<PAGE>
As filed with the Securities and Exchange Commission on August 6, 1996
Registration No. 333-6649
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CBES BANCORP, INC.
(Name of Small Business Issuer in Its Charter )
Delaware 6712 (Applied for)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
1001 N. Jesse James Road
Excelsior Springs, MO 64024-1202
(816) 630-6711
(Address and Telephone Number of Principal Executive Offices)
1001 N. Jesse James Road
Excelsior Springs, MO 64024-1202
(Address of Principal Place of Business or Intended Principal Place of Business)
Larry E. Hermreck
1001 N. Jesse James Road
Excelsior Springs, MO 64024-1202
(816) 630-6711
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Robert I. Lipsher, Esq.
Robert B. Pomerenk, Esq.
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Approximate date of proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box:[X]
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering:[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:[_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:[_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
maximum maximum
Title of each class of Amount to be offering price aggreegate Amount of
securities to be registered registered per share offering price registration fee
(1) (2)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share 1,388,625 $10.00 $13,886,250 $ 0
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) A filing fee of $4,789 was paid with the initial registration
statement.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
================================================================================
<PAGE>
PROSPECTUS
CBES Bancorp, Inc.
(Proposed Holding Company for Community Bank of Excelsior Springs, a Savings
Bank)
Up to 1,207,500 Shares of Common Stock
(Anticipated Maximum)
CBES Bancorp, Inc. (the "Holding Company"), a Delaware corporation, is
offering up to 1,207,500 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the conversion of Community Bank of
Excelsior Springs, a Savings Bank ("Community Bank" or the "Bank"), from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, and the issuance of all of Community Bank's outstanding capital stock to
the Holding Company pursuant to the Bank's Plan of Conversion (the "Plan" or
"Plan of Conversion"). The simultaneous conversion of the Bank to stock form,
the issuance of Community Bank's outstanding common stock to the Holding Company
and the Holding Company's sale of its Common Stock are referred to herein as the
"Conversion." References herein to the Bank refer to Community Bank both in its
mutual and stock form as the context may indicate.
(continued on following page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT
(816) ________
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 18
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION,
OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), THE BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION
INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
<TABLE>
<CAPTION>
Purchase Price(1) Estimated Estimated Net
Underwriting Proceeds(2)
Fees and Other
Expenses(2)
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<S> <C> <C> <C>
Minimum Per Share ........... $10.00 $0.59 $9.41
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Midpoint Per Share .......... $10.00 $0.50 $9.50
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Maximum Per Share ........... $10.00 $0.43 $9.57
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Maximum Per Share, as
adjusted(3) ................ $10.00 $0.38 $9.62
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Total Minimum ............... $8,925,000 $525,000 $8,400,000
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Total Midpoint .............. $10,500,000 $525,000 $9,975,000
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Total Maximum ............... $12,075,000 $525,000 $11,550,000
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Total Maximum, as
adjusted(3)................. $13,886,250 $525,000 $13,361,000
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(footnotes on second following page)
</TABLE>
TRIDENT SECURITIES, INC.
The date of this Prospectus is August ___, 1996.
<PAGE>
(continued from preceding page)
Non-transferable rights to subscribe for the Common Stock have been
granted, in order of priority, to (i) the Bank's deposit account holders with
deposits of at least $50 as of March 31, 1995 ("Eligible Account Holders"), (ii)
tax-qualified employee stock benefit plans of the Bank ("Tax Qualified Employee
Plans"), (iii) the Bank's deposit account holders with deposits of at least $50
as of June 30, 1996 ("Supplemental Eligible Account Holders") (iv) certain other
depositors as of July 31, 1996 and certain borrowers of the Bank as of both June
1, 1995 and July 31, 1996, who continue to be borrowers as of the date of the
special meeting of members ("Other Members"), and (v) officers, directors and
employees of the Bank in a subscription offering (the "Subscription Offering").
