by single-family homes. Current accounting
standards require fees received (net of certain loan origination costs) for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees or costs associated with loans
that are prepaid are recognized as income at the time of prepayment. The Company
had $10,000 of net deferred mortgage loan fees at December 31, 1998.
Loan Servicing. The Company sells loans to Freddie Mac and private
investors on a servicing retained basis and receives fees in return for
performing the traditional services of collecting individual payments and
managing the loans. At December 31, 1998, the Company was servicing $30.3
million of loans for Freddie Mac and $2.8 million of
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loans for private investors. Loan servicing includes processing payments,
accounting for loan funds and collecting and paying real estate taxes, hazard
insurance and other loan-related items such as private mortgage insurance. When
the Company receives the gross mortgage payment from individual borrowers, it
remits to the investor in the mortgage a predetermined net amount based on the
yield on that mortgage. The difference between the coupon on the underlying
mortgage and the predetermined net amount paid to the investor is the gross loan
servicing fee. For the year ended December 31, 1998, loan servicing fees totaled
$54,000. In addition, the Company retains certain amounts in escrow for the
benefit of Freddie Mac for which the Company incurs no interest expense but is
able to invest. At December 31, 1998, the Savings Bank held $29,000 in escrow
for its portfolio of loans serviced for Freddie Mac.
Nonperforming Assets and Delinquencies. When a mortgage loan borrower
fails to make a required payment when due, the Company institutes collection
procedures. The first notice is mailed to the borrower approximately ten days
after the payment is due in order to permit the borrower to make the payment
before the imposition of a late fee. A second notice is generated when a payment
becomes 30 days past due. Attempts to contact the borrower by telephone or
letter generally begin soon after the first notice is mailed to the borrower. If
a satisfactory response is not obtained, continuous follow-up contacts are
attempted until the loan has been brought current. Before the 90th day of
delinquency, attempts to interview the borrower, preferably in person, are made
to establish (i) the cause of the delinquency, (ii) whether the cause is
temporary, (iii) the attitude of the borrower toward the debt, and (iv) a
mutually satisfactory arrangement for curing the default.
In most cases, delinquencies are cured promptly; however, if by the
91st day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans is reduced by the full amount of
accrued and uncollected interest.
The Board of Directors is informed on a monthly basis as to the status
of all loans that are delinquent more than 30 days, the status on all loans
currently in foreclosure, and the status of all foreclosed and repossessed
property owned by the Company.
9
<PAGE>
The following table sets forth information with respect to the
Company's nonperforming assets and restructured loans within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 15 at the dates
indicated. It is the policy of the Company to cease accruing interest on loans
90 days or more past due.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1998 1997 1996
------------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family.................................. $ -- $132 $145
Commercial real estate............................... 156 -- 165
---- ---- ----
Total............................................... 156 132 310
---- ---- ----
Accruing loans which are
contractually past due
90 days or more..................................... -- -- --
Total nonaccrual and
90 days past due loans.............................. 156 132 310
---- ---- ----
Real estate owned, net................................. 46 -- --
---- ---- ----
Total nonperforming assets.. $202 $132 $310
==== ==== ====
Restructured loans..................................... $ 18 $ 85 $228
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net............................ 0.25% 0.19% 0.51%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets..................................... 0.16 0.13 0.32
Nonperforming assets as a
percentage of total assets.......................... 0.21 0.13 0.32
</TABLE>
Interest income that would have been recorded for the year ended
December 31, 1998 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $9,000. The amount of interest included
in interest income on such loans for the year ended December 31, 1998 amounted
to approximately $11,000.
Real Estate Owned and Held for Investment. Real estate acquired by the
Company as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate owned ("REO") until it is sold. When property is
acquired it is recorded at the lower of its cost, which is the unpaid principal
balance of the related loan plus foreclosure costs, or fair market value.
Subsequent to foreclosure, REO held for sale is carried at the lower of the
carrying amount or fair value, less estimated selling costs. At December 31,
1998, REO consisted of one single family residence valued at $51,000.
In June 1997, the Company invested in a real estate joint venture in
Waynesville, Missouri, known as Briar Pointe Development Co., LLC. At December
31, 1998, the Company's investment was $664,000. Briar Pointe, LLC will develop
and sell 125 building lots for single family homes in a new subdivision known as
Briar Pointe located in the city of Waynesville, Missouri. The project is
expected to be completed within the next two years. The Company
10
<PAGE>
will provide the financing and the other joint venture party will provide the
management for the project. When all lots have been sold any net profit will be
shared, with the Company to receive 55% and other joint venture party to receive
45%. Through December 31, 1998, 14 lots have been sold at an average price of
$18,800.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, 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 have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are placed on a "watch list" and monitored by the Company.
The following table sets forth the composition of the Company's
classified assets at December 31, 1998:
<TABLE>
<CAPTION>
Loss Doubtful Substandard
------------------------- ------------------------ -------------------------
Number Amount Number Amount Number Amount
------------ ------------ ----------- ----------- ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.............. -- $-- -- $ -- 1 $ 18
Multi-family..................... -- -- -- -- 1 156
Commercial....................... -- -- -- -- -- --
Construction..................... -- -- -- -- -- --
Land............................. -- -- -- -- -- --
Commercial loans.................. -- -- -- -- -- --
Consumer and other loans.......... 1 1 -- -- -- --
</TABLE>
Allowance for Loan Losses. The Company has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Company recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Company increases its allowance for
loan losses by charging provisions for loan losses against the Company's income.
The general valuation allowance is maintained to cover losses inherent
in the portfolio of performing loans. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Specific valuation allowances are
11
<PAGE>
established to absorb losses on loans for which full collectibility may not be
reasonably assured. The amount of the allowance is based on the estimated value
of the collateral securing the loan and other analyses pertinent to each
situation. Generally, a provision for losses is charged against income on a
quarterly basis to maintain the allowances.
At December 31, 1998, the Company had an allowance for loan losses of
$410,000. Management believes that the amount maintained in the allowances will
be adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Company believes it has established its existing allowance
for loan losses in accordance with generally accepted accounting principles,
there can be no assurance that regulators, in reviewing the Company's loan
portfolio, will not request the Company to increase significantly its allowance
for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Company's financial condition and results of
operations.
The following table sets forth an analysis of the Company's allowance
for loan losses for the periods indicated. Where specific loan loss reserves
have been established, any differences between the loss allowances and the
amount of loss realized has been charged or credited to current income.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
------------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period...................... $388 $383 $319
---- ---- ----
Provision for loan losses............................. 63 5 64
---- ---- ----
Total recoveries...................................... -- -- --
---- ---- ----
Total charge-offs..................................... 41 -- --
---- ---- ----
Net charge-offs....................................... 41 -- --
---- ---- ----
Balance at end of period.............................. $410 $388 $383
==== ==== ====
Allowance for loan losses as a percentage
of total loans outstanding at the end
of the period...................................... 0.67% 0.58% 0.62%
Net charge-offs as a percentage of average
loans outstanding during the period................ 0.06% -- --
Allowance for loan losses as a percentage
of nonperforming loans at end of period............ 198.07 293.94 123.50
</TABLE>
12
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -------------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------------ ------------ ----------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................. $219 70.79% $204 76.63% $180 76.57%
Multi-family........................ 55 8.50 52 7.68 48 5.73
Commercial.......................... 76 11.74 103 10.31 109 8.94
Construction........................ 21 4.66 3 2.38 18 4.26
Land................................ 1 0.11 1 0.16 1 0.21
Commercial loans...................... 27 1.80 4 0.62 12 1.91
Consumer and other loans.............. 11 2.40 13 2.21 15 2.38
Unallocated........................... -- N/A 8 N/A -- N/A
------ -------- ----- -------- ----- --------
Total allowance for
loan losses...................... $410 100.00% $388 100.00% $383 100.00%
====== ======== ===== ======== ===== ========
</TABLE>
Investment Activities
The Company is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the FHLB-Des Moines, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
the Company may also invest a portion of its assets in commercial paper and
corporate debt securities. The Company is also required to maintain an
investment in FHLB-Des Moines stock. The Company is required under federal
regulations to maintain a minimum amount of liquid assets. See "REGULATION."
It is the intention of management to classify all securities in the
Company's investment portfolio as available for sale. SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires the investments
be categorized as "held to maturity," "trading securities" or "available for
sale," based on management's intent as to the ultimate disposition of each
security. SFAS No. 115 allows debt securities to be classified as "held to
maturity" and reported in financial statements at amortized cost only if the
reporting entity has the positive intent and ability to hold those securities to
maturity. Securities that might be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, or other similar factors cannot be classified as "held to maturity."
Debt and equity securities held for current resale are classified as "trading
securities." Such securities are reported at fair value, and unrealized gains
and losses on such securities would be included in earnings. Debt and equity
securities not classified as either "held to maturity" or "trading securities"
are classified as "available for sale." Such securities are reported at fair
value, and unrealized gains and losses on such securities are excluded from
earnings and reported as a net amount in a separate component of equity.
13
<PAGE>
A committee consisting of the Chief Executive Officer, the Chief
Financial Officer and three outside Directors determines appropriate investments
in accordance with the Board of Directors' approved investment policies and
procedures. The Company's investment policies generally limit investments to
U.S. Government and agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed securities and
certain types of mutual funds. The Company's investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products or corporate bonds rated less than BBB. Mutual funds held by
the Company may from time to time engage in hedging activities and invest in
derivative securities. Investments are made based on certain considerations,
which include the interest rate, yield, settlement date and maturity of the
investment, the Company's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Company's credit and interest
rate risk, and risk-based capital is also given consideration during the
evaluation.
The following table sets forth the composition of the Company's
investment and mortgage-backed securities portfolios at the dates indicated, all
of which were classified as available for sale.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
----------- ------------- ----------- ------------ ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government and federal
agency obligations................ $ 3,869 21.84% $ 5,806 26.79% $10,112 36.67%
Mutual funds......................... 5,310 29.97 5,376 24.81 5,452 19.77
------- ------ ------- ------ ------- ------
Total investment securities......... 9,179 51.81 11,182 51.60 15,564 56.44
Mortgage-backed securities............ 8,536 48.19 10,489 48.40 12,010 43.56
------- ------ ------- ------ ------- ------
Total available-for-sale............ $17,715 100.00% $21,671 100.00% $27,574 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Company's investment and mortgage-backed securities at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------------
Amount Due or Repricing Within:
One Year or Less Over One to Over Five to Over Ten Years Totals
Five Years Ten Years
------------------ ----------------- ----------------- ----------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- -------- -------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
obligations....... $1,809 5.85% $2,060 5.51% $ -- --% $-- --% $ 3,869 5.67%
Mutual funds......... 5,310 5.35 -- -- -- -- -- -- 5,310 5.35
Mortgage-backed
securities........ 8,129 5.70 133 6.72 189 7.40 85 9.00 8,536 5.79
-------- -------- ---- --- -------
Total......... $15,248 5.60 $2,193 5.58 $189 7.40 $85 9.00 $17,715 5.63
======== ======== ==== === =======
</TABLE>
14
<PAGE>
Mutual Funds. The Company's portfolio of mutual funds consists of two
funds, both of which invest in adjustable-rate mortgage-backed securities. One
fund had a fair value of $960,000 ($990,000 at amortized cost) and yielded 4.86%
at December 31, 1998, and the other fund had a fair value of $4.4 million ($4.9
million at amortized cost) and yielded 5.24% at December 31, 1998.
U.S. Government and Federal Agency Obligations. The Company's portfolio
of U.S. Government and federal agency obligations had a fair value of $3.9
million ($3.9 million at amortized cost) at December 31, 1998. The portfolio
consisted of short-term securities due within two years of December 31, 1998.
Mortgage-Backed Securities. At December 31, 1998, the Company's net
mortgage-backed securities totaled $8.6 million at fair value ($8.7 million at
amortized cost) and had a weighted average yield of 5.79%. At December 31, 1998,
96.89% of the mortgage-backed securities were adjustable-rate and 3.11% were
fixed-rate. The Company purchased most of its mortgage-backed securities in 1991
through 1993 and has not purchased any mortgage-backed securities since that
time. The Company currently intends to use available funds to invest in higher
yielding loans and does not intend to increase its mortgage-backed securities
portfolio.
Mortgage-backed securities (which also are known as mortgage
participation certificates or pass-through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages. The
principal and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include Freddie Mac,
Fannie Mae and the Government National Mortgage Association. Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
that fall within a specific range and have varying maturities. Mortgage-backed
securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees and credit enhancements. In addition,
mortgage-backed securities are usually more liquid than individual mortgage
loans and may be used to collateralize certain liabilities and obligations of
the Company. These types of securities also permit the Company to optimize its
regulatory capital because they have low risk weighting.
At December 31, 1998, $189,000 of the Company's mortgage-backed
securities had contractual maturities under ten years and the remainder had
contractual maturities over ten years. However, the actual maturity of a
mortgage-backed security may be less than its stated maturity due to prepayments
of the underlying mortgages. Prepayments that are faster than anticipated may
shorten the life of the security and may result in a loss of any premiums paid
and thereby reduce the net yield on such securities. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Company may be subject to reinvestment risk because, to the extent that the
Company's mortgage-backed securities amortize or prepay faster than anticipated,
the Company may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Company's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions.
15
<PAGE>
Borrowings through the FHLB-Des Moines may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources.
Presently, the Company has no other borrowing arrangements.
Deposit Accounts. Substantially all of the Company's depositors are
residents of the State of Missouri. Deposits are attracted from within the
Company's market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market deposit accounts, regular savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Company considers current market interest rates, profitability to
the Company, matching deposit and loan products and its customer preferences and
concerns. The Company reviews its deposit mix and pricing weekly. The Company
does not accept brokered deposits, nor has it aggressively sought jumbo
certificates of deposit.
The Company currently offers certificates of deposit for terms not
exceeding 48 months. As a result, the Company believes that it is better able to
match the repricing of its liabilities to the repricing of its loan portfolio.
The following table indicates the amount of the Company's jumbo
certificates of deposit by time remaining until maturity as of December 31,
1998. Jumbo certificates of deposit are certificates in amounts of $100,000 or
more.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- --------------
(In Thousands)
<S> <C>
Three months or less................................. $ 944
Over three through six months........................ 1,064
Over six through 12 months........................... 214
Over 12 months....................................... 533
------
Total jumbo certificates of deposit......... $2,755
======
</TABLE>
The following table sets forth the balances (inclusive of interest
credited) and changes in dollar amounts of deposits in the various types of
accounts offered by the Company between the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------
1998 1997 1996
----------------------------- --------------------------------------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
--------- --------- --------- --------- --------- ---------- ------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing............... $ 981 1.35% $ 501 $ 480 0.66% $ (168) $ 648 0.89%
NOW checking...................... 4,419 6.08 404 4,015 5.51 560 3,455 4.74
Regular savings accounts.......... 6,372 8.77 (366) 6,738 9.25 25 6,713 9.21
Money market deposit accounts
("MMDAs")...................... 6,266 8.62 926 5,340 7.33 434 4,906 6.73
Fixed-rate certificates which
mature:
Within 1 year.................. 39,706 54.62 (683 40,389 55.41 (1,068) 41,457 56.88
After 1 year, but within
2 years..................... 13,211 18.17 4,482 8,729 11.97 (1,725) 10,454 14.35
After 2 years, but
within 5 years.............. 1,734 2.39 (5,458) 7,192 9.87 1,945 5,247 7.20
--------- --------- --------- --------- --------- ---------- ------- ----------
Total deposits........ $72,689 100.00% $ (194) $72,883 100.00% $ 3 $72,880 100.00%
========= ========= ========= ========= ========= ========== ======= ==========
</TABLE>
16
<PAGE>
The following table sets forth the Company's time deposits categorized
by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1998 1997 1996
------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C>
0.00 - 3.99%........................................ $ 13 $ 13 $ 13
4.00 - 4.99%........................................ 11,051 471 4,103
5.00 - 5.99%........................................ 39,523 49,273 42,919
6.00 - 6.99%........................................ 3,981 6,474 10,050
7.00 - 7.99%........................................ 83 78 73
------- ------- -------
Total.......................................... $54,651 $56,309 $57,158
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------
Less Than 1 - 2 2 - 3 3 Years Total
One Year Years Years and After
------------ ------------ -------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00 - 3.99%.......................................... $ 13 $ -- $-- $ -- $ 13
4.00 - 4.99%.......................................... 9,466 1,379 -- 206 11,051
5.00 - 5.99%.......................................... 26,656 11,339 -- 1,528 39,523
6.00 - 6.99%.......................................... 3,488 493 -- -- 3,981
7.00 - 7.99%.......................................... 83 -- -- -- 83
------- ------- ---- ------ -------
Total............................................ $39,706 $13,211 $-- $1,734 $54,651
======= ======= ==== ====== =======
</TABLE>
The following table sets forth the deposit activities of the Company
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance.................................... $72,883 $72,880 $75,931
Net deposits (withdrawals)
before interest credited.......................... (3,101) (2,905) (6,058)
Interest credited.................................... 2,907 2,908 3,007
------- -------- -------
Net increase (decrease) in deposits.................. (194) 3 (3,051)
------- -------- ------
Ending balance....................................... $72,689 $72,883 $72,880
======= ======= =======
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company has the ability to use advances from the FHLB-Des Moines
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Des Moines functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Des Moines, the Company is required to own capital stock
in the FHLB-Des Moines and is authorized to apply for advances on the security
of such stock and certain of its mortgage loans and other
17
<PAGE>
assets (principally securities that are obligations of, or guaranteed by, the
U.S. Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At December 31, 1998, the Company had $571,000 borrowed from
the FHLB-Des Moines. The Company borrowed $600,000 on a mortgage match advance
in October 1997 to fund a loan on commercial property with a yield to the
Company of 8.50%.
The following table sets forth certain information regarding short-term
borrowings by the Company at the dates and for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Amount of FHLB advances outstanding at end of period........................ $571 $596 $--
Maximum amount of FHLB advances outstanding
at any month end......................................................... 594 600 --
Approximate average FHLB advances outstanding
during the period........................................................ 584 164 4
Approximate weighted average rate paid on
FHLB advances during the period.......................................... 6.51% 6.10% 5.40%
Weighted average rate paid on FHLB advances at end of period................ 6.35 6.35 --
</TABLE>
Competition
The Company operates in a competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Its most direct competition for savings deposits has historically come
from local commercial banks, credit unions and other thrifts operating in its
market area. As of December 31, 1998, there were ten commercial banks and one
other thrift operating in Cole County, Missouri. Most of these financial
institutions are locally-owned community oriented banks and thrifts, however,
there are two subsidiaries of larger regional holding companies. As a result of
this competition, the Company at times has suffered deposit declines and loss of
market share. The Company's branches in California, Tipton and St. Robert,
Missouri also face competition from other financial institutions. Particularly
in times of high interest rates, the Company has faced additional significant
competition for investors' funds from short-term money market securities and
other corporate and government securities. The Company's competition for loans
also comes from mortgage bankers. Such competition for deposits and the
origination of loans may limit the Company's growth in the future.
Personnel
As of December 31, 1998, the Company had 26 full-time and 4 part-time
employees. The employees are not represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount in
excess of 2% is used primarily for community, inner-city and community
development projects. The Savings Bank's investment in its service corporation,
Parity Insurance Agency, Inc. ("Parity"), did not exceed these limits at
December 31, 1998.
18
<PAGE>
Parity is a wholly owned subsidiary of the Savings Bank. Parity
previously sold mortgage life and disability insurance to the Savings Bank's
borrowers and continues to collect commissions. Parity also owns City National
Real Estate, Inc., which is inactive. At December 31, 1998, the Savings Bank's
investment in its subsidiaries was $107,000.
Joint Venture
In 1997, the Company invested in Bales Brothers, Inc. J.V., a joint
venture which will be building single family homes for sale in the Briar Pointe
subdivision in Waynesville, Missouri. Under the terms of the joint venture, the
Company provides the funds and Bales Brothers, Inc. provides the labor and
management for the construction projects. When a house is sold, any net profit
will be shared with the Company to receive 50% and Bales Brothers, Inc. to
receive 50%. At December 31, 1998, Bales Brothers, Inc. J.V. had two houses
under construction in the Briar Pointe subdivision. The Company's interest in
the joint venture at December 31, 1998 was $220,000. See Note 8 of the Notes to
Consolidated Financial Statements.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Savings Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary federal regulator, and
the FDIC, as the deposit insurer. The Savings Bank is a member of the Federal
Home Loan Bank System and its deposit accounts are insured up to applicable
limits by the SAIF managed by the FDIC. The Savings 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 savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Savings Bank's safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company, the
Savings Bank and their operations. Certain of the regulatory requirements
applicable to the Savings Bank and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
Form 10-KSB does not purport to be a complete description of such statutes and
regulations and their effects on the Savings Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding
company within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Savings
Bank continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
19
<PAGE>
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Savings Bank must
notify the OTS 30 days before declaring any dividend to the Company. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1998, the
Savings Bank met each of its capital requirements.
20
<PAGE>
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Savings Bank are
presently insured by the SAIF. The FDIC maintains a risk-based assessment system
by which institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Savings Bank. Management
cannot predict what insurance assessment rates will be in the future.
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 OTS. The
management of the Savings Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided
that the BIF and SAIF were to have merged on January 1, 1999 if there were no
more savings associations as of that date. Various proposals to eliminate the
federal savings association charter, create a uniform financial institutions
charter, abolish the OTS and restrict savings and loan holding company
activities have been introduced in Congress. The Savings Bank is unable to
predict whether such legislation will be enacted or the extent to which the
legislation would restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
December 31, 1998, the Savings Bank's limit on loans to one borrower was $2.9
million, and the Savings Bank's largest aggregate outstanding balance of loans
to one borrower was $2.1 million.
21
<PAGE>
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 1998, the Savings Bank met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier 1 Bank") and had not been advised by the
OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval. At December
31, 1998, the Savings Bank was a Tier 1 Bank. Effective April 1, 1999, the OTS's
capital distribution regulation will change. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application is
not required, the institution must still provide prior notice to OTS of the
capital distribution. In the event the Savings Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Savings Bank's ability to make capital distributions
could be restricted. 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.
Liquidity. The Savings Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Savings Bank's liquidity ratio at December 31, 1998 exceeded the applicable
requirements. The Savings Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Savings Bank's latest
quarterly thrift financial report. The assessments paid by the Savings Bank for
the fiscal year ended December 31, 1998 totaled $30,000.
Transactions with Related Parties. The Savings Bank's authority to
engage in transactions with "affiliates" (e.g., any company that controls or is
under common control with an institution, including the Company and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law.
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<PAGE>
The purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Savings Bank may make to insiders based, in
part, on the Savings Bank's capital position and requires certain board approval
procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Savings Bank complies with the foregoing requirements.
23
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a
fiscal year, consolidated basis and the accrual method of accounting, and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Savings Bank or the Company. The Savings Bank has not been
audited by the IRS in the last five years. For its 1998 taxable year, the
Savings Bank is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code were permitted to use certain
favorable provisions to calculate their deductions from taxable income for
annual additions to their bad debt reserve. A reserve could be established for
bad debts on qualifying real property loans (generally secured by interests in
real property improved or to be improved) under (i) the Percentage of Taxable
Income Method (the "PTI Method") or (ii) the Experience Method. The reserve for
nonqualifying loans was computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, repeals the reserve method of accounting for bad
debts for tax years beginning after 1995 and requires savings institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. Thrift institutions eligible to be treated as "small banks"
(assets of $500 million or less) are allowed to use the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (assets exceeding $500 million) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481(a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to a 2-year suspension if the "residential loan requirement" is
satisfied.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Savings Bank's 1996 taxable year, in which the Savings
Bank originates a minimum of certain residential loans based upon the average of
the principal amounts of such loans made by the Savings Bank during its six
taxable years preceding its current taxable year.
The Savings Bank is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
a result of such recapture, the Savings Bank will incur an additional tax
liability of approximately $76,000 which is generally expected to be taken into
income beginning in 1998 over a six year period.
Distributions. Under the 1996 Act, if the Savings Bank makes
"non-dividend distributions" to the Company, such distributions will be
considered to have been made from the Savings Bank's unrecaptured tax bad debt
reserves (including the balance of its reserves as of December 31, 1987) to the
extent thereof, and then from the Savings Bank's supplemental reserve for losses
on loans, to the extent thereof, and an amount based on the amount distributed
(but not in excess of the amount of such reserves) will be included in the
Savings Bank's income. Non-dividend distributions include distributions in
excess of the Savings Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Savings Bank's current or accumulated earnings and profits will not be so
included in the Savings Bank's income.
24
<PAGE>
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Savings Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Savings Banks do not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible in the year of payment.
State Taxation
Missouri. Missouri-based thrift institutions, such as the Savings 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 Savings 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
Savings Bank is entitled to credit against this tax all paid to the State of
Missouri or any political subdivision, except taxes on tangible personal
property owned by the Savings Bank and held for lease or rental to others and on
real estate, contributions paid pursuant to the Unemployment Compensation Law of
Missouri, social security taxes, sales and use taxes, and taxes imposed by the
Missouri Financial Institutions Tax Law. Missouri thrift institutions are not
subject to the regular corporate income tax.
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax, but is required to
file an annual report with, and pay an annual franchise tax to, the State of
Delaware.
Item 2. Description of Property
- --------------------------------
The Company operates five full service facilities in Jefferson City
(2), California, Tipton and St. Robert, Missouri, all of which it owns. At
December 31, 1998, the net book value of the property (including land and
building) and the Company's fixtures, furniture and equipment was $1.6 million.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties on which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. Neither the Company nor the Savings Bank is a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
25
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Price Range of
Common Stock" on page 48 of the 1998 Annual Report to Stockholders ("Annual
Report") is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations or Plan of Operations
-------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page _ of the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
(a) Financial Statements
Independent Auditors' Report*
Consolidated Statements of Financial Condition as of December
31, 1997 and 1998*
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1997, and 1998
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ---------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Executive Officers
The following table sets forth certain information regarding the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Richard E. Caplinger 65 Chairman of the Board
Robert E. Chiles 63 President and Chief Executive Officer
David L. Jobe 50 Treasurer and Secretary
Delphine E. Prenger 61 Vice President
Jason E. Schwartz 30 Vice President
</TABLE>
26
<PAGE>
The following table sets forth certain information regarding the
executive officers of the Savings Bank.
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Richard E. Caplinger 65 Chairman of the Board
Robert E. Chiles 63 President and Chief Executive Officer
David L. Jobe 50 Secretary and Treasurer
Delphine E. Prenger 61 Vice President
Jason E. Schwartz 30 Vice President
</TABLE>
- -----------------------------
(1) As of December 31, 1998.
Robert E. Chiles serves as President, Chief Executive Officer and Director
of the Savings Bank, positions he has held since 1974. Mr. Chiles has also
served as President, Chief Executive Officer and Director of the Company since
its formation in 1996. Mr. Chiles is currently a member of the Loan Review
Committee, the Planning Committee, the Investment Committee and the In-House
Loan Committee. Mr. Chiles served as a member of the FHLB-Des Moines Board from
1989 to 1994 and as Vice Chairman in 1994.
David L. Jobe currently serves as the Treasurer and Secretary of the
Savings Bank, positions which he has held since 1984. Mr. Jobe also served as
the Treasurer of the Jefferson City Chamber of Commerce in 1996.
Delphine E. Prenger has been associated with the Savings Bank since 1968
and has served as Vice-President since 1983. Ms. Prenger is also a member of the
Jefferson City Chamber of Commerce.
Jason E. Schwartz has been with the Company since 1995 and served as
Vice-President since 1997. Mr. Schwartz is currently Treasurer-Elect of the
Jefferson City Chamber of Commerce.
Richard E. Caplinger is co-owner of Caplinger's Inc., a mens' specialty
retailer, with which he has been associated since 1952. Mr. Caplinger has served
as a Director since 1975 and as Chairman of the Board of Directors of the
Company since 1996 and of the Savings Bank since 1993. He currently serves on
the Planning Committee, the Budget and Salary Committee and the Compliance
Committee. Mr. Caplinger is also chairman of the Jefferson City Community
Betterment Association and a member of the small business task force of the
Jefferson City Chamber of Commerce.
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement is
incorporated herein by reference. Reference is made to the cover page of this
report for information regarding compliance with Section 16(a) of the Exchange
Act.
Item 10. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Proposal I - Election of Directors - Directors' Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
27
<PAGE>
The information required by this item is incorporated herein
by reference to the section captioned "Stock Ownership" of the
Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein
by reference to the section captioned "Stock Ownership" of the
Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Transactions
with Management" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 13. Exhibits List and Reports on Form 8-K
- -----------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of CNS Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-01880))
3.2 Amended and Restated Bylaws of CNS Bancorp, Inc.
10.1 Employment Agreement with Robert E. Chiles (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997)
10.2 CNS Bancorp, Inc. 1997 Stock Option Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated
March 19, 1997)
10.3 CNS Bancorp, Inc. 1997 Management Recognition and Development
Plan (incorporated by reference Exhibit B to the Company's
Proxy Statement dated March 19, 1997)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
December 31, 1998.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CNS BANCORP, INC.
Date: March 30, 1999 By: /s/ Robert E. Chiles
--------------------------------
Robert E. Chiles
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Robert E. Chiles President, Chief March 30, 1999
- ------------------------------ Executive Officer and
Robert E. Chiles Director (Principal
Executive Officer)
/s/ David L. Jobe Treasurer and Secretary March 30, 1999
- ------------------------------ (Principal Financial
David L. Jobe and Accounting Officer)
/s/ James F. McHenry Director March 30, 1999
- ------------------------------
James F. McHenry
/s/ Ronald D. Roberson Director March 30, 1999
- ------------------------------
Ronald D. Roberson
/s/ Richard E. Caplinger Chairman of the Board March 30, 1999
- ------------------------------
Richard E. Caplinger
/s/ Michael A. Dallmeyer Director March 30, 1999
- ------------------------------
Michael A. Dallmeyer
/s/ John C. Kolb Director March 30, 1999
- ------------------------------
John C. Kolb
</TABLE>
29
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
CNS BANCORP, INC.
ARTICLE I
Home Office
The home office of CNS Bancorp, Inc. (herein the "Corporation") shall be at
427 Monroe Street, Jefferson City, 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 be present at a meeting, or
in writing waive 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 or more, 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 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 is to be taken.
When a determination of stockholders entitled to vote at any
<PAGE>
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, 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 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 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 trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him 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.
2
<PAGE>
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, and 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.
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 and Term and Election. The number of directors who
----------------------------
shall constitute the whole Board of Directors shall be fixed from time to time
exclusively by the Board by resolution adopted by a majority of the total number
of the Corporation's directors. The members of each class shall be elected for a
term of three years and until their successors are elected or qualified. One
class shall be elected by ballot annually. The board of directors shall be
classified in accordance with the provisions of the Corporation's Certificate of
Incorporation.
3
<PAGE>
SECTION 3. Qualification. Each director shall at all times be the
-------------
beneficial owner of not less than 100 shares of capital stock of the
Corporation.
SECTION 4. 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 5. 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.
SECTION 6. Notice. Written notice of any special meeting shall be given
------
to each director at least two days previous thereto delivered personally or by
telecopier or 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 by
telecopier or 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.
SECTION 7. 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 6 of this Article III.
SECTION 8. 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 General Corporation Law of the State of
Delaware.
SECTION 9. 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 10. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the home office or the administrative
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 11. 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.
4
<PAGE>
SECTION 12. Removal of Directors. Any director or the entire board of
--------------------
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 13. 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 14. 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.
SECTION 15. Advisory Directors. The board of directors may by resolution
------------------
appoint advisory directors or directors emeriti to the board, and shall have
such authority and receive such compensation and reimbursement as the board of
directors shall provide. Advisory directors or directors emeriti shall not have
the authority to participate by vote in the transaction of business.
ARTICLE IV
Committees of the Board of Directors
SECTION 1. Appointment. The board of directors, by resolution adopted by
-----------
a majority of the full board, may designate the president or chief executive
officer and two or more of the other directors to constitute an executive
committee. The designation of any committee pursuant to this Article IV and the
delegation of authority shall not operate to relieve the board of directors, or
any director, of any responsibility imposed by law or regulation.
SECTION 2. Authority. The executive committee, when the board of
---------
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Corporation, or recommending to the shareholders a plan
of merger, consolidation, or conversion; the sale, lease, or other disposition
of all or substantially all of the property and assets of the Corporation
otherwise than in the usual and regular course of its business; a voluntary
dissolution of the Corporation; a revocation of any of the foregoing; or the
approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this
------
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. Meetings. Regular meetings of the executive committee may be
--------
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date, and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
5
<PAGE>
SECTION 5. Quorum. A majority of the members of the executive committee
------
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
SECTION 6. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the executive committee 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 members of the executive committee.
SECTION 7. Vacancies. Any vacancy in the executive committee may be
---------
filled by a resolution adopted by a majority of the full board of directors.