Pursuant to Office of Thrift Supervision ("OTS") regulations, these subscription
rights are non-transferable. Persons violating this prohibition against transfer
may lose their right to purchase stock in the Conversion and be subject to other
possible sanctions. To the extent that shares remain available for purchase
after the Subscription Offering, the Holding Company and Bank intend to offer
shares of Common Stock for sale in a community offering to members of the
general public to whom a prospectus is delivered with a preference given to
natural persons residing in Clay and Ray Counties, Missouri (the "Community
Offering"). It is anticipated that shares of Common Stock not subscribed for in
the Subscription and Community Offerings may be offered at the discretion of the
Holding Company to certain members of the general public as part of a community
offering on a best efforts basis by a selling group of broker-dealers managed by
Trident Securities, Inc. (the "Syndicated Community Offering"). The
Subscription, Community and Syndicated Community Offerings are referred to
collectively as the "Offerings."
The Bank's Employee Stock Ownership Plan ("ESOP") intends to subscribe
for up to 8% of the total number of shares of Common Stock issued in the
Conversion; however, the Bank reserves the right to have all or part of the
order of the ESOP filled by purchases in the open market, subject to OTS
approval, if required. Shares sold above the maximum of the Estimated Valuation
Range (as hereinafter defined) may be sold to the ESOP to fill its subscription
(prior to filling any other orders). With the exception of the ESOP, no
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may purchase in the Subscription Offering shares of Common Stock
having an aggregate purchase price of more than $100,000; no individual person
or other entity, together with associates of and persons acting in concert with
such person, may purchase in the Community Offering and the Syndicated Community
Offering shares of Common Stock having an aggregate purchase price of more than
$100,000; and no person, together with associates and persons acting in concert
with such person, may purchase in the aggregate shares of Common Stock having an
aggregate purchase price of more than $200,000. However, the Bank and the
Holding Company in their sole discretion may increase or decrease the purchase
limitations without notice to members or subscribers, provided that the
aggregate purchase limit may not be reduced below 1.0% of the shares offered.
The minimum purchase is 25 shares. See "The Conversion--Offering of Holding
Company Common Stock--Limitations on Purchase of Shares."
The Holding Company may, in its absolute discretion, accept or reject,
in whole or in part, any or all subscriptions in the Community Offering or
Syndicated Community Offering at the time of receipt of an order or as soon as
practicable following the completion of such offerings. All orders submitted are
irrevocable until completion of the Conversion. Subscriptions paid by cash,
check, bank draft or money order will be placed in a segregated account at
Community Bank and will earn interest at the rate of 2.25%, the rate currently
paid by Community Bank on passbook savings accounts, from the date of receipt
until completion or termination of the Conversion. Payments may be authorized by
withdrawal from deposit accounts at Community Bank without penalty and will
continue to earn interest at the contractual rate until the Conversion is
completed or terminated; these funds will be otherwise unavailable to the
depositor until such time. See "The Conversion-- Subscription Offering" and "--
Community Offering."
The Holding Company must receive an original stock order form (the
"Stock Order Form") (facsimile copies and photocopies will not be accepted) and
a fully executed separate Certification Form together with full payment (or
appropriate instructions authorizing a withdrawal from a deposit account at the
Bank) of $10.00 per share for all shares for which subscription is made, at the
executive office of the Bank, 1001 N. Jesse James Road, Excelsior Springs,
Missouri, by noon, Excelsior Springs, Missouri Time, on September __, 1996.
Payment for shares of Common Stock by wire transfer will not be accepted.
<PAGE>
The Subscription Offering will terminate at noon, Excelsior Springs,
Missouri Time, on September ___, 1996 (the "Expiration Date"), unless extended
at the discretion of the Holding Company and the Bank without notice to
subscribers, with the approval of the OTS, if necessary. The Community Offering
may commence simultaneously with, during, or following the completion of the
Subscription Offering and may terminate on the Expiration Date or any date
thereafter at the discretion of the Bank and the Holding Company but not later
than 45 days after the Expiration Date unless extended with the approval of the
OTS. The Syndicated Community Offering may commence subsequent to the
Subscription and Community Offerings and may terminate on any date at the
discretion of the Bank and the Holding Company but not later than 45 days after
the Expiration Date unless extended with the approval of the OTS.
If the Offerings are extended beyond 45 days after the Expiration Date
(i.e. ______, 1996), all subscribers will be notified of such extension, of
their rights to modify or confirm their subscriptions or to rescind their
subscriptions and have their subscription funds returned promptly with interest,
and of the time period within which the subscriber must notify the Bank of his
intention to modify, confirm or rescind his subscription. In the event the value
of an updated independent appraisal of the pro forma market value of the Common
Stock to be issued in the Conversion is less than $8,925,000 or more than
$13,886,250 and the Holding Company determines to sell an amount outside of this
range to its subscribers, all subscribers must be resolicited with an updated
prospectus. The failure of a subscriber to notify the Bank of his intention
during a resolicitation will be deemed a rescission of the subscription. Under
applicable OTS regulations, the Conversion must be completed or terminated no
later than 24 months from the approval of the Conversion by the Bank's members.
The Holding Company and the Bank have engaged Trident Securities, Inc.
("Trident Securities") to consult with and advise the Bank and the Holding
Company in connection with the Conversion and with the sale of shares of the
Common Stock in the Offerings. In addition, in the event the Common Stock is not
fully subscribed for in the Subscription and Community Offerings, Trident
Securities will manage the Syndicated Community Offering. Neither Trident
Securities nor any other broker-dealers will have any obligation to purchase or
accept any shares of Common Stock in the Conversion. See "The Conversion" and "-
- -Marketing Arrangements."
The Holding Company intends to have the Common Stock listed on the
Nasdaq SmallCap Market under the symbol "CBES," and the Holding Company has
received conditional approval for such a listing. Prior to this offering there
has been no public market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock will develop or,
if developed, be maintained. The lack of an active and liquid trading market may
adversely affect liquidity and the price for the Common Stock. See "Market for
Common Stock."
- ---------------------
(footnotes for preceding table)
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC ("RP Financial") as of June 14, 1996. The estimated pro
forma market value of the Holding Company and the Bank, as converted,
ranges from $8,925,000 to $12,075,000 ("Estimated Valuation Range") or
between 892,500 and 1,207,500 shares of Common Stock at the purchase
price of $10.00 per share, which is the amount to be paid for each
share of Common Stock sold in the Offerings ("Purchase Price"). See
"The Conversion--Stock Pricing and Number of Shares to be Issued." The
valuation by RP Financial is not intended and must not be construed as
a recommendation of any kind as to the advisability of voting to
approve the Conversion or of purchasing shares of Common Stock.
Moreover, because the valuation is necessarily based upon estimates of
and projections as to a number of matters (including certain
assumptions as to expense factors affecting the net proceeds from the
sale of Common Stock in the Conversion and as to the net earnings on
such net proceeds), all of which are subject to change from time to
time, no assurance can be given that persons who purchase such shares
in the Conversion will be able to sell such shares thereafter at or
above the Purchase Price.
(2) Consists of the estimated expenses of $525,000, which includes, among
other things, printing, postage, legal, accounting, appraisal and
filing fees. These expenses also include financial advisory and
marketing fees to be paid to Trident Securities of $150,000. Such fees
may be deemed to be underwriting fees, and Trident Securities may be
deemed to be an underwriter. Actual expenses and, thus, net proceeds,
may be more or less than estimated amounts. The Holding Company and
the Bank have agreed to indemnify
<PAGE>
Trident Securities against certain liabilities, including liabilities
that may arise under the Securities Act of 1933 (the "Securities
Act"). See "Pro Forma Data" and "The Conversion--Marketing
Arrangements."
(3) Gives effect to an increase in the number of shares sold which could
occur without a resolicitation of subscribers or any right of
cancellation due to an increase in the Estimated Valuation Range of up
to 15% above the maximum of the Estimated Valuation Range to reflect
changes in market and financial conditions following commencement of
the Offerings or to fill in part or in whole the order of the ESOP.
See "The Conversion--Stock Pricing and Number of Shares to be Issued."
<PAGE>
[INSERT MAP HERE]
The Bank's conversion to stock form is contingent upon the approval of the Plan
by its members and the sale of at least the minimum number of shares of Common
Stock to be issued pursuant to the Plan of Conversion.