SECTION 8. Resignations and Removal. Any member of the executive
------------------------
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the Corporation. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 9. Procedure. The executive committee shall elect a presiding
---------
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
SECTION 10. Other Committees. The board of directors may by resolution
----------------
passed by a majority of the whole board establish an audit, loan, or other
committee composed of directors 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 president or 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.
6
<PAGE>
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 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.
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
7
<PAGE>
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 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.
8
<PAGE>
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the 31st day of December 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.
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, alteration, 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 two-thirds of the board of directors at a legal
meeting held in accordance with the provisions of these Bylaws.
Effective as of February 18, 1999.
9
<PAGE>
EXHIBIT 13
1998 Annual Report to Stockholders
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter to Stockholders 1
Business of the Corporation 2
Selected Consolidated Financial Information 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Independent Auditor's Report 15
Consolidated Financial Statements 16
Notes to Consolidated Financial Statements 22
Stockholder Information 48
Corporate Information 49
<PAGE>
CNS BANCORP, INC
----------------
March 19, 1999
Dear Fellow Shareholders:
On behalf of the Board of Directors and the employees, it is a pleasure
to share with you the results for CNS Bancorp, Inc.'s fiscal year ended
December 31, 1998, and submit to you our third Annual Report as a public stock
company.
CNS Bancorp, Inc. had a record year of loan originations and purchases in
1998 with $28.1 million originated and $8.3 million purchased. The Company ended
the year with net loans receivable of $61.7 million. Total assets of the Company
decreased $2.5 million to $95.4 million at December 31, 1998 from $97.9 million
at December 31, 1997. Total stockholders' equity decreased $2.2 million to $21.7
million from $23.9 million. The reduction in assets and stockholders' equity in
1998 was primarily due to the repurchase of 201,079 shares of common stock for
$3.2 million. Book value per share increased $0.50 to $14.97 at December 31,
1998 from $14.47 at December 31, 1997.
The Company had net income of $862,000, or $0.58 per share, for the fiscal
year ended December 31, 1998 and paid dividends of $0.27 per share for the
calendar year 1998 as compared to $.22 per share for 1997.
The Company remains committed to the goals of increasing profitability with
minimal risk and enhancing shareholder value. We are committed to being a
hometown bank, delivering the kind of personal customer service you have come to
know and expect through the years.
Thank you for your continued support and investment in CNS Bancorp, Inc.
Sincerely,
/s/ Robert E. Chiles
Robert E. Chiles
President
1
<PAGE>
CNS Bancorp, Inc. (the "Company") is a Delaware corporation organized in
January 1996 for the purpose of becoming the holding company for City National
Savings Bank, FSB (the "Bank"). CNS Bancorp Inc. and the Bank are collectively
referred to as "the Company" in this annual report. The principal business of
the Company consists of attracting deposits from the general public and using
such deposits to originate and purchase mortgage loans secured primarily by 1 to
4 family residences and to a lesser extent, one-to four-family residential
construction, multi-family and commercial real estate loans, consumer loans and
commercial loans. The Company also invests in mortgage-backed securities, U.S.
government and federal agency obligations and other permissible securities.
The Company is not engaged in any significant business activity other than
holding the stock of City National Savings Bank, FSB. Accordingly, the
information set forth in this report, including financial statements and related
data, applies primarily to the Bank.
City National Savings Bank, FSB is a federally-chartered, federally-insured
financial institution organized in 1921. The Bank is regulated by the Office of
Thrift Supervision ("OTS"). Its deposits are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is also a member of the Federal Home Loan Bank
("FHLB") System.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets $87,966 $85,390 $97,481 $97,891 $95,401
Loans receivable, net (1) $44,853 $52,611 $60,981 $66,512 $61,700
Mortgage-backed securities $18,966 $13,926 $12,010 $10,489 $ 8,536
Cash, interest-bearing deposits and
investment securities $18,911 $14,400 $20,137 $15,673 $18,993
Deposits $79,493 $75,931 $72,880 $72,883 $72,689
Borrowed funds --- --- --- $ 596 $ 571
Stockholders' equity $ 8,234 $ 9,180 $24,199 $23,924 $21,741
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- -------------------------
Interest income $5,224 $5,638 $6,551 $7,057 $6,881
Interest expense $3,032 $3,617 $3,753 $3,647 $3,610
------ ------ ------ ------ ------
Net interest income $2,192 $2,021 $2,798 $3,410 $3,271
Provision for loan losses $ 7 $ 124 $ 64 $ 5 $ 63
------ ------ ------ ------ ------
Net interest income after provision
for loan losses $2,185 $1,897 $2,734 $3,405 $3,208
Non-interest income $ 274 $ 162 $ 389 $ 201 $ 570
Non-interest expense $1,818 $1,776 $2,494 $2,297 $2,329
------ ------ ------ ------ ------
Income before federal income tax
provision, and extraordinary item $ 641 $ 283 $ 629 $1,309 $1,449
Provision for income taxes $ 213 $ 93 $ 206 $ 445 $ 587
------ ------ ------ ------ ------
Net income $ 428 $ 190 $ 423 $ 864 $ 862
====== ====== ====== ====== ======
Earnings per share n/a n/a n/a $ .56 $ .58
Dividends per share n/a n/a $ .05 $ .22 $ .27
Dividend payout ratio n/a n/a 17.89% 42.08% 46.38%
</TABLE>
- ---------------------------------------
(1) Does not include loans held for sale.
3
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets(1) 0.48% 0.22% 0.46% 0.88% 0.89%
Return on stockholders' equity(2) 4.94% 2.18% 2.53% 3.59% 3.78%
Stockholders' equity-to-assets ratio(3) 9.71% 10.05% 18.25% 24.63% 23.62%
Interest rate spread(4) 2.29% 2.02% 2.19% 2.43% 2.40%
Net interest margin(5) 2.54% 2.40% 3.02% 3.58% 3.48%
Average interest-earning assets to
average interest-bearing liabilities 107.23% 108.73% 120.30% 130.15% 128.38%
Non-interest expense as a percent of
average total assets 2.04% 2.05% 2.73% 2.35% 2.41%
Asset Quality:
Nonaccrual and 90 days or more past
due loans as a percent of total loans, net -- 0.17% 0.51% 0.20% 0.25%
Nonperforming assets as a percent of
total assets 0.48% 0.29% 0.32% 0.15% 0.16%
Allowance for losses as a percent of
total assets 0.22% 0.37% 0.39% 0.40% 0.42%
Allowance for losses as a percent of
nonperforming loans n/a 362.50% 123.23% 272.54% 256.28%
Net charge-offs to average outstanding
loans 0.05% 0.00% 0.00% 0.00% 0.06%
Number of full service offices 5 5 5 5 5
</TABLE>
- ---------------------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average stockholders' equity.
(3) Average stockholders' equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning
assets and weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's results of operations primarily depend upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed securities
and investment securities and the average rate paid on deposits and borrowings,
as well as the relative amounts of such assets and liabilities. The interest
rate spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Company, like
other thrift institutions, is subject to interest-rate risk to the degree that
its interest-earning assets mature or reprice at different times, or on a
different basis, than its interest-bearing liabilities.
The Company's results of operations are also affected by, among other things,
provision for loan losses, loan servicing income, fee income, income from real
estate owned, gain on sale of assets, other expenses and income taxes. Other
expenses include compensation and benefits, occupancy and equipment, federal
deposit insurance premiums and other general expenses.
The Company is significantly affected by prevailing economic conditions
including federal monetary and fiscal policies as well as by federal regulation
of financial institutions. Deposit balances are influenced by a number of
factors including interest rates paid on competing investments and the level of
personal income and savings within the Company's market area. Lending
activities are influenced by consumer demand as well as competition from other
lending institutions. The primary sources of funds for the Company's lending
activities include deposits, loan payments, borrowings, and funds provided by
operations.
Financial Condition at December 31, 1997 compared to December 31, 1998.
The Company's total assets decreased $2.5 million, or 2.54%, to $95.4
million at December 31, 1998 from $97.9 million at December 31, 1997. The
decrease was primarily attributable to a $4.0 million decrease in securities
available-for-sale, a $277,000 decrease in FHLB stock and a $4.8 million
decrease in loans receivable, offset by a $5.3 million increase in cash and due
from depository institutions and a $1.3 million increase in loans held-for-sale.
Securities available-for-sale decreased 18.25 %, to $17.7 million at
December 31, 1998 from $21.7 million at December 31, 1997. The decrease in
securities available-for-sale was primarily the result of allowing investment
securities to mature.
FHLB stock decreased to $663,000 at December 31, 1998 from $939,000 at
December 31, 1997 due to a redemption of excess stock in 1998.
Net loans receivable decreased 7.24%, to $61.7 million at December 31, 1998
from $66.5 million at December 31, 1997. The decrease in loans receivable was
primarily the result of the sale of $19.3 million in loans, some of which were
refinanced loans previously held in portfolio. Purchased loans receivable
increased to $19.2 million at December 31, 1998 from $15.3 million at December
31, 1997. During 1998, the Company originated and purchased $29.2 million of
one-to four-family residential mortgage loans, $4.5 million of other residential
and nonresidential loans and $2.7 million of nonmortgage loans.
Cash and due from depository institutions increased 118.54% to $9.8 million
at December 31, 1998 from $4.5 million at December 31, 1997. The increase in
cash primarily resulted from investment securities maturing and loan sales.
Loans held-for-sale increased to $1.8 million at December 31, 1998 from
$447,000 at December 31, 1997. The increase in loans held-for-sale was
primarily the result of increased loan sale volume at the end of 1998 compared
to loan sale volume at the end of 1997.
5
<PAGE>
Deposits decreased $193,000 to $72.7 million at December 31, 1998 from $72.9
million at December 31, 1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1998
Net Income. The Company's net income decreased $2,000 to $862,000 for the
year ended December 31, 1998 from $864,000 for the year ended December 31, 1997.
The change was primarily the result of a $139,000 decrease in net interest
income, a $58,000 increase in provision for loan losses, a $32,000 increase in
non-interest expense and a $142,000 increase in provision for income taxes
offset by a $369,000 increase in non-interest income. Diluted earnings per
share increased to $0.54 for the year ended December 31, 1998 from $0.52 for the
year ended December 31, 1997 due primarily to the purchase of 201,079 shares of
treasury stock in 1998.
Net Interest Income. Net interest income decreased $139,000, or 5.44%, to
$3.3 million for the year ended December 31, 1998 from $3.4 million for the year
ended December 31, 1997. Total interest income decreased $176,000, or 3.34%, to
$6.9 million for the year ended December 31, 1998 from $7.1 million for the year
ended December 31, 1997. The decrease in total interest income was primarily
due to a decrease in interest on investment securities and mortgage-backed
securities offset by an increase in interest on loans and other interest-earning
assets. Interest income from investment securities decreased $167,000, or 31.20%
to $370,000 for the year ended December 31,1998 from $537,000 for the year ended
December 31, 1997. Interest income on investment securities decreased due to a
lower average balance of investment securities, which decreased to $3.6 million
in 1998 from $7.9 million in 1997 and a lower average yield on investment
securities which was 5.80% in 1998 compared to 5.94% in 1997. Interest income
on mortgage-backed securities decreased $118,000, or 16.94%, to $575,000 for the
year ended December 31, 1998 from $693,000 for the year ended December 31, 1997.
Interest income on mortgage-backed securities decreased due to a lower average
balance on mortgage-backed securities, which decreased to $9.8 million in 1998
from $11.5 million 1997. During 1998, the Company continued to allow mortgage-
backed securities to be reduced by principal repayments. Interest income on
loans increased by $29,000 for the year ended December 31, 1998 as a result of a
higher average balance of loans receivable, which increased to $65.9 million in
1998 from $65.2 million in 1997 offset by a decrease in the average yield on
loans to 8.05% in 1998 from 8.09% in 1997. Interest income from other
interest-earning assets increased $79,000, or 14.38% to $633,000 for the year
ended December 31, 1998 from $554,000 for the year ended December 31, 1997.
Interest income from other interest-earning assets increased due to a higher
average balance on other interest-earning assets. Total interest expense
decreased $37,000, or 1.36%, to $3.61 million for the year ended December 31,
1998 from $3.65 million for the year ended December 31, 1997. Interest expense
decreased due to a lower average deposit balance which decreased to $72.6
million in 1998 from $72.9 million in 1997 and a decrease in average cost to
4.92% for 1998 from 4.99% for 1997.
Provision for Loan Losses. The provision for loan losses increased to
$63,000 for the year ended December 31, 1998 from $5,000 in 1997. The increase
in the provision for loan losses primarily resulted from a shift in the
composition of the loan portfolio to include a smaller percentage of one-to
four-family, owner occupied mortgages, for which a lower loss reserve is
maintained. The allowance for loan losses increased to $410,000, or .67% of
total loans at December 31, 1998 compared to $387,000, or .58% of total loans at
December 31, 1997.
Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level considered by management to be adequate to
provide for estimated losses based on management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. Management also reviews individual loans
for which full collectibility may not be reasonably assured and considers among
other factors, the estimated fair value of the underlying collateral.
Non-interest Income. Non-interest income increased $369,000 to $570,000 for
the year ended December 31, 1998 from $201,000 for the year ended December 31,
1997. Non-interest income increased primarily as a result of a $68,000 increase
in loan servicing fees and a $328,000 increase in net gain on sale of assets
offset by a $16,000 decrease in
6
<PAGE>
income from real estate owned and a decrease of $11,000 in other non-interest
income. Loan servicing fees increased due to increased loans originated of $28.1
million in 1998 from $19.4 million in 1997. Net gain on sale of assets increased
due to increased loan sales of $19.3 million in 1998 from $1.5 million in 1997.
Non-interest Expense. Non-interest expense increased $32,000 in 1998. The
increase in non-interest expense in 1998 is primarily due to an increase in
compensation and benefits and occupancy and equipment offset by decreases in
deposit insurance and other non-interest expense. Compensation and benefits
increased $42,000 to $1.4 million for the year ended December 31, 1998 from $1.3
million for the year ended December 31, 1997. The increase in compensation and
benefits is primarily due to a $103,000 increase in MRDP stock benefit plan
expense offset by a $45,000 decrease in ESOP compensation expense and a $14,000
decrease in directors fees. Occupancy and equipment expense increased $9,000 to
$255,000 for the year ended December 31, 1998 due to year 2000 compliance
requirements. Deposit insurance decreased $2,000 to $45,000 in 1998 from
$47,000 in 1997 due to a lower average deposit balance. Other non-interest
expenses decreased $16,000 to $644,000 for the year ended December 31, 1998 from
$660,000 for the year ended December 31, 1997. The decrease in other non-
interest expenses was due primarily to a $31,000 decrease in franchise taxes
offset by a $15,000 increase in other professional fees.
Provision for Income Taxes. The provision for income taxes increased
$142,000 in 1998 to $587,000 for the year ended December 31, 1998 from $445,000
for the year ended December 31, 1997. This is a result of higher income before
taxes, which increased $140,000 to $1.5 million for the year ended December 31,
1998 and a higher effective tax rate in 1998. The tax rate increase is due to
the expiration of tax credits from a Missouri financial institution tax and the
difference between book and tax reporting of MRDP and ESOP compensation expense
in 1998.
Comparison of Operating Results for the Years Ended December 31, 1996 and 1997
Net Income. The Company's net income increased $441,000, or 104.4%, to
$864,000 for the year ended December 31, 1997 from $423,000 for the year ended
December 31, 1996. The increase was due to an increase in net interest income,
a decrease in provision for loan losses and a decrease in non-interest expense
offset by a decrease in non-interest income. The interest rate spread increased
to 2.43% for the year ended December 31, 1997 from 2.19% for the year ended
December 31, 1996. In 1996, the Company paid $513,000 as part of an industry-
wide special assessment to recapitalize the SAIF. Without the special
assessment, the Company would have had net income of $768,000.
Net Interest Income. Net interest income increased $612,000, or 21.87%, to
$3.4 million for the year ended December 31, 1997 from $2.8 million for the year
ended December 31, 1996. Total interest income increased $506,000, or 7.72%, to
$7.1 million from $6.6 million for the year ended December 31, 1996. The
increase in total interest income was primarily due to an increase in interest
on loans which was partially offset by a decrease in interest on investment
securities, mortgage-backed securities, and other interest-earning assets.