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete. It is
qualified in its entirety by the detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. The
purchase of Common Stock is subject to certain risks. See "Risk Factors."
Community Bank of Excelsior Springs, a Savings Bank
Community Bank is a federally chartered mutual savings bank
headquartered in Excelsior Springs, Missouri. Community Bank was originally
chartered as a Missouri savings and loan association in 1931 under the name
Excelsior Springs Savings and Loan Association. In 1991, the Bank changed its
name to its current form, and in 1995, the Bank amended its charter to become a
federal mutual savings bank. Its deposits are insured up to the maximum
allowable amount by the SAIF of the FDIC. Through its main office in Excelsior
Springs and its branch office in Kearney, Community Bank primarily serves
communities located in Clay and Ray Counties and to a lesser extent in
surrounding counties in the State of Missouri. At March 31, 1996, Community
Bank had total assets of $86.2 million, deposits of $67.9 million and total
equity of $7.9 million.
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At March 31, 1996, the Bank's total loan
portfolio was $86.0 million, of which 61.0% were one- to four-family residential
mortgage loans, 25.0% were construction and land loans (the vast majority of
which related to single-family residential properties), and 12.4% were consumer
loans. During the nine months ended March 31, 1996, the Bank originated $14.3
million of fixed-rate one-to four-family residential mortgage loans, of which
$12.6 million, or 87.5%, were sold in the secondary market. See "Business -
Lending Activities." To a substantially lesser extent, the Bank invests in
various investment securities, including mortgage-backed securities.
Community Bank's executive office is located at 1001 North Jesse James
Road, Excelsior Springs, Missouri 64024. Its telephone number at that address
is (816) 630-6711.
4
<PAGE>
CBES Bancorp, Inc.
CBES Bancorp, Inc. was organized in June 1996 by Community Bank for
the purpose of acquiring all of the outstanding capital stock of Community Bank
to be issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Holding Company will be the capital stock of the Bank,
the note evidencing its loan to fund the Bank's ESOP and approximately 50% of
the net proceeds from the Conversion (less the amount to fund the ESOP loan).
Upon Conversion, the Holding Company initially will be a unitary savings and
loan holding company. See "Regulation - Holding Company Regulation" and "Use of
Proceeds." The business of the Holding Company initially will consist only of
the business of Community Bank. The Holding Company has not engaged and, prior
to the Conversion, will not engage in any material operations. See "CBES
Bancorp, Inc."
The Conversion
The Offerings are being made in connection with the Conversion of
Community Bank from a federally chartered mutual savings bank to a federally
chartered stock savings bank and the formation of CBES Bancorp, Inc. as the
holding company of the Bank. The Holding Company will retain up to 50% of the
net proceeds of the issuance of the Common Stock and will use the remaining 50%
of the net proceeds to purchase all of the stock of Community Bank issued in the
Conversion. Net Conversion proceeds will increase the capital of the Bank and,
consistent with regulatory restrictions, will support the Bank's lending and
investment activities. The conversion to stock form and the use of a holding
company structure are also expected to enhance the ability of the Bank to expand
through possible mergers and acquisitions and facilitate future access to the
capital markets. The Holding Company will have additional authorized shares of
common stock and serial preferred stock available for issuance to raise
additional equity capital for future acquisitions or for other business
purposes, although the Holding Company has no specific plans for expansion and
no present plans for the issuance of such securities. See "Use of Proceeds" and
"Description of Capital Stock - Holding Company Capital Stock."
The Conversion is subject to certain conditions, including the prior
approval of the Plan of Conversion by the Bank's members at a special meeting to
be held at __:__ __.m., Excelsior Springs, Missouri Time on September __, 1996
(the "Special Meeting"). Approval of the Plan requires the affirmative vote of
members of the Bank holding not less than a majority of the total number of
votes eligible to be cast at the Special Meeting. After the Conversion,
depositors and borrowers of the Bank will have no voting rights in the Holding
Company, unless they become Holding Company stockholders. Eligible Account
Holders and Supplemental Eligible Account Holders, however, will have certain
liquidation rights in the Bank. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Bank - Liquidation Rights."