Interest income on loans increased by $837,000, or 18.87%, to $5.3 million for
the year ended December 31, 1997 from $4.4 million for the year ended December
31, 1996. Interest income on loans increased as a result of a higher average
balance of loans, which increased to $65.2 million in 1997 from $55.7 million in
1996, and an increase in the average yield on loans to 8.09% in 1997 from 7.96%
in 1996. The increase in yield on loans is due to the production or purchase of
loans at a higher rate of interest that those loans that paid off during the
year. Interest income from investment securities decreased $108,000, or 16,68%,
to $537,000 for the year ended December 31,1997 from $645,000 for the year
ended December 31, 1996. Interest income on investment securities decreased due
to a lower average balance of investment securities, which decreased to $7.9
million in 1997 from $9.7 million in 1996. The average yield on investment
securities remained at 5.94% in 1997. Interest income on mortgage-backed
securities decreased $111,000, or 13.85%, to $693,000 for the year ended
December 31, 1997 from $804,000 for the year ended December 31, 1996. Interest
income on mortgage-backed securities decreased due to a lower average balance on
mortgage-backed securities which decreased to $11.5 million in 1997 from $13.2
million 1996. During 1997, the Company continued to allow mortgage-
7
<PAGE>
backed securities to be reduced by principal repayments without reinvesting in
mortgage-backed securities. Interest income from other interest-earning assets
decreased $112,000, or 16.90%, to $554,000 for the year ended December 31, 1997
from $666,000 for the year ended December 31, 1996. Interest income from other
interest-earning assets decreased due to a lower average balance on other
interest-earning assets. Total interest expense decreased $106,000, or 2.83%, to
$3.7 million for the year ended December 31, 1997 from $3.8 million for the year
ended December 31, 1996. Interest expense decreased due to a lower average
deposit balance, which decreased $4.2 million, or 5.26%, to $72.9 million at
December 31, 1997 from $77.1 million at December 31, 1996. The lower average
balance was partially offset by an increase in average cost of deposits, which
increased to 4.99% for 1997 from 4.87% for 1996.
Provision for Loan Losses. The provision for loan losses was $5,000 for the
year ended December 31, 1997 as compared to $64,000 in 1996. The provision for
loan losses decreased significantly in 1997 due to a reduction in classified
assets when a large commercial real estate loan, which was delinquent at the end
of 1996 was paid current. The allowance for loan losses increased to $387,000,
or .58% of total loans at December 31, 1997 compared to $382,000, or .62% of
total loans at December 31, 1996.
Non-interest Income. Non-interest income decreased $187,000, or 48.26%, to
$201,000 for the year ended December 31, 1997 from $388,000 for the year ended
December 31, 1996. Non-interest income decreased primarily due to the decrease
in income from real estate owned, the gain on sale of assets and other income
and other non-interest income which was partially offset by an increase in loan
servicing fees. Income from real estate owned decreased $178,000 to $12,000 for
the year ended December 31, 1997 from $190,000 for the year ended December 31,
1996. The decrease in income from real estate owned is due to the sale of all
of the income-producing real estate in 1996 except a hotel building which the
Company has owned since 1989. The hotel building was disposed of in December of
1997 and resulted in an $854,000 contribution carry forward tax deduction to be
utilized over the next five years. The Company had an $18,000 net gain on sale
of assets in 1997 compared to a $34,000 net gain on sale of assets in 1996.
Non-interest Expense. Non-interest expense decreased $198,000, or 7.93%, to
$2.3 million in the year ended December 31, 1997 from $2.5 million for the year
ended December 31, 1996. The decrease in non-interest expense in 1997 is
primarily due to a decrease in deposit insurance premiums, which is partially
offset by increases in compensation and benefits, occupancy and equipment and
other non-interest expenses. Compensation and benefits increased $279,000, or
26.16%, to $1.3 million for the year ended December 31, 1997 from $1.1 million
for the year ended December 31, 1996. The increase in compensation and benefits
is primarily due to a $191,000 increase in ESOP compensation expense and a
$103,000 increase in MRDP compensation expense, partially offset by a $15,000
decrease in retirement and other benefits. Deposit insurance decreased
$631,000, or 93.08%, to $47,000 in 1997 from $677,000 in 1996. The decrease in
deposit insurance was primarily due to a $513,000 special assessment to
recapitalize the SAIF paid in the third quarter of 1996. Other non-interest
expenses increased $149,000, or 29.20%, to $659,000 in 1997 from $510,000 in
1996. The increase in other non-interest expense was due primarily to a $75,000
increase in franchise taxes and a $50,000 increase in legal fees, accounting
fees and other expenses related to the operation as a public company.
Provision for Income Taxes. The provision for income taxes increased
$240,000 in 1997 to $445,000 for the year ended December 31, 1997 from $206,000
for the year ended December 31, 1996 as a result of higher taxable income which
increased $681,000, or 108.39%, to $1.3 million in 1997 from $628,000 in 1996.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
-------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net (1)..............$55,278 $4,436 7.96% $65,160 $5,274 8.09% $65,868 $5,303 8.05%
Mortgage-backed securities............$13,235 $ 804 6.07% $11,491 $ 693 6.03% $ 9,763 $ 575 5.89%
Investment securities.................$ 9,746 $ 579 5.94% $ 7,929 $ 471 5.94% $ 3,551 $ 206 5.80%
Mutual funds..........................$ 7,831 $ 466 5.95% $ 5,990 $ 362 6.04% $ 5,986 $ 326 5.45%
FHLB stock............................$ 939 $ 66 7.03% $ 939 $ 66 7.03% $ 743 $ 50 6.73%
Interest-bearing deposits.............$ 5,306 $ 200 3.77% $ 3,608 $ 191 5.29% $ 8,056 $ 421 5.23%
------- ------ ------- ------ ------- ------
TOTAL INTEREST-EARNING ASSETS.......$92,785 $6,551 7.06% $95,117 $7,057 7.42% $93,967 $6,881 7.32%
------- ------ ------- ------ ------- ------
Non-interest-earning assets............$ 2,461 $ 2,875 $ 3,513
------- ------- -------
TOTAL AVERAGE ASSETS...............$95,246 $97,992 $97,480
======= ======= =======
INTEREST BEARING LIABILITIES:
Regular savings accounts..............$ 9,659 $ 242 2.51% $ 6,802 $ 207 3.04% $ 6,470 $ 184 2.84%
MMDAs.................................$ 4,749 $ 181 3.81% $ 5,050 $ 193 3.82% $ 5,673 $ 217 3.83%
Demand and NOW accounts...............$ 4,235 $ 93 2.20% $ 4,093 $ 91 2.22% $ 4,896 $ 106 2.17%
Certificates of deposit...............$58,483 $3,237 5.54% $56,973 $3,146 5.52% $55,570 $3,065 5.52%
------- ------- ------ ------- ------
TOTAL AVERAGE DEPOSITS.................$77,126 $3,753 6.87% $72,918 $3,637 4.99% $72,609 $3,572 4.92%
------- ------ ------- ------ ------- ------
FHLB advances.........................$ 4 -- 5.40% $ 164 $ 10 6.10% $ 584 $ 38 6.51%
------- ------ ------- ------ ------- ------
TOTAL INTEREST-BEARING
LIABILITIES........................$77,130 $3,753 4.87% $73,082 $3,647 4.99% $73,193 $3,610 4.93%
------ ------ ------
Non-interest-bearing liabilities.......$ 709 $ 805 $ 920
------- ------- -------
TOTAL AVERAGE LIABILITIES..........$77,839 $73,887 $74,113
------- ------- -------
Average Retained Earnings..............$17,407 $24,105 $23,367
------- ------- -------
Total Liabilities and
Retained Earnings..................$95,246 $97,992 $3,410 $97,480
======= ======= ====== =======
Net interest income.................... $2,798 $3,271
====== ======
Interest rate spread................... 2.19% 3.58% 2.43% 2.40%
Net interest margin.................... 3.02% 3.38%
Ratio of average interest-earning
assets to average interest- 130.15%
bearing liabilities................. 120.30% 128.38%
</TABLE>
- --------------------------------------------------------------------------------
(1) Average loans receivable includes nonperforming loans. Interest income does
not include interest on loans 90 days or more past due.
(2) Yields on average mortgage-backed and investment securities available for
sale have been calculated based upon the historical cost bases of the underlying
securities.
9
<PAGE>
Yields Earned and Rates Paid
The Company's results of operations are determined primarily by net
interest income and, to a lesser extent, fee income, other operating income and
operating expenses. Net interest income is determined by the interest rate
spread between the yields earned on its interest-earning assets and the rate
paid on interest-bearing liabilities and by the relative amounts of interest
earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest rate
earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits and borrowings, the interest
rate spread of the Company, and the net yield on weighted average interest-
earning assets for the periods and at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31, At December 31,
1996 1997 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable, net 7.96% 8.09% 8.05% 8.00%
Mortgage - backed securities 6.07% 6.03% 5.89% 5.79%
Investment Securities 5.94% 5.94% 5.80% 5.67%
Mutual funds 5.95% 6.04% 5.45% 5.35%
FHLB Stock 7.03% 7.03% 6.73% 6.50%
Interest - bearing deposits 3.77% 5.29% 5.23% 5.01%
All interest - earning assets 7.06% 7.42% 7.32% 7.23%
Weighted average rate paid on:
Regular savings accounts 2.51% 3.04% 2.84% 2.84%
MMDA's 3.81% 3.82% 3.83% 3.84%
Demand & NOW accounts 2.20% 2.22% 2.17% 2.19%
Certificates of deposit 5.54% 5.52% 5.52% 5.38%
FHLB Advances 5.40% 6.10% 6.51% 6.35%
All interest-bearing liabilities 4.87% 4.99% 4.93% 4.80%
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest -bearing
liabilities) 2.19% 2.43% 2.40% 2.43%
Net interest margin (net interest income
as a percentage of average interest-
earnings assets) 3.02% 3.58% 3.48% 3.69%
</TABLE>
10
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense. Information is provided with respect:
(i) to effects attributable to changes in volume (changes in volume multiplied
by prior rate); (ii) to effects attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) to changes in rate/volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
1996 Compared to 1997 1997 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
----- ------ ------ ------ ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In
Interest-Earning Assets: Thousands
Loans receivable, net $ 75 $ 751 $ 12 $ 838 --------- ($28) $ 57 ($0) $ 29
Mortgage-backed
securities ($6) ($106) $ 1 ($111) ($16) ($104) $ 2 ($118)
Investment Securities $ 0 ($108) $ 0 ($108) ($11) ($260) $ 6 ($265)
Mutual funds $ 7 ($109) ($2) ($104) ($36) $ -0 $ 0 ($36)
FHLB stock $ 0 $ 0 $ 0 $ 0 ($3) ($14) $ 1 ($16)
Interest-bearing deposits $ 81 ($64) ($26) ($ 9) ($2) $ 236 ($3) $ 230
----- ------ ----- ------ ----- ------ ---- ------
Total net change in income
on interest-earning assets $ 157 $ 364 ($15) $ 506 ($96) ($86) $ 6 ($176)
----- ------ ----- ------ ----- ------ ---- ------
Interest-Bearing Liabilities:
Regular savings accounts $ 52 ($72) ($15) ($35) ($14) ($10) $ 1 ($23)
MMDA's $ 1 $ 11 $ 0 $ 12 $ 0 $ 24 $ 0 $ 24
Demand & NOW accounts $ 1 ($3) ($0) ($2) ($3) $ 18 ($0) $ 15
Certificates of deposit ($12) ($79) $ 0 ($91) ($4) ($77) $ 0 ($81)
FHLB advances $ 0 $ 9 $ 1 $ 10 $ 1 $ 25 $ 2 $ 28
----- ------ ----- ------ ----- ------ ---- ------
Total net change in expense
on interest-bearing
liabilities $ 42 ($134) ($14) ($106) ($20) ($20) $ 3 ($37)
----- ------ ----- ------ ----- ------ ---- ------
Net change in net interest
income $ 115 $ 498 ($1) $ 612 ($76) ($66) $ 3 ($139)
===== ====== ===== ====== ===== ====== ==== ======
</TABLE>
11
<PAGE>
Asset and Liability Management
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Company has sought to reduce exposure of its earnings to changes in market
interest rates by attempting to manage the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this
objective is to increase the interest-rate sensitivity of the Company's
interest-earning assets by retaining for its portfolio loans with interest rates
subject to periodic adjustment to market conditions and selling substantially
all of its fixed-rate one- to four-family mortgage loans. In addition, the
Company maintains an investment portfolio with adjustable-rate mortgage-backed
securities and laddered maturities in shorter-term debt securities. The
Company relies on retail deposits as its primary source of funds. Management
believes retail deposits, compared to brokered deposits, reduce the effects of
interest rate fluctuations because they generally represent a more stable source
of funds. As part of its interest rate risk management strategy, the Company
promotes transaction accounts and certificates of deposit with terms up to four
years.
Using data from the Bank's quarterly reports to the OTS, the Company receives
a report which measures interest rate risk by modeling the change in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. This
procedure for measuring interest rate risk was developed by the OTS to replace
the "gap" analysis (the difference between interest-earning assets and interest-
bearing liabilities that mature or reprice within a specific time period). NPV
is the present value of expected cash flows from assets, liabilities, and off-
balance sheet contracts. The calculation is intended to illustrate the change
in NPV that will occur in the event of an immediate change in interest rates of
at least 200 basis points with no effect given to any steps that management
might take to counter the effect of that interest rate movement.
<TABLE>
<CAPTION>
Net Portfolio as %
Net Portfolio Value Portfolio Value of Assets
-------------------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------ -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
+400 bp 16,385 - 3,516 -18% 18.28% - 260 bp
+300 bp 17,540 - 2,361 -13% 19.21% - 167 bp
+200 bp 18,554 - 1,347 -7% 19.98% - 90 bp
+100 bp 19,372 - 530 -3% 20.56% - 32 bp
0 bp 19,901 20.88%
-100 bp 20,424 523 +3% 21.18% +30 bp
-200 bp 21,039 1,138 +6% 21.53% +66 bp
-300 bp 21,880 1,978 +10% 22.06% +118 bp
-400 bp 22,645 2,744 +14% 22.50% +162 bp
- ----------------------------------------------------------------------------
</TABLE>
Management reviews the OTS measurements on a quarterly basis. In addition to
monitoring selected measures on NPV, management also monitors effects on net
interest income resulting from increases or decreases in rates. The measure is
used in conjunction with NPV measures to identify excessive interest rate risk.
12
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on the sale of loans, maturing securities and
FHLB advances. While maturities and scheduled amortization of loans area
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At December 31, 1998, cash and
due from depository institutions totaled $9.8 million, or 10.27% of total
assets, and mutual funds and investment securities classified as available-for-
sale that matured in one year or less totaled $7.1 million, or 7.44% of total
assets. In addition, the Company maintains a credit facility with the FHLB
which provides for immediately available advances. The Company had FHLB
advances outstanding of $571,000 at December 31, 1998.
Federal regulations require a savings institution to maintain an average
daily balance of liquid assets (cash and eligible investments) equal to at least
4% of the average daily balance of its net withdrawable deposits and short-term
borrowing. The Company consistently maintains liquidity levels in excess of
regulatory requirements, and believes this is an appropriate strategy for proper
asset and liability management. At December 31, 1998 the liquidity ratio was
21.63%.
The Company uses its liquid resources principally to meet on-going
commitments, to fund maturing certificates of deposits and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain liquidity
and to meet operating expenses. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At December 31,
1998 the Company had outstanding commitments to extend credit which totaled $2.6
million and lines of credit which totaled $784,000. Management anticipates that
it will have sufficient funds available to meet its current loan origination
commitments.
The primary investing activity of the Company is the origination and
purchase of mortgage loans. During years ended December 31, 1996, 1997, and
1998, the Company originated loans in the amounts of $18.7 million, $19.4
million, and $28.1 million, and purchased loans in the amounts of $5.6 million,
$4.3 million, and $8.3 million, respectively.
At December 31, 1998 the Company had stockholders' equity of $21.7 million,
or 22.79% of total assets which was sufficient to meet all regulatory capital
requirements.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation is reflected in the increased cost of the Company's
operation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
13
<PAGE>
Year 2000 Issues
The Company has a Year 2000 Action Plan which management is using to
identify and correct Year 2000 compliance issues. The Company has reviewed all
services and operation components to identify technical and non-technical
issues. Having identified internal components and external components, the
Company has replaced its computer hardware with Year 2000 compliant equipment
and updated software with Year 2000 compliant versions. The Company has
requested third party providers to insure Year 2000 compliance with software and
services and has required testing of these services to assure compliance. All
third party providers have identified Year 2000 issues and are completing
revisions to systems and software to become Year 2000 compliant. Testing
schedules have been established with each provider.