Subscription, Community and Syndicated Community Offerings. The
Holding Company is offering up to 1,207,500 shares of Common Stock, at a price
of $10.00 per share, in the Subscription, Community and Syndicated Community
Offerings. The shares of Common Stock to be issued in the Conversion are being
offered in the following order of priority: (1) Eligible Account Holders
(deposit account holders of the Bank with an account balance of $50 or more as
of March 31, 1995); (2) Tax-Qualified Employee Plans; (3) Supplemental Eligible
Account Holders (deposit account holders of the Bank with an account balance of
$50 or more as of June 30, 1996); (4) Other Members (deposit account holders of
the Bank as of July 31, 1996, other than Eligible Account Holders or
Supplemental Eligible Account Holders, and certain borrowers as of both June 1,
1995 and July 31, 1996, who continue to be borrowers as of the date of the
Special Meeting); and (5) employees, officers and directors of the Bank. In
addition, the Tax-Qualified Employee Plans shall have first priority
Subscription Rights to the extent that the total number of shares of Common
Stock sold in the Conversion exceeds the maximum of the Estimated Valuation
Range. Concurrently with, during, or following the Subscription Offering, and
subject to the prior rights of holders of Subscription Rights, any shares of
Common Stock not subscribed for in the Subscription Offering are being offered
in the Community Offering to certain members of the general public, to whom a
prospectus is delivered, with a preference given to natural persons residing in
Clay and Ray Counties, Missouri. The determination as to the residency of these
subscribers in the Community Offering shall be made by the Bank in its sole
discretion based upon its books and records. See "The Conversion." The Holding
Company
5
<PAGE>
and the Bank reserve the absolute right to accept or reject any orders in the
Community Offering, in whole or in part, either at the time of receipt of an
order or as soon as practicable following the Expiration Date.
It is anticipated that shares of Common Stock not otherwise subscribed
for in the Subscription Offering and Community Offering, if any, may be offered
at the discretion of the Holding Company to certain members of the general
public as part of a Syndicated Community Offering on a best efforts basis by a
selling group of selected broker-dealers to be managed by Trident Securities.
See "The Conversion--Offering of Holding Company Common Stock."
The Plan of Conversion places limitations on the number of shares that
may be purchased in the Conversion by various categories of persons. Except for
the Tax-Qualified Employee Plans which intend to subscribe for 8% of the total
number of shares of Common Stock offered in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering shares of Common Stock
having an aggregate purchase price of more than $100,000; no individual person
or other entity, together with associates of and persons acting in concert with
such person, may purchase in the Community Offering and the Syndicated Community
Offering shares of Common Stock having an aggregate purchase price of more than
$100,000; and no person, together with associates of or persons acting in
concert with such person, may purchase in the aggregate shares of Common Stock
having an aggregate purchase price of more than $200,000. The purchase
limitations described herein are subject to increase or decrease within the sole
discretion of the Bank and the Holding Company. Further, to the extent that
shares are available, each subscriber must subscribe for a minimum of 25 shares.
See "The Conversion - Offering of Holding Company Common Stock." The Bank and
the Holding Company have engaged Trident Securities Inc. ("Trident Securities")
to consult, advise and assist in the distribution of shares of Common Stock in
the Offerings on a best efforts basis. Trident Securities is under no
obligation to purchase any of the Common Stock offered in the Conversion.
All Subscription Rights for Common Stock are non-transferable and will
expire at noon, Excelsior Springs, Missouri Time on September __, 1996, unless
the Subscription Offering is extended by Community Bank and the Holding Company.
The accompanying stock order form and executed certification, together with full
payment for all shares of Common Stock for which subscription is made, or
appropriate instructions authorizing withdrawal of such amount from one or more
deposit accounts at the Bank, must be received by the Holding Company prior to
that time or any extension thereof. Under applicable federal regulations, all
shares of Common Stock must be sold in the Conversion within 45 days after the
completion of the Subscription Offering, unless extended with OTS approval.