The primary service provider for the Company is Fiserv who provides data
processing. Fiserv has provided the Company with 'proxy' test results
indicating Year 2000 compliance. We will be testing our specific connectivity
with Fiserv in March 1999.
The cost incurred by the Company for Year 2000 compliance for the year ended
December 31, 1998 was $72,000, most of which was capitalized for three years.
Fiserv will bill for the testing costs of the data processing system at an
expected cost of $7,000. Minimal other expense is projected to be incurred.
The Company is currently in the testing phase of the Year 2000 Action Plan.
This requires the testing of systems and software to insure continued service to
customers until and beyond the Year 2000.
The Company is substantially dependent on its computer systems and the
computer system of Fiserv, Des Moines, the data processor for the Company.
Failure to remedy Year 2000 issues could result in an interruption of service to
customers and could have a material adverse financial impact on the Company.
The most likely worst-case scenario of not being Year 2000 compliant are (1) the
loss of customers because of decreased levels of service, resulting in loss of
revenue; (2) increased employee expense if additional staff or overtime is
required to perform data processing functions currently provided by Fiserv; (3)
substantial deposit outflows caused by increased withdrawal requests; (4)
failure of utilities could cause substantial decrease in customer service.
The Company is not able to estimate the potential loss of revenue due to the
Year 2000 issue, since the exact impact and longevity of any potential problems
cannot be predicted. However, because the majority of the loan portfolio
consists of residential mortgages, management believes the Year 2000 issue will
not impair these borrowers ability to repay their debt.
The Company is preparing for the event of different systems not being Year
2000 capable as of June 30, 1999. Any system not tested or found to not be Year
2000 compliant will be handled manually or by another provider that is Year 2000
compliant. Currently the Company is on target to have testing completed during
the first quarter of 1999. There can be no assurances the Company's Year 2000
Action Plan will effectively address the Year 2000 issue. Partial or total
system failures would have an adverse effect on the Company's operations and
could result in a material financial impact.
14
<PAGE>
[Letterhead of William Keepers LLP Appears Here]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
CNS Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of CNS Bancorp, Inc. and subsidiaries (Company) as of December 31, 1997 and
1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the consolidated financial
position of CNS Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
As described in Note 1, the Company changed its method of accounting for
mortgage servicing rights in 1996.
/s/ Williams-Keepers LLP
- ------------------------
February 5, 1999
15
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1998
<TABLE>
<CAPTION>
ASSETS 1997 1998
----------- -----------
<S> <C> <C>
Cash and due from depository institutions (including interest-bearing
accounts totaling $3,112,633 in 1997 and $8,578,960 in 1998) $ 4,490,638 $ 9,813,816
Securities available-for-sale (Note 2) 21,670,913 17,715,083
Stock in Federal Home Loan Bank (Note 2) 939,300 662,500
Loans held-for-sale, net (Note 3) 446,748 1,767,075
Loans receivable, net (Note 3) 66,512,442 61,699,912
Accrued interest receivable (Note 4) 616,075 561,175
Real estate owned, net (Note 5) 652,795 710,085
Premises and equipment, net (Note 6) 1,625,137 1,611,454
Income taxes (Note 7) 299,784 166,356
Other assets (Note 8) 636,963 693,189
------------- -----------
Total assets $97,890,795 $95,400,645
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 10) $72,882,810 $72,689,165
Borrowed funds (Note 11) 595,985 570,983
Advances from borrowers for taxes and insurance 28,829 34,287
Accrued expenses and other liabilities 459,045 365,419
------------- -----------
Total liabilities 73,966,669 73,659,854
------------- -----------
Stockholders' equity
Common stock, $.01 par value:
Authorized, 6,000,000 shares; 1,653,125 shares issued 16,531 16,531
Additional paid-in capital 16,023,150 16,121,656
Retained earnings, substantially restricted (Notes 12, 13) 10,544,892 11,007,233
Deferred compensation - Employee Stock Ownership Plan (ESOP)
(Note 14) (1,082,640) (951,361)
Deferred compensation - Management Recognition and Development
Plan (MRDP) (Note 14) (929,883) (723,243)
Stock held in trust for Executive Deferred Compensation Plan (Note 15) (162,396) (94,258)
Treasury stock, 201,079 shares at cost - (3,182,279)
Accumulated other comprehensive income (485,528) (453,488)
------------- -----------
Total stockholders' equity 23,924,126 21,740,791
------------- -----------
Total liabilities and stockholders' equity $97,890,795 $95,400,645
============= ===========
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
16
<PAGE>
CNS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
INTEREST INCOME 1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage loans $4,316,254 $5,070,798 $5,099,846
Consumer and other loans 120,164 202,896 202,899
Investment securities 644,656 537,151 369,543
Mortgage-backed securities 804,073 692,680 575,329
Other interest-earning assets 666,226 553,648 633,251
---------- ---------- ----------
Total interest income 6,551,373 7,057,173 6,880,868
---------- ---------- ----------
INTEREST EXPENSE
Deposits 3,752,985 3,636,701 3,572,420
Borrowed funds (Note 11) 222 10,298 37,638
---------- ---------- ----------
Total interest expense 3,753,207 3,646,999 3,610,058
---------- ---------- ----------
Net interest income 2,798,166 3,410,174 3,270,810
PROVISION FOR LOAN LOSSES (Note 3) 63,668 5,000 62,889
---------- ---------- ----------
Net interest income after provision
for loan losses 2,734,498 3,405,174 3,207,921
---------- ---------- ----------
NON-INTEREST INCOME
Loan servicing fees 51,980 64,389 132,430
Income (loss) from real estate owned (Note 5) 189,960 11,790 (4,040)
Net gain on sale of assets (Note 16) 34,451 17,714 345,285
Other (Note 17) 112,014 107,059 96,277
---------- ---------- ----------
Total non-interest income 388,405 200,952 569,952
---------- ---------- ----------
NON-INTEREST EXPENSE
Compensation and benefits 1,065,289 1,343,923 1,385,382
Occupancy and equipment 241,374 246,300 254,875
Deposit insurance premiums (Note 19) 677,395 46,873 44,519
Other (Note 17) 510,416 659,466 643,701
---------- ---------- ----------
Total non-interest expense 2,494,474 2,296,562 2,328,477
---------- ---------- ----------
Income before income taxes 628,429 1,309,564 1,449,396
PROVISION FOR INCOME TAXES (Note 7) 205,643 445,264 587,014
---------- ---------- ----------
Net income $ 422,786 $ 864,300 $ 862,382
========== ========== ==========
Earnings per share (Note 18) $ - $0.56 $0.58
========== ========== ==========
Diluted earnings per share (Note 18) $ - $0.52 $0.54
========== ========== ==========
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
17
<PAGE>
CNS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock
-----------------------
Additional Deferred Deferred
Paid-in Retained Compensation Compensation
Shares Amount Capital Earnings ESOP MRDP
----------- --------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 - $ - $ - $ 9,697,118 $ - $ -
Net proceeds from common
stock issued in conversion 1,653,125 16,531 15,983,295 - (1,322,500) -
Compensation expense recognized
for ESOP - - 20,207 - 73,089 -
Value of Company stock
acquired for executive deferred
compensation plan - - - - - -
Dividends ($ .05 per share) - - - (75,624) - -
Net income - - - 422,786 - -
Net change in unrealized
loss on securities
available-for-sale, net
of deferred taxes - - - - -
--------- ------- ----------- ------------ ------------ -----------
Balance, December 31, 1996 1,653,125 16,531 16,003,502 10,044,280 (1,249,411) -
Establishment of MRDP - - - - - (1,033,203)
Compensation expense - - 117,389 - 166,771 -
recognized for ESOP
Compensation expense - - - - - 103,320
recognized for MRDP
Valuation adjustment for - - (97,741) - - -
MRDP trust receivable
Earnings on the executive - - - - - -
deferred compensation plan
Dividends ($ .22 per share) - - - (363,688) - -
Net income - - - 864,300 - -
Net change in unrealized
loss on securities
available-for-sale, net
of deferred taxes - - - - - -
--------- ------- ----------- ------------ ------------ ----------
Balance, December 31, 1997 1,653,125 16,531 16,023,150 10,544,892 (1,082,640) $ (929,883)
<CAPTION>
Stock Held In
Trust For
Executive Accumulated
Deferred Other (Memo)
Compensation Treasury Comprehensive Comprehensive
Plan Stock Income Total Income
------------- ---------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - $ (517,247) $ 9,179,871 $ -
Net proceeds from common
stock issued in conversion - - - 14,677,326 -
Compensation expense recognized
for ESOP - - - 93,296 -
Value of Company stock
acquired for executive deferred
compensation plan (127,428) - - (127,428) -
Dividends ($ .05 per share) - - - (75,624) -
Net income - - - 422,786 422,786
Net change in unrealized
loss on securities
available-for-sale, net
of deferred taxes - - 29,051 29,051 29,051
------------ ---------- -------- ---------- ---------
Balance, December 31, 1996 (127,428) - (488,196) 24,199,278 $ 451,837
=========
Establishment of MRDP - - - (1,033,203) $ -
Compensation expense
recognized for ESOP - - - 284,160 -
Compensation expense
recognized for MRDP - - - 103,320 -
Valuation adjustment for
MRDP trust receivable - - - (97,741) -
Earnings on the executive (34,968) - - (34,968) -
deferred compensation plan
Dividends ($ .22 per share) - - - (363,688) -
Net income - - - 864,300 864,300
Net change in unrealized
loss on securities
available-for-sale, net
of deferred taxes - - 2,668 2,668 2,668
------------ ---------- --------- ----------- ---------
Balance, December 31, 1997 (162,396) - (485,528) 23,924,126 $ 866,968
=========
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
CNS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - Continued
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock
-----------------------
Additional Deferred Deferred
Paid-in Retained Compensation Compensation
Shares Amount Capital Earnings ESOP MRDP
----------- --------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Compensation expense
recognized for ESOP - - 80,503 - 131,279 -
Compensation expense
recognized for MRDP - - - - - 206,640
Valuation adjustment for
MRDP trust receivable - - 18,003 - - -
Net change in executive
deferred compensation plan - - - - - -
Dividends paid ($ .27 per
share) - - - (400,041) - -
Acquisition of 201,079
common shares to be held as
treasury stock - - - - - -
Net income - - - 862,382 - -
Net change in unrealized
loss on securities
available-for-sale, net
of deferred taxes - - - - - -
----------- --------- ------------- -------------- ------------ ------------
Balance, December 31, 1998 1,653,125 $16,531 $ 16,121,656 $ 11,007,233 $ (951,361) $ (723,243)
=========== ========= ============= ============== ============ ============
<CAPTION>
Stock Held In
Trust For
Executive Accumulated
Deferred Other (Memo)
Compensation Treasury Comprehensive Comprehensive
Plan Stock Income Total Income
------------- ---------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Compensation expense - - - 211,782 $ -
recognized for ESOP
Compensation expense
recognized for MRDP - - - 206,640 -
Valuation adjustment for
MRDP trust receivable - - - 18,003 -
Net change in executive
deferred compensation plan 68,138 - - 68,138 -
Dividends paid ($ .27 per
share) - - - (400,041) -
Acquisition of 201,079
common shares to be held as
treasury stock - (3,182,279) - (3,182,279) -
Net income - - - 862,382 862,382
Net change in unrealized
loss on securities
available-for-sale, net
of deferred taxes - - 32,040 32,040 32,040
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1998 $ (94,258) $(3,182,279) $ (453,488) $21,740,791 $894,422
=========== =========== =========== =========== ==========
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
19
<PAGE>
CNS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Net income $ 422,786 $ 864,300 $ 862,382
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Compensation expense - ESOP 93,296 284,160 211,782
Compensation expense - MRDP - 103,320 206,640
Amortization of premiums on
securities available-for-sale 15,060 23,666 75,833
Proceeds from the sale of loans held-for-sale 4,081,012 1,523,816 18,899,608
Origination of loans held-for-sale (5,295,676) (1,057,990) (20,112,977)
Depreciation 133,872 127,900 128,345
Provision for losses on loans and real
estate owned 63,668 5,000 67,989
Loss on sale of securities available-for-
sale 45,617 - 13,414
Gain on sale of real estate owned (200,716) - -
Gain on sales of loans held-for-sale (41,752) (17,714) (106,958)
Adjustments for (increases) decreases in operating
assets and increases (decreases) in operating
liabilities:
Other assets (60,746) (484,187) 16,677
Accrued expenses and other liabilities 84,397 115,055 (93,626)
Income taxes receivable 70,847 184,568 112,065
------------ ----------- ------------
Net cash (used) provided by operating
activities (588,335) 1,671,894 281,174
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan (originations) payments, net of principal
repayments (1,690,300) (1,545,170) 12,951,379
Purchases of:
Loans receivable (5,591,255) (4,315,320) (8,252,738)
Securities available-for-sale (14,889,757) (2,401,243) (2,050,000)
Proceeds from maturity of:
Securities available-for-sale 9,027,877 8,285,624 5,878,401
Securities held-to-maturity - - 276,800
Proceeds from sales of securities available-for-sale 3,655,781 - 91,585
Purchase of real estate held for investment - (897,543) (11,390)
Proceeds from sales of real estate owned 358,421 244,748 -
Purchase of premises and equipment (27,574) (95,616) (114,662)
------------ ----------- ------------
Net cash (used) provided by investing
activities $ (9,156,807) $ (724,520) $ 8,769,375
------------ ----------- ------------
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
20
<PAGE>
CNS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
CASH FLOWS FROM FINANCING ACTIVITIES 1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Net (decrease) increase in deposits (3,050,486) 2,379 (193,645)
Net increase (decrease) in borrowed funds - 595,985 (25,002)
Net increase (decrease) in advance payments by
borrowers (5,742) (28,470) 5,458
Net proceeds from stock issuance 14,677,326 - -
Change in Company stock held in trust for executive
deferred compensation plan (84,250) (34,968) 68,138
Funding provided to MRDP trust - (1,200,000) -
Purchase of treasury stock - - (3,182,279)
Dividends (75,624) (363,688) (400,041)
------------ ----------- ------------
Net cash (used) provided by financing
activities 11,461,224 (1,028,762) (3,727,371)
------------ ----------- ------------
Increase (decrease) in cash and cash 1,716,082 (81,388) 5,323,178
equivalents
Cash and cash equivalents at beginning of year 2,855,944 4,572,026 4,490,638
------------ ----------- ------------
Cash and cash equivalents at end of year $ 4,572,026 $ 4,490,638 $ 9,813,816
============ =========== ============
Cash paid for:
Interest $ 3,784,173 $ 3,831,630 $ 3,606,418
Income taxes $ 131,988 $ 235,328 $ 577,128
Non-cash transactions:
Valuation adjustment for MRDP trust receivable $ - $ 97,741 $ 18,003
Transfer from loans receivable to foreclosed real
estate $ - $ - $ 51,000
Exchange of common stock for loan receivable from
ESOP $ 1,322,500 $ - $ -
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
21
<PAGE>
CNS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: CNS Bancorp, Inc. (Company) is a Delaware corporation
incorporated on January 16, 1996, for the purpose of becoming the holding
company of City National Savings Bank, FSB (Bank).The Bank was formerly known as
City National Savings and Loan Association prior to its March 1, 1995 conversion
from a state to a federal charter. On June 16, 1996, the Bank converted from a
mutual to a stock form of ownership and the Company completed its initial public
offering with one-half of the net proceeds used to acquire all of the issued and
outstanding capital stock of the Bank.
The Bank provides a variety of financial services to individuals and corporate
customers through its headquarters office in Jefferson City, Missouri, and its
four branches in Jefferson City, California, Tipton and Waynesville, Missouri.
The Bank's primary deposit products are interest-bearing checking and savings
accounts and certificates of deposit. Its primary lending products are one-to
four-family residential loans.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, the Bank.
The Bank's wholly-owned subsidiary is Parity Insurance Agency, Inc. and its
wholly-owned subsidiary is City National Real Estate, Inc. The Bank's
subsidiaries have been relatively inactive in recent years, but are authorized
to sell insurance products as well as develop and sell real estate.
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 losses on loans and the
valuation of real estate owned held-for-sale. In connection with the
determination of the allowances for losses on loans and real estate owned held-
for-sale, management obtains independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of one-to four-family
residential loans in the Central Missouri area. The Central Missouri economy is
primarily dependent upon state government and, to a lesser extent, upon light
manufacturing and agriculture. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's portfolio is susceptible to changes in local
market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future changes to the allowances may be necessary based
on changes in local economic conditions. In addition, regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to make changes to the allowances based on their judgments
about information available to them at the time of their examination. Because
of these factors, the likelihood of a material change in the allowances for
losses on loans and real estate owned held-for-sale is more than remote.