If the Conversion is not approved by the members at the Special
Meeting, no shares will be issued, the Conversion will not take place, all
subscription funds received will be returned promptly with interest at the
Bank's current passbook rate, and all withdrawal authorizations will be
terminated. If the aggregate Purchase Price of the Common Stock actually sold
in the Conversion is below $8,925,000 or above $13,886,000 (15% above the
maximum of the Estimated Valuation Range), or if the Offerings are extended
beyond September __, 1996, subscribers will be permitted to modify or cancel
their subscriptions and to have their subscription funds returned promptly with
interest. In the event of such an extension, each subscriber will be notified
in writing of the time period within which the subscriber must notify the Bank
of his intention to maintain, modify or rescind his subscription. In the event
the subscriber does not respond in any manner to the Bank's notice, the funds
submitted will be refunded to the subscriber with interest at 2.25% per annum,
the Bank's current passbook rate, and/or the subscriber's withdrawal
authorizations will be terminated.
Stock Pricing. The Purchase Price of the Common Stock in the
Subscription, Community and Syndicated Community Offerings is a uniform price
for all subscribers, including members of the Bank's board of directors (the
"Board of Directors") and management. The aggregate Purchase Price is based
upon an independent appraisal of the aggregate pro forma market value of the
Holding Company and the Bank as converted. The aggregate pro forma market value
was estimated by RP Financial, an experienced conversion appraisal firm
independent of the Bank, to range from $8,925,000 to $12,075,000 at June 14,
1996. Depending upon the final updated valuation, the number of shares to be
issued is subject to a maximum of 1,388,600 shares (15% above the maximum of the
6
<PAGE>
Estimated Valuation Range) and a minimum of 892,500 shares. The appraisal
should not be considered a recommendation as to the advisability of purchasing
shares of the Common Stock. In preparing the appraisal, RP Financial assumed
the accuracy and completeness of the financial and statistical information
provided by the Bank and did not independently value the Bank's assets and
liabilities. The Board of Directors of the Holding Company and the Bank have
reviewed the appraisal of RP Financial and in determining the reasonableness and
adequacy of such appraisal consistent with OTS regulations and policies, have
reviewed the methodology and reasonableness of the assumptions utilized by RP
Financial in the preparation of such appraisal. See "The Conversion--Stock
Pricing and Number of Shares to be Issued" for a description of the manner in
which such valuation was made and the limitations on its use. Subject to
regulatory approval, the Estimated Valuation Range may be increased or decreased
to reflect market and financial conditions prior to the completion of the
Conversion and may be increased to permit an increase in the number of shares of
Common Stock sold in the Conversion to cover any oversubscriptions in the
Offerings. The actual number of shares to be issued in the Conversion will not
be determined until completion of the Offerings. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the gross proceeds from the sale of the Common
Stock are below the minimum of the Estimated Valuation Range or more than 15%
above the maximum of the Estimated Valuation Range. See "The Conversion--Stock
Pricing and Number of Shares to be Issued."
The Estimated Valuation Range is necessarily based upon estimates of a
number of matters (including certain assumptions as to expense factors affecting
the net proceeds from the sale of Common Stock in the Conversion and as to the
net earnings on such net proceeds), all of which are subject to change from time
to time. As a result, no assurance can be given that persons who purchase such
shares in the Conversion will be able to sell such shares thereafter at or above
the Purchase Price.
Non-transferability of Subscription Rights. Prior to the completion
of the Conversion, federal regulations prohibit any person from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the Subscription Rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Persons violating such
prohibition may lose their right to purchase stock in the Conversion and may be
subject to sanctions by the OTS. Each person exercising Subscription Rights
will be required to certify that a purchase of Common Stock is solely for the
purchaser's own account and that there is no agreement or understanding
regarding the sale or transfer of such shares. See "The Conversion--
Restrictions on Transferability."