Regulation: The Bank is subject to examination and regulation by the Office of
Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).
22
<PAGE>
Cash and cash equivalents: Cash and cash equivalents are composed of cash,
Federal Home Loan Bank (FHLB) daily time deposits, certificates of deposit and
due from depository institutions. The Bank considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.
Securities available-for-sale: Securities available-for-sale consist of mutual
funds, bonds, notes, debentures, and mortgage-backed securities not classified
as trading securities nor as held-to-maturity securities.
Unrealized gains and losses, net of tax, on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity until
realized.
Any declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are included in
earnings as realized losses.
Gains and losses on the sale of securities available-for-sale are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Loans held-for-sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Gains and losses on the sales of these loans are included as non-
interest income.
Loans receivable: Loans receivable that management has the intent and ability
to hold until maturity or pay-off are reported at their outstanding principal
balances adjusted for any charge-offs, the allowance for loan losses, any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on purchased loans are amortized to income using the interest method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Commitment fees and costs relating to commitments, the likelihood
of exercise of which is remote, are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment of yield.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and outstanding. Income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management utilizes a systematic, documented
approach in determining the appropriate level of the allowance for loan losses.
Management's approach, which provides for general and specific allowances, is
based, among other factors, on the Bank's past loan loss and collection
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Management applies its normal loan review procedures in determining when a loan
is impaired. Management considers impaired loans to be all loans classified as
substandard, doubtful, or loss except for smaller balance
23
<PAGE>
homogeneous loans (primarily consumer installment loans) which are collectively
evaluated for impairment. Impaired loans are charged off when deemed to be
uncollectible by management.
Management has elected to continue to use its existing nonaccrual methods for
recognizing interest income on impaired loans.
Real estate owned: Real estate properties acquired through, or in lieu of, loan
foreclosure and held-for-sale are initially recorded at fair value at the date
of foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Increases or decreases in
the valuation allowance are charged or credited to income from real estate
owned.
Foreclosed assets held for the production of income are carried at cost, less
accumulated depreciation, computed principally by the straight-line method over
the estimated useful lives of the depreciable assets.
Real estate properties acquired for investment are carried at the lower of cost,
including cost of improvements and amenities incurred subsequent to acquisition,
or net realizable value. Costs relating to development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed. The portion of interest costs relating to the development of real
estate is capitalized.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated net realizable value.
Premises and equipment: Land is carried at cost. Buildings and furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation and
amortization computed principally by the straight-line method over the estimated
useful lives of the assets.
Loan servicing: Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 122, Accounting for Mortgage Servicing
Rights (an amendment of SFAS No. 65). Effective January 1, 1997, the Company
adopted SFAS No. 125, Accounting For Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, which superceded SFAS No. 122. The adoption
of these statements did not have a material effect on the Company's financial
condition or operating results for 1996 or 1997. These pronouncements require
that rights to service mortgage loans for others be recognized as separate
assets, with such rights evaluated for impairment based on the fair value of
such rights.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. 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
interest rate. For purposes of measuring impairment, the rights are stratified
based on the following predominant risk characteristics of the underlying loans:
loan type, interest rate, and term. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed
their fair value.
Income taxes: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized and settled. As changes in
tax law or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
24
<PAGE>
Employee stock ownership plan: In conjunction with the Bank's conversion, the
Company formed an ESOP for the benefit of eligible employees. Common stock of
the Company acquired for the ESOP is recorded as deferred compensation, which is
a reduction to stockholders' equity. ESOP shares are considered uncommitted
until such time the shares are released (committed) to the ESOP trustee for
distribution to the plans' participants. As the committed shares are released,
compensation expense is recognized for the then fair value of the stock and
deferred compensation for the committed shares is reduced by the amount of the
shares' acquisition cost. Any difference between the acquisition cost and the
then fair value is credited or charged to additional paid-in capital. Dividends
paid on uncommitted ESOP shares are recognized as compensation expense and
dividends paid on allocated shares are recognized as a reduction of retained
earnings.
Earnings per share: Earnings per share of common stock have been computed on
the basis of the weighted average number of shares of common stock outstanding,
including committed ESOP shares and treasury stock. Uncommitted ESOP shares and
granted stock options are included in the weighted average number of common
shares outstanding for computing diluted earnings per share.
Advertising: The Company expenses the production costs of advertising as
incurred.
Comprehensive income: The Company adopted SFAS No. 130, Reporting Comprehensive
Income, as of January 1, 1998. Accounting principles generally require that
recognized revenues, expenses, gains and losses be included in net income.
Although certain changes in net assets and liabilities, such as unrealized gains
and losses on available-for-sale securities, are reported as a separate
component of the equity section of the statement of financial condition, such
items, along with net income, are components of comprehensive income. The
adoption of SFAS No. 130 had no effect on the Company's net income or
stockholders' equity.
The Company has elected to report its comprehensive income in the consolidated
statement of stockholders' equity. The only element of other comprehensive
income that the Company has is the unrealized gain or losses on available-for-
sale securities. The 1996 and 1997 financial statements have been reclassified
to reflect these changes in reporting formats.
The components of other comprehensive income and related tax effects for the
years ended are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------- --------
<S> <C> <C> <C>
Unrealized holdings gains (losses) on
available-for-sale securities $ (1,600) $ 4,042 $ 35,131
Reclassification adjustment for losses
(gains) realized in income 45,617 - 13,414
---------- ------- --------
Net unrealized gain 44,017 4,042 48,545
Tax effect (14,966) (1,374) (16,505)
---------- ------- --------
Net-of-tax amount $ 29,051 $ 2,668 $ 32,040
========== ======= ========
</TABLE>
25
<PAGE>
2. SECURITIES
The amortized cost and fair values of investment securities at December 31 are
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale
Mutual funds, which invest in adjustable rate
mortgage-backed securities of U.S. government
agencies and short-term government debt
securities $ 5,990,000 $ - $ 613,549 $ 5,376,451
U.S. government and federal agency 5,800,037 7,792 2,123 5,805,706
Mortgage-backed securities of U.S. government
agencies 10,690,092 25,759 227,095 10,488,756
------------- ---------- ---------- -----------
$ 22,480,129 $ 33,551 $ 842,767 $21,670,913
============= ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale
Mutual funds, which invest in adjustable rate
mortgage-backed securities of U.S. government
agencies and short-term government debt
securities $ 5,885,000 $ - $ 575,000 $ 5,310,000
U.S. government and federal agency 3,850,686 18,591 - 3,869,277
Mortgage-backed securities of U.S. government
agencies 8,735,210 5,349 204,753 8,535,806
------------- ---------- ---------- -----------
$ 18,470,896 $23,940 $ 779,753 $17,715,083
============= ========== ========== ===========
</TABLE>
Gross realized and unrealized gains and losses on sales of securities available-
for-sale for the year ended and as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gross realized gains $ 303 $ - $ -
Gross realized losses (45,920) - (13,414)
----------- ------------ ------------
Net (loss) on sale of securities (Note 16) $ (45,617) $ - $ (13,414)
=========== ============ ============
Gross unrealized gains $ 48,778 $ 33,551 $ 23,937
Gross unrealized losses (862,438) (842,767) (779,753)
----------- ------------ ------------
Net unrealized losses (813,660) (809,216) (755,816)
Deferred tax asset (Note 7) 325,464 323,688 302,328
----------- ------------ ------------
Unrealized loss on securities available-
for-sale, net of deferred taxes $ (488,196) $ (485,528) $ (453,488)
============ ============ ============
</TABLE>
26
<PAGE>
The amortized cost and fair value of securities available-for-sale at December
31, 1998, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities as securities may have the right to call or
prepay with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amounts maturing in: Amortized Cost Fair Value
-------------- -----------
<S> <C> <C>
One year or less $ 1,800,641 $ 1,809,025
More than one year less than five years 2,050,045 2,060,252
Mortgage-backed securities 8,735,210 8,535,806
Mutual funds 5,885,000 5,310,000
-------------- -----------
$18,470,896 $17,715,083
============== ===========
</TABLE>
The investment in FHLB stock of $939,300 and $662,500 at December 31, 1997 and
1998, respectively, is recorded at cost and is considered a restricted asset.
The Bank has pledged certain mortgage-backed securities to secure advances from
the FHLB. At December 31, 1997 and 1998, these pledged assets had a carrying
value of $1,814,862 and $1,683,476, respectively.
3. LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Mortgage loans (principally conventional):
One-to four-family residences $52,265,708 $45,495,028
Other properties 12,269,200 13,007,630
Construction loans 1,619,797 3,087,108
Land 108,699 69,176
----------- -----------
66,263,404 61,658,942
Less:
Undisbursed portion of mortgage loans 1,287,231 2,239,218
Net deferred loan-origination fees 14,125 10,203
----------- -----------
Net mortgage loans 64,962,048 59,409,521
----------- -----------
Commercial loans 424,669 1,156,858
----------- -----------
Consumer and other loans:
Automobile 401,483 512,494
Manufactured home 47,595 46,234
Share loans 651,273 613,994
Other 412,823 370,609
----------- -----------
1,513,174 1,543,331
----------- -----------
Net loans before allowance for loan losses 66,899,891 62,109,710
Less allowance for loan losses 387,449 409,798
----------- -----------
Loans receivable, net $66,512,442 $61,699,912
=========== ===========
</TABLE>
Loans held-for-sale of $446,748 and $1,767,075 at December 31, 1997 and 1998,
respectively, are carried at cost, which approximated market value at year-end.
27
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Beginning balance $318,781 $382,449 $387,449
Provision charged to income 63,668 5,000 62,889
Charge-offs - - (40,540)
-------- -------- --------
Ending balance $382,449 $387,449 $409,798
======== ======== ========
</TABLE>
Loans to directors and executive officers approximated $462,000 and $522,000 as
of December 31, 1997 and 1998, respectively.
The following information relates to impaired loans as of and for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- --------
<S> <C> <C>
Recorded investment in impaired loans for which a valuation allowance of
$10,000 is provided for both 1997 and 1998, based upon the measure of
the loan's fair value of underlying collateral $ 18,970 $ 19,270
Recorded investment in impaired loans for which there is no need for a
valuation allowance, based upon the measure of the loan's fair value of
underlying collateral 198,495 156,103
---------- --------
Total recorded investment in impaired loans $ 217,465 $175,373
========== ========
Average recorded investment in impaired loans $ 336,780 $156,302
========== ========
</TABLE>
Interest income recognized for cash payments received on impaired loans during
1997 and 1998 totaled $15,187 and $10,466, respectively.
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Investment securities $158,292 $ 94,563
Mortgage-backed securities 78,632 65,473
Loans receivable and loans held-for-sale 379,151 401,139
-------- --------
$616,075 $561,175
======== ========
</TABLE>
28
<PAGE>
5. REAL ESTATE OWNED
Real estate owned consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Real estate acquired for investment $ 652,795 $ 664,185
Foreclosed real estate held-for-sale - 51,000
--------- ---------
652,795 715,185
Allowance for losses - (5,100)
--------- ---------
$ 652,795 $ 710,085
========== =========
</TABLE>
The real estate acquired for investment consists of an equity interest in a
joint venture engaged in the development of residential real estate.
Income (loss) from real estate owned for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Income (loss) from real estate owned, net $(10,756) $11,790 $(4,040)
Net gain on sale of real estate owned 200,716 - -
-------- ------- -------
$189,960 $11,790 $(4,040)
======== ======= =======
</TABLE>
Depreciation expense on foreclosed real estate held for the production of income
for the years ended December 31, 1996, 1997, and 1998 totaled $4,282, $0, and
$0, respectively.
Activity in the allowance for losses for real estate owned for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
Real Estate
Foreclosed Acquired for
Real Estate Investment Total
----------- ------------ -----------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 18,015 $ 1,250,000 $ 1,268,015
Elimination of allowance due to
sale of real estate owned (18,015) - (18,015)
----------- ------------ -----------
Balance at December 31, 1996 - 1,250,000 1,250,000
Elimination of allowance due to
sale of real estate owned - (1,250,000) (1,250,000)
----------- ------------ -----------
Balance at December 31, 1997 - - -
Provision for loss 5,100 - 5,100
----------- ------------ -----------
Balance at December 31, 1998 $ 5,100 $ - $ 5,100
=========== ============ ===========
</TABLE>
29
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land $ 237,356 $ 237,356
Buildings 2,115,372 2,131,701
Furniture, fixtures and equipment 510,255 487,410
----------- -----------
2,862,983 2,856,467
Accumulated depreciation (1,237,846) (1,245,013)
----------- -----------
$ 1,625,137 $ 1,611,454
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997, 1998 totaled
$133,872, $127,900, and $128,345, respectively.
7. INCOME TAXES
The Company and its subsidiaries file consolidated federal income tax and
individual state tax returns on a calendar year basis. Historically, the Bank
was allowed a special bad-debt deduction based on a percentage of taxable income
or on specified experience formulas. The Small Business Job Protection Act of
1996 repealed the percentage of taxable income method of computing bad debt
deductions for tax years beginning after December 31, 1995. Effective 1996, the
Bank was required to compute its bad debt deduction based on specified
experience formulas.
The Small Business Job Protection Act of 1996 also required the Bank to bring
into taxable income post-1987 tax bad debt reserves. Tax on this income will be
payable over a six year period beginning in 1998 and is included in deferred
taxes in the accompanying consolidated statements of financial condition.
Generally accepted accounting principles allow an exception to providing a
deferred tax liability on bad debt reserves for tax purposes of qualified thrift
lenders such as the Bank that arose in fiscal years beginning before December
31, 1987. Such bad debt reserve for the Bank amounted to approximately
$2,932,000 with an income tax effect of approximately $997,000 at December 31,
1998. This bad debt reserve would become taxable if the Bank does not maintain
certain qualifying assets as defined, if the reserve is charged for other than
bad debt losses, or if the Bank does not maintain its thrift charter.
Income taxes receivable (payable) at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Current $(156,219) $(166,105)
Deferred 456,003 332,461
--------- ---------
Income taxes receivable $ 299,784 $ 166,356
========= =========
</TABLE>
30
<PAGE>
The consolidated provision (benefit) for income taxes consisted of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current $218,678 $293,982 $397,793
Deferred (39,564) 111,541 123,542
-------- -------- --------
179,114 405,523 521,335
State:
Current 26,529 39,741 65,679
-------- -------- --------
Provision for income taxes $205,643 $445,264 $587,014
======== ======== ========
</TABLE>
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ----- -----
<S> <C> <C> <C>
Statutory federal income tax rates 34.0 % 34.0 % 34.0 %
Increase (decrease) resulting from:
State income taxes 4.5 % 6.2 % 4.8 %
Tax-exempt interest (3.6)% (1.4)% (0.8)%
Other (2.2)% (4.8)% 2.5 %
------ ----- -----
32.7 % 34.0 % 40.5 %
====== ===== =====
</TABLE>
The tax effects of temporary differences between the financial reporting basis
and income tax basis of assets and liabilities that are included in the net
deferred tax asset at December 31 relate to the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowances for losses on loans $ 67,162 $ 95,126
Deferred compensation 55,216 46,464
Unrealized loss on securities
available-for-sale (Note 2) 323,688 302,328
Contribution carryforward 290,335 276,430
Other 6,521 21,253
-------- --------
Total deferred tax assets 742,922 741,601
-------- --------
Deferred tax liabilities:
FHLB stock dividends 111,671 127,305
Cash/accrual differences 9,806 7,492
Involuntary conversion 151,656 166,684
Mortgage servicing rights 13,786 107,659
-------- --------
Total deferred tax liabilities 286,919 409,140
-------- --------
Net deferred tax asset $456,003 $332,461
======== ========
</TABLE>
31
<PAGE>
8. OTHER ASSETS
Other assets at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Equity interest in joint venture partnership
(residential construction) $382,418 $219,616
Receivable from MRDP revocable trust (Note 14) 69,056 -
Mortgage servicing rights, net (Note 9) 33,156 277,757
Miscellaneous 152,333 195,816
-------- --------
$636,963 $693,189
======== ========
</TABLE>
9. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balance of
mortgage loans serviced for others was $20,755,283 and $33,065,560 at December
31, 1997 and 1998, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $11,253 and $29,206 at December 31, 1997 and 1998, respectively.
Mortgage servicing rights of $28,421 and $251,747 were capitalized in 1997 and
1998, respectively. Amortization of mortgage servicing rights totaled $4,349 and
$7,146 in 1997 and 1998, respectively. The unamortized balance of $33,156 and
$277,757 approximated the fair value of such rights at December 31, 1997 and
1998, respectively, and is included in other assets in the accompanying
consolidated statement of financial condition.
10. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Demand deposits $ 480,426 $ 945,322
Savings deposits 16,093,089 17,092,782
Time deposits 56,309,295 54,651,061
----------- -----------
$72,882,810 $72,689,165
=========== ===========
</TABLE>
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was approximately $2,967,000 and $2,755,000 at December
31, 1997 and 1998, respectively. The portions of deposits which exceed $100,000
are not federally insured.
32
<PAGE>
At December 31, 1998, scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------- -----------
Interest Rates: 1999 2000 2001 2002 Total
----------- ----------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
0.0 to 3.99% $ 13,094 $ - $ - $ - $ 13,094
4.0 to 4.99% 9,465,444 1,378,842 - 206,257 11,050,543
5.0 to 5.99% 26,655,994 11,339,257 - 1,527,999 39,523,250
6.0 to 6.99% 3,488,077 492,843 - - 3,980,920
7.0 to 7.99% 83,254 - - - 83,254
----------- ----------- ----- ---------- -----------
$39,705,863 $13,210,942 $ - $1,734,256 $54,651,061
=========== =========== ===== ========== ===========
</TABLE>
11. BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Advances from FHLB $595,985 $570,983
======== ========
</TABLE>
Information concerning advances from the FHLB is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Average balance during the year $149,499 $583,615
Maximum month end balance during the year $600,000 $594,973
Weighted average interest rate during the year 6.10% 6.51%
</TABLE>
Interest expense on borrowed funds for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ------- -------
<S> <C> <C> <C>
Advances from the FHLB $ 222 $10,298 $37,638
===== ======= =======
</TABLE>
The Bank has signed a blanket pledge agreement with the FHLB under which it can
draw advances of unspecified amounts from the FHLB. The outstanding advance at
both December 31, 1998 and 1997, is a 15 year advance with a fixed interest rate
of 6.35%. Prior to 1998, the Bank was required to hold an unencumbered
portfolio of eligible one-to-four family residential mortgages with a book value
of not less than 150% of the indebtedness. During 1998, such requirement was
eliminated as the Bank also pledges mortgage-backed securities to secure such
advances.
The following represents amounts due on the advances from the FHLB as of
December 31, 1998:
<TABLE>
<S> <C>
1999 $ 26,636
2000 28,378
2001 30,233
2002 32,212
2003 34,316
Thereafter 419,208
--------
$570,983
========
</TABLE>
33
<PAGE>
12. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. The regulations require the Bank to meet specific
capital adequacy 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 judgements 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 Tangible, Tier I, and Risk-based capital (as defined in the
regulations). Management believes, as of December 31, 1998, the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997 and 1998, the most recent notification from the OTS
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. A well-capitalized institution significantly exceeds
the required minimum level for each relevant capital measure. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
(Dollars in thousands)
To Be Well
Capitalized For
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- --------------------- ------------------
As of December 31, 1997: Ratio Amount Ratio Amount Ratio Amount
------ ------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio
to total assets 19.8% $18,557
======
Unrealized loss on securities 486
available-for-sale
Disallowed servicing assets (33)
-------
Tangible capital, and ratio to
adjusted total assets 20.1% $19,010 1.5% $1,416
====== ======= ===== ======
Tier 1 (core) capital, and ratio
to adjusted total assets 20.1% $19,010 3.0% $2,832 5.0% $4,719
====== ======= ===== ====== ===== ======
Tier 1 capital, and ratio to
risk-weighted assets 40.6% $19,010 6.0% $2,811
====== ===== ======
Allowance for loan and lease
losses 373
-------
Total risk-based capital, and
ratio to risk-weighted assets 41.4% $19,383 8.0% $3,748 10.0% $4,685
====== ======= ===== ====== ===== ======
Total assets $93,933
=======
Adjusted total assets $94,386
=======
Risk-weighted assets $46,853
=======
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized For
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- --------------------- ------------------
As of December 31, 1998: Ratio Amount Ratio Amount Ratio Amount
------ ------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio
to total assets 20.3% $19,026
======
Unrealized loss on securities
available-for-sale 453
-------
Tangible capital, and ratio
to adjusted total assets 20.7% $19,479 1.5% $1,415
====== ======= ===== ======
Tier 1 (core) capital, and ratio
to adjusted total assets 20.7% $19,479 4.0% $3,772 5.0% $4,715
====== ======= ===== ====== ===== ======
Tier 1 capital, and ratio to
risk-weighted assets 40.9% $19,479 6.0% $2,857
====== ===== ======
Allowance for loan and lease
losses 398
-------
Total risk-based capital, and
ratio to risk-weighted assets 41.7% $19,877 8.0% $3,809 10.0% $4,761
====== ======= ===== ====== ===== ======
Total assets $93,849
=======
Adjusted total assets $94,302
=======
Risk-weighted assets $47,613
=======
</TABLE>
13. CONVERSION TO STOCK OWNERSHIP
On December 19, 1995, the Board of Directors of the Bank adopted a plan of
conversion pursuant to which the Bank converted from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank with the
concurrent formation of the holding company which acquired all of the common
stock of the Bank. On June 10, 1996, the Company sold 1,653,125 shares of
common stock at $10 per share to eligible purchasers, including depositors of
the Bank. Total proceeds from the conversion, after deducting conversion
expenses of $531,424, were $15,999,826 and are reflected as common stock and
additional paid-in capital in the accompanying consolidated statements of
financial condition. The Company utilized $7,999,913 of the net proceeds to
acquire all of the common stock of the Bank. The Company was also authorized to
issue 1,000,000 shares of $.01 par value preferred stock. As of December 31,
1998, no shares of preferred stock have been issued.
35
<PAGE>
As part of the conversion, the Bank established a liquidation account for the
benefit of eligible depositors who continue to maintain their deposit accounts
in the Bank after conversion. In the unlikely event of a complete liquidation
of the Bank, and only in such event, each eligible depositor will be entitled to
receive a liquidation distribution from the liquidation account in the
proportionate amount of the then-current adjusted balance for deposit accounts
held, before distribution may be made with respect to the Bank's capital stock.
The Bank may not declare or pay a cash dividend to the Company on, or repurchase
any of, its capital stock if the effect thereof would cause the retained
earnings of the Bank to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the liquidation account
does not restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital requirements
imposed by OTS. OTS regulations provide that an institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution and, like the Bank, has not been notified of a need for more than
normal supervision could, after prior notice but without approval by the OTS,
make capital distributions during the calendar year of up to 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. Any additional
capital distributions would require prior regulatory approval.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its stockholders. However, the source of future
dividends may depend upon dividends from the Bank.
14. BENEFIT PLANS
Pension plan: The Bank maintains a non-contributory defined benefit pension
plan for the benefit of eligible employees. This plan covers all employees who
have completed one year of service and have attained the age of 21 years and
provides for monthly retirement benefits determined on the basis of the
employee's base salary and years of service. The normal retirement age is 65
and the early retirement age is before age 65, but generally after age 55.
Benefits under the plan are not subject to offset for social security benefits.
Under the plan, benefits vest at the rate of 20% per year beginning with a
participant's third year of service. The Bank's funding policy is to make, as a
minimum contribution, the equivalent of the minimum required by the Employee
Retirement Income Security Act of 1974.
36
<PAGE>
The following table sets forth the plan's funded status at the plan's year end
of December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 539 $ 607
Service cost 57 60
Interest cost 38 45
Actuarial loss (gain) 18 (47)
Benefits paid (45) (2)
Change in actuarial assumptions for discount rate and long term
rate of return - 88
------- -------
Benefit obligation at end of year $ 607 $ 751
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 489 $ 559
Actual return on plan assets 58 22
Employer contribution 57 56
Benefits paid (45) (2)
------- -------
Fair value of plan assets at end of year $ 559 $ 635
======= =======
Funded status:
Funded status at December 31 $ (48) $ (116)
Unrecognized net actuarial (gain) (97) (39)
Unrecognized transition amount 108 97
------- -------
(Accrued) pension cost $ (37) $ (58)
======= =======
</TABLE>
The components of net periodic pension cost for each of the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Service cost $ 54 $ 57 $ 60
Interest cost on projected benefit obligation 35 38 45
Expected return on plan assets (34) (39) (39)
Asset (gain) or loss 5 (19) 17
Net amortization and deferral 3 27 (6)
----- ----- -----
Net periodic pension cost $ 63 $ 64 $ 77
===== ===== =====
<CAPTION>
Actuarial assumptions were as follows for the years ended December 31:
1996 1997 1998
----- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate 7.00% 7.00% 6.50%
Expected long term rate of return 7.25% 7.25% 6.50%
Rate of increase in future compensation levels 3.50% 3.50% 3.50%
</TABLE>
37
<PAGE>
Executive deferred compensation plan: The Bank maintains a non-qualified
deferred compensation plan for a select group of management employees. Under the
plan, eligible employees may elect to defer up to 30% of annual compensation.
The Bank credits employee deferrals with interest based on the Bank's rate for a
certificate of deposit with a term of one year, as well as changes in values of
assets set aside in a revocable trust established in 1996. Upon termination of
employment, the balance of the employee's deferred compensation account is
distributable in a lump sum or in installments over a number of years specified
by the employee. At December 31, 1997 and 1998, the Bank had an accrued
liability with respect to the plan of $185,229 and $119,881, respectively.
Employee stock ownership plan: In conjunction with the Bank's conversion, the
Company formed an ESOP which covers substantially all employees with more than
one year of employment, who have completed 1,000 hours of service, and who have
attained the age of 21. The ESOP borrowed $1,322,500 from the Company and
purchased 132,250 common shares, equal to 8% of the total number of shares
issued in the conversion. The ESOP debt is secured by shares of the Company.
The Bank will make scheduled discretionary contributions to the ESOP sufficient
to service the debt. The balance outstanding on this debt was $1,132,443 and
$1,032,453 at December 31, 1997 and 1998, respectively. As the debt is paid
down, the number of shares to be released from serving as collateral is computed
as the ratio of the current principal and interest paid to the estimated total
principal and interest to be paid. Deferred compensation relating to the ESOP
was $1,082,640 and $951,361 at December 31, 1997 and 1998, respectively, and is
reported as a reduction of stockholders' equity. Compensation expense totaled
$93,296, $284,160 and $211,782 for 1996, 1997 and 1998, respectively.
During 1997, all dividends on unallocated ESOP shares were used to reduce the
ESOP debt. During 1998, all dividends on unallocated ESOP shares were paid to
the ESOP for future distribution to plan participants.
The following is a summary of ESOP shares at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Allocated shares 23,986 36,589
Uncommitted shares 108,264 95,136
---------- ----------
Total ESOP shares 132,250 131,725
========== ==========
Fair value of uncommitted shares $2,057,016 $1,064,334
========== ==========
</TABLE>
ESOP participants entitled to a distribution have the right to demand such
distribution in the form of the Company's common stock. In the event that the
Company's common stock is not readily tradeable on an established market,
participants are entitled to require that the Company repurchase the common
stock under a fair valuation formula, as provided by governmental regulations.
Management recognition and development plan: In conjunction with the Bank's
conversion, the Company formed an MRDP which is authorized to award 4% of the
total shares of common stock issued in the conversion. During 1997, a trust was
established to purchase the MRDP shares from the open market with $1,200,000 in
funds transferred from the Company. The trust was revocable by the Company upon
completion of its intended purpose. As of December 31, 1997, 48,025 shares had
been purchased by the trust with 18,100 shares still to be acquired. Because the
funds remaining in the trust exceeded the market value of the shares remaining
to be purchased as of December 31, 1997, the Company recorded a receivable of
$69,056, from the trust, which is included in other assets in the accompanying
statements of financial condition. As of December 31, 1998, all 66,125 shares
have been purchased and the trust has been terminated.
38
<PAGE>
As of December 31, 1997 and 1998, the Company had awarded a total of 66,125
shares of common stock to directors and employees in key management positions in
order to provide them with a proprietary interest in the Company in a manner
designed to encourage such employees to remain with the Company. As of December
31, 1997 and 1998, there were no common shares remaining to be awarded under the
Plan.
Deferred compensation, representing the shares' fair market value at the date of
award, is charged to income on a straight-line basis over the five year vesting
period as the Bank's directors and employees perform the related future
services. The unamortized balance of $929,883 and $723,243 as of December 31,
1997 and 1998, respectively, is reflected as a reduction of stockholders'
equity. The Company recognized $103,benefits expense relating to this plan for
the years ended December 31, 1997 and 1998, respectively.
Stock option and incentive plan: In conjunction with the Bank's conversion, the
Company established a stock option and incentive plan for the benefit of
directors and employees of the Company and Bank. The plan became effective upon
its adoption by the Board of Directors of the Company and approval of the plan
by the stockholders' of the Company in June, 1997. The number of authorized but
unissued shares reserved under the plan is 165,313. Granted stock options are
regarded as common stock equivalents and are considered in earnings per share
calculations. At both December 31, 1997 and 1998, no options have been exercised
nor stock issued for this plan.
The stock options may be either incentive stock options or nonqualified stock
options. Incentive stock options can be granted only to participants who are
employees of the Company or its subsidiaries. The exercise price of an incentive
stock option must not be less than the market value of the Company's stock on
the date of the grant. All options expire no later than 10 years from the date
of grant. The options vest at the rate of 20% per year over a five-year period.
A summary of the status of the plan at December 31, and changes during the
period since inception in June 1997, are presented below:
<TABLE>
<CAPTION>
1997 1998
----------------------- ------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- ---------------
<S> <C> <C> <C> <C>
Stock options:
Outstanding, January 1 - 132,590 $ 15.625
Granted 132,590 $ 15.625 -
Exercised - -
Forfeited - -
------- -------
Outstanding, December 31 132,590 $ 15.625 132,590 $ 15.625
======= =======
Options exercisable, December 31 - 26,518
======= =======
</TABLE>
39
<PAGE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Expected dividend yield 1.75% 3.00%
Risk-free interest rate 5.63% 5.63%
Expected life of options 5 years 5 years
Expected volatility 0.195 0.219
</TABLE>
The following table summarizes information about stock options under the plan
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- ------------------------
<S> <C> <C> <C> <C>
Range of Number Remaining Number Exercise
Exercise Prices Outstanding Contractual Life Exercisable Price
- --------------- ----------- ---------------- ----------- ----------
$15.625 132,590 8.5 years 26,518 $15.625
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans, and no compensation cost has been recognized for the plan. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates using Statement of Financial Accounting Standards No. 123,
the Company's net income would have decreased by approximately $35,000 and
$58,000 for 1997 and 1998, respectively, and basic and diluted earnings per
share would each have decreased by $.02 and $.04 for 1997 and 1998,
respectively. The effects of applying this statement for either recognizing
compensation cost or providing pro forma disclosures are not likely to be
representative of the effects on reported net income for future years because
options vest over several years.
Executive employment agreement: Under an employment agreement with the
President and Chief Executive Officer, the Company and the Bank will provide
severance payments in the event of an involuntary termination of employment in
connection with a change in control of the Company, as defined in the contract.
If the employment of the President and Chief Executive Officer were to be
terminated as of December 31, 1998 pursuant to a change in control, he would be
entitled to receive a severance payment amounting to approximately $296,000.
15. STOCK HELD IN TRUST FOR EXECUTIVE DEFERRED COMPENSATION PLAN
In 1996, the Bank acquired 8,425 shares of the Company's common stock which is
held in a revocable trust as assets set aside for the Bank's executive deferred
compensation plan. Such stock is recorded at its fair value and, combined with
miscellaneous cash funds in the trust, results in a value of $162,396 and
$94,258 as of December 31, 1997 and 1998, respectively, which is reported as a
reduction of stockholders' equity in the accompanying consolidated statements of
financial condition.
40
<PAGE>
16. NET GAIN ON SALE OF ASSETS
Net gain on sale of assets for each of the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Net (loss) on sale of securities (Note 2) $(45,617) $ - $(13,414)
Net gain on sale of loans held-for-sale 41,752 17,714 358,699
Net gain on sale of other assets 38,316 - -
-------- ------- --------
$ 34,451 $17,714 $345,285
======== ======= ========
</TABLE>
17. OTHER NON-INTEREST INCOME AND EXPENSES
Other non-interest income and expense amounts are summarized as follows for each
of the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Other non-interest income:
Banking service charges and other fees $ 69,874 $ 59,904 $ 64,658
Loan late charges 17,113 15,629 13,513
Commission income 5,681 6,433 5,041
Other miscellaneous 19,346 25,093 13,065
-------- -------- --------
$112,014 $107,059 $ 96,277
======== ======== ========
Other non-interest expense:
Stationery, printing and other supplies $ 35,000 $ 54,425 $ 53,803
Telephone and postage 38,490 41,729 41,041
Insurance and surety bond premiums 44,940 34,757 26,403
Professional fees 33,790 72,650 85,294
Supervisory examinations 31,901 29,962 30,116
Other operating expenses 76,243 177,849 154,558
Data processing 138,748 136,904 144,107
Advertising and promotions 111,304 111,190 108,379
-------- -------- --------
$510,416 $659,466 $643,701
======== ======== ========
</TABLE>
41
<PAGE>
18. EARNINGS PER SHARE
Earnings per share (EPS) for the years ended December 31, 1997 and 1998, were
calculated as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
Weighted Weighted
Average Average
Shares Per-share Shares Per-share
(denominator) amount (denominator) amount
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Basic EPS 1,536,096 $0.56 1,499,045 $0.58
========= =========
Effect of dilutive shares
Unallocated ESOP shares 117,029 102,234
Stock options 4,534 2,804
------------ ------------
Diluted EPS 1,657,659 $0.52 1,604,083 $0.54
============ ========= ============ =========
</TABLE>
19. RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
On September 30, 1996, legislation was enacted to recapitalize the SAIF which
required savings institutions with SAIF insured deposits to pay a one time
special assessment of 65.7 cents per $100 of deposits at March 31, 1995. The
Bank's special assessment amounted to $512,867 and is included in non-interest
expense in the consolidated statement of income for the year ended December 31,
1996. Subsequent to the special assessment, the Bank's deposit premium rate
decreased from 23 cents to 6.48 cents per $100 of deposits.
20. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the Consolidated Statements of Financial Condition. The
contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates. The Company evaluates each
customer's creditworthiness and related collateral on a case-by-case basis.
The Company's exposure to market loss in the event of future changes in market
prices rendering these financial instruments less valuable is represented by the
contractual amount of the instruments.
The Company's exposure to accounting loss on these financial instruments is a
combination of the credit and market risk described above.
42
<PAGE>
The Company does not require collateral or other security to support financial
instruments with credit risk.
The Company is not committed to lend additional funds to debtors whose loans
have been modified.
At December 31, 1998, the Company had approximate outstanding commitments to
originate loans of $2,606,000. Fixed rate loan commitments were $336,000 in
first mortgage loans committed at interest rates ranging from 6.625% to 7%.
Variable-rate loan commitments were $31,000 in first mortgage loans with
interest rates ranging from 6.625% to 8.5%. Unfunded portions of construction
loans were $2,239,000 with interest rates ranging from 6.625% to 8.75%.
Other commitments, as of December 31, 1998, are summarized as follows:
<TABLE>
<S> <C>
Home equity lines of credit $ 61,149
Overdraft lines of credit 182,183
Commercial lines of credit 540,217
----------
$ 783,549
==========
</TABLE>
Fair value estimates, methods and assumptions for the Company's financial
instruments are set forth below, as of December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1998
------------------------- ------------------------
Carrying Fair Carrying Fair
FINANCIAL ASSETS Amount Value Amount Value
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Cash and due from depository institutions $ 4,490 $ 4,490 $ 9,814 $ 9,814
Mutual funds 5,376 5,376 5,310 5,310
Investment securities 5,806 5,806 3,869 3,869
Mortgage-backed securities 10,489 10,489 8,536 8,536
Stock in FHLB 939 939 663 663
Loans held-for-sale, net 447 447 1,767 1,767
Loans receivable, net 66,512 67,403 61,700 62,959
Accrued interest receivable 616 616 561 561
FINANCIAL LIABILITIES
Transaction accounts $16,574 $16,574 $18,038 $18,038
Certificates of deposit 56,309 56,460 54,651 55,124
Borrowed funds 596 596 571 571
Advances from borrowers for taxes and insurance 29 29 34 34
All other liabilities 459 459 365 365
</TABLE>
Cash and due from depository institutions: The carrying amounts of cash and due
from depository institutions approximate their fair value.
Mutual funds, investment securities, and mortgage-backed securities: Fair value
is determined by reference to quoted market prices.
Stock in FHLB: This stock is a restricted asset and its carrying value is a
reasonable estimate of fair value.
Loans held-for-sale: The carrying value is a reasonable estimate of fair value.
43
<PAGE>
Loans receivable: The fair value of first mortgage loans is estimated by using
discounted cash flow analyses, using interest rates currently offered for loans
with similar terms to borrowers of similar credit quality. The majority of real
estate loans are residential. First mortgage loans are segregated by fixed and
adjustable interest terms. The fair value of commercial and consumer loans is
calculated by using the discounted cash flow based upon the current market for
like instruments. Fair values for impaired loans are estimated using discounted
cash flow analyses.
Accrued interest receivable: The carrying value approximates fair value.
Transaction deposits: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
Certificates of Deposit: The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar maturities.
Advances from borrowers for taxes and insurance: The book value approximates
fair value.
All other liabilities: The book value approximates fair value.
Off-Balance Sheet Instruments: The fair value of a loan commitment and a letter
of credit is determined based on the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreement and
the present creditworthiness of the counter parties. Neither the fees earned
during the year on these instruments nor their value at year-end are significant
to the Company's consolidated financial position.
Limitations: Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
The valuation techniques employed above involve uncertainties and are affected
by assumptions used and judgements regarding prepayments, credit risk, discount
rates, cash flows and other factors. Changes in assumptions could significantly
affect the reported fair value.
In addition, the fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Company has a mortgage
servicing portfolio that contributes net fee income annually. The mortgage
servicing portfolio is not considered a financial instrument and its value has
not been incorporated into the fair value estimates. Also, the fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
44
<PAGE>
21. PARENT COMPANY FINANCIAL INFORMATION
The following tables present condensed financial information of the parent
company, CNS Bancorp, Inc.
Condensed Statements of Financial Condition
December 31, 1997 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1998
------- -------
<S> <C> <C>
ASSETS
Cash and due from depository institutions $ 1,784 $ 495
Securities available-for-sale 1,201 -
Investment in subsidiary 18,557 19,026
Other assets 2,389 2,220
------- -------
Total assets $23,931 $21,741
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities $ 7 $ -
Stockholders' equity 23,924 21,741
------- -------
Total liabilities and stockholders' equity $23,931 $21,741
======= =======
</TABLE>
Condensed Statements of Income
For the years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Income
Interest from securities available-for-sale $ 156 $ 156 $ 113
Other interest 58 197 103
Other non-interest income - 5 3
------- ------ ------
214 358 219
Expenses 15 258 379
------- ------ ------
Income (loss) before income taxes and equity in undistributed
earnings of subsidiary 199 100 (160)
(Provision) benefit for income taxes (96) (40) 64
Equity in undistributed earnings of subsidiary 320 804 958
------- ------ ------
Net income $ 423 $ 864 $ 862
======= ====== ======
</TABLE>
45
<PAGE>
Condensed Statements of Cash Flows
For the years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1997 1998
---------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 423 $ 864 $ 862
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed earnings of subsidiary (320) (804) (957)
Accretion of discounts on securities available-for-sale - (8) -
Compensation expense - MRDP - 103 207
Change in other assets (72) (1,116) 87
Change in accrued liabilities 135 (89) (7)
Change in due to subsidiary - (1,368) -
---------- -------- --------
Net cash provided (used) by operating activities 166 (2,418) 192
---------- -------- --------
Cash Flows From Investing Activities
Investment in City National Savings Bank, FSB (8,000) - -
Dividends received from subsidiary - - 800
Purchases of securities available-for-sale (7,741) - -
Maturities of securities available-for-sale 3,650 2,900 1,201
---------- -------- --------
Net cash (used) provided by investing activities (12,091) 2,900 2,001
---------- -------- --------
Cash Flows From Financing Activities
Net proceeds from stock issuance 14,677 - -
Payment received on loan to ESOP (other asset) 73 117 100
Funding provided to MRDP trust - (1,200) -
Purchase of treasury stock - - (3,182)
Dividends paid (76) (364) (400)
---------- -------- --------
Net cash provided (used) by financing activities 14,674 (1,447) (3,482)
---------- -------- --------
Net change in cash and cash equivalents 2,749 (965) (1,289)
Cash and cash equivalents, beginning of period - 2,749 1,784
---------- -------- --------
Cash and cash equivalents, end of period $ 2,749 $ 1,784 $ 495
========== ======== ========
Supplemental Disclosure of Non-Cash Transactions:
Exchange of common stock for loan receivable from
ESOP (other asset) $ 1,322 $ - $ -
========== ======== ========
Write down of MRDP trust receivable after establishment
of the MRDP $ - $ 98 $ 18
========== ======== ========
</TABLE>
46
<PAGE>
22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly data for each quarter is presented below for the years ended
December 31, 1997 and 1998.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Total interest income $ 1,742 $ 1,774 $ 1,767 $ 1,775
Total interest expense 892 908 922 925
------------- ------------- -------------- ---------------
Net interest income 850 866 845 850
(Benefit) provision for loan losses (27) 22 16 (6)
------------- ------------- -------------- ---------------
Net interest income after provision for
loan losses 877 844 829 856
Total non-interest income 52 42 45 62
Total non-interest expense 544 527 555 671
------------- ------------- -------------- ---------------
Income before income taxes 385 359 319 247
Provision for income taxes 154 144 128 20
------------- ------------- -------------- ---------------
Net income $ 231 $ 215 $ 191 $ 227
============= ============= ============== ===============
Earnings per share $ 0.15 $ 0.14 $ 0.12 $ 0.15
============= ============= ============== ===============
Diluted earnings per share $ 0.14 $ 0.13 $ 0.11 $ 0.14
============= ============= ============== ===============
<CAPTION>
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Total interest income $ 1,742 $ 1,731 $ 1,708 $ 1,700
Total interest expense 885 917 914 894
------------- ------------- -------------- ---------------
Net interest income 857 814 794 806
(Benefit) provision for loan losses 14 - 38 11
------------- ------------- -------------- ---------------
Net interest income after provision for
loan losses 843 814 756 795
Total non-interest income 145 141 108 176
Total non-interest expense 574 619 561 575
------------- ------------- -------------- ---------------
Income before income taxes 414 336 303 396
Provision for income taxes 165 133 123 166
------------- ------------- -------------- ---------------
Net income $ 249 $ 203 $ 180 $ 230
============= ============= ============== ===============
Earnings per share $ 0.16 $ 0.13 $ 0.12 $ 0.17
============= ============= ============== ===============
Diluted earnings per share $ 0.15 $ 0.12 $ 0.11 $ 0.16
============= ============= ============== ===============
</TABLE>
47
<PAGE>
CNS BANCORP, INC
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 2:00 p.m. Tuesday, April 20,
1999 at City National Savings Bank located at 427 Monroe Street, Jefferson City,
Missouri.
STOCK LISTING
The Company's stock is traded on the Nasdaq Small Cap Market under symbol
"CNSB".
PRICE RANGE OF COMMON STOCK
The table below shows the price range of common stock for the calendar years of
1997 and 1998. This information was provided by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Low Dividends QUARTER High Low Dividends
$17.75 $15.00 $.05 First $ 19.00 $ 17.50 $ .06
$16.75 $15.00 $.05 Second $ 18.25 $ 17.50 $ .06
$17.75 $16.25 $.06 Third $17.625 $ 13.25 $.075
$21.625 $17.25 $.06 Fourth $ 13.50 $11.125 $.075
</TABLE>
Dividend payment decisions are made based on a variety of factors including
earnings, financial condition, market considerations, and regulatory
restrictions. Restrictions on dividend payments are described on Note 13 of the
Notes to Consolidated Financial Statements included in this report.
As of March 1, 1999 the Company had approximately 411 stockholders of record and
1,443,046 outstanding shares of common stock.
<TABLE>
<CAPTION>
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
<S> <C>
Robert E. Chiles 1/st/ Bankers Trust Company
President Broadway at 12/th/ Street
City National Savings Bank, FSB P. O. Box 3566
427 Monroe Street Quincy, IL 62305-3566
Jefferson City, MO 65101 (217) 228-8000
(573) 634-3336
</TABLE>
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its year
ended December 31, 1998 with the Securities and Exchange Commission. Copies of
the Company's annual and quarterly reports may be obtained without charge by
contacting:
David L. Jobe
Treasurer
City National Savings Bank, FSB
427 Monroe Street
Jefferson City, MO 65101
(573) 634-3336
48
<PAGE>
CNS BANCORP, INC.
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
427 Monroe Street Telephone: (573) 634-3336
Jefferson City, MO 65101 Fax: (573) 636-3191
DIRECTORS OF CNS BANCORP, INC. AND CITY NATIONAL SAVINGS BANK, FSB.
Richard E. Caplinger
Chairman of the Board CNS Bancorp, Inc. and City National Savings Bank, FSB,
Jefferson City, Missouri. Retired Co-owner of Caplinger's Inc., a mens'
specialty retailer.
Robert E. Chiles
President, Chief Executive Officer, and Director of the Savings Bank since
1974.
James F. McHenry
Director since 1964. Retired Circuit Court Judge for Cole County.
Ronald D. Roberson
Director since 1983. Sole owner of R.D. Roberson & Associates, a financial
and management consulting firm.
John C. Kolb
Director since 1989. President and part-owner of Jefferson City Oil Co.,
Inc.
Michael A. Dallmeyer
Director since 1993. Partner in the law firm of Hendren and Andrae,
Jefferson City, Missouri.
OFFICERS OF CNS BANCORP, INC.
Robert E. Chiles David L. Jobe
President Secretary/Treasurer
Chief Executive Officer Chief Financial Officer
Delphine E. Prenger Jason E. Schwartz
Vice-President Vice-President
OFFICERS OF CITY NATIONAL SAVINGS BANK, FSB
Robert E. Chiles David L. Jobe
President Secretary/Treasurer
Chief Executive Officer Chief Financial Officer
Delphine E.Prenger Jason E. Schwartz
Vice-President Vice-President
INDEPENDENT AUDITORS SPECIAL COUNSEL
Williams-Keepers LLP Muldoon, Murphy & Faucette LLP
107 Adams Street 5101 Wisconsin Avenue
Jefferson City, Missouri 65101 Washington, DC 20016
49
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
EXHIBIT 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
<S> <C> <C>
City National Savings Bank, FSB 100% United States
Parity Insurance Agency, Inc.(b) 100% Missouri
City National Real Estate, Inc.(c) 100% Missouri
</TABLE>
(a) The operations of the Company's subsidiaries are included in the
Company's consolidated financial statements.
(b) Owned directly by City National Savings Bank, FSB.
(c) Owned directly by Parity Insurance Agency, Inc.
<PAGE>
Exhibit 23
Consent of Independent Auditors
<PAGE>
EXHIBIT 23.0
[LETTERHEAD OF WILLIAMS-KEEPERS LLP APPEARS HERE]
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in the Registration
Statement of CNS Bancorp, Inc. on Form S-8 (File No. 333-29861), of our report,
dated February 5, 1999, accompanying the consolidated financial statements
incorporated by reference in CNS Bancorp, Inc.'s Annual Report on Form 10-KSB
for the year ended December 31, 1998.
/s/ Williams-Keepers LLP
Jefferson City, Missouri
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of CNS Bancorp, Inc. for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,235
<INT-BEARING-DEPOSITS> 8,579
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,715
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 62,110
<ALLOWANCE> 410
<TOTAL-ASSETS> 95,401
<DEPOSITS> 72,689
<SHORT-TERM> 0
<LIABILITIES-OTHER> 400
<LONG-TERM> 571
0
0
<COMMON> 17
<OTHER-SE> 21,724
<TOTAL-LIABILITIES-AND-EQUITY> 95,401
<INTEREST-LOAN> 5,803
<INTEREST-INVEST> 945
<INTEREST-OTHER> 633
<INTEREST-TOTAL> 6,881
<INTEREST-DEPOSIT> 3,572
<INTEREST-EXPENSE> 3,610
<INTEREST-INCOME-NET> 3,271
<LOAN-LOSSES> 63
<SECURITIES-GAINS> (13)
<EXPENSE-OTHER> 2,316
<INCOME-PRETAX> 1,449
<INCOME-PRE-EXTRAORDINARY> 862
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-PRIMARY> .58
<EPS-DILUTED> .54
<YIELD-ACTUAL> 7.32
<LOANS-NON> 156
<LOANS-PAST> 0
<LOANS-TROUBLED> 18
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 388
<CHARGE-OFFS> 41
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 410
<ALLOWANCE-DOMESTIC> 410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