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion are
estimated to be approximately $8.4 million, $10.0 million, $11.6 million and
$13.4 million, respectively, based on the minimum, midpoint, maximum and 15%
above the maximum, of the Estimated Valuation Range. See "Pro Forma Data." The
Holding Company will purchase all of the common stock of the Bank to be issued
upon Conversion in exchange for 50% of the net proceeds from the issuance of the
Common Stock and will retain the remaining 50% of such net proceeds as its
initial capitalization (less funds loaned to the ESOP sufficient to purchase up
to 8% of shares sold in the Conversion). Subject to regulatory approval, the
Holding Company intends to lend a portion of the net proceeds to the ESOP to
facilitate its purchase of up to 8% of the Common Stock sold in the Conversion.
It is anticipated that the funds will be borrowed by the ESOP at an interest
rate equal to the prime rate as published in the Wall Street Journal on the
closing date of the Conversion, which rate is currently 8.25%. It is
anticipated that the ESOP loan will have a term of 10 years. Based upon the
issuance of shares at the minimum and maximum of the Estimated Valuation Range,
the loan to the ESOP to purchase 8% of the Common Stock would be $714,000 and
$966,000, respectively. The Bank intends to make contributions to the ESOP in
an amount to be determined by the Board of Directors, but not less than the
amount needed to pay any currently maturing obligations under the loan made to
the ESOP, subject to the Bank's continuing compliance with OTS capital
requirements. These contributions would be allocated among all eligible
participants in proportion to their compensation. It is expected the ESOP will
purchase up to 8% of the total number of shares sold in the Conversion. See
"Management--Benefit Plans--Employee Stock Ownership Plan." The remaining net
proceeds retained by the Holding Company are anticipated to be initially
invested in short- and intermediate-term securities and will be available as
general working capital. Subject to compliance with OTS regulations, such funds
may also be used to repurchase the Common
7
<PAGE>
Stock. However, since the Holding Company has not yet issued stock, there is
currently insufficient information upon which an intention to repurchase stock
could be based. For information regarding the possible purchase of stock to
implement a restricted stock plan following the Conversion, see "Use of
Proceeds." The net proceeds to the Bank will become part of the Bank's general
funds and will be used to support its lending and investment activities, subject
to applicable regulatory restrictions. A portion of the proceeds may be used to
repay a portion of the Bank's Federal Home Loan Bank advances. On an interim
basis, such proceeds will be invested primarily in short- and intermediate-term
securities and will be available as general working capital. OTS regulations
permit Tier 1 associations, such as the Bank, to make capital distributions,
subject to certain limitations. See "Regulation--Limitations on Dividends and
Other Capital Distributions." Assuming net proceeds from the sale of Common
Stock in the Conversion are $10.0 million (representing the midpoint of the
Estimated Valuation Range), and assuming net income for the Bank of $93,000 for
the three months ended March 31, 1996, the Bank would be permitted to make a
capital distribution of $3.2 million to the Holding Company.
Purchases by Directors and Officers
The directors and officers of Community have indicated their intention
to purchase in the Conversion an aggregate of $1,050,000 of Common Stock (or
105,000 shares, or approximately 11.8%, 10.0%, 8.7%, or 7.6%, respectively, of
the shares to be issued in the Conversion at the minimum, the midpoint, the
maximum and 15% above the maximum of the Estimated Valuation Range). There is
no formal agreement among the executive officers and directors and their
affiliates regarding their purchases of Common Stock. In addition, 8% of the
shares issued in the Conversion are expected to be purchased by the Bank's ESOP.
See "Management - Benefit Plans - Employee Stock Ownership Plan" and "The
Conversion - Participation by Management."
Benefits of Conversion to Directors and Executive Officers
Employment Agreements. The Board of Directors of the Bank intends to
enter into an employment agreement with each of Larry E. Hermreck, Chief
Executive Officer of the Bank and certain other officers of the Bank. See
"Management--Employment Agreements." It is anticipated that the agreement will
be at Mr. Hermreck's current salary and will become effective upon completion of
the Conversion. Under certain circumstances, including involuntary termination
of employment following a change in control, as defined in the employment
agreement, Mr. Hermreck will also be entitled to a severance payment equal to
299% of his base amount of compensation, as defined. Assuming a change in
control occurred as of March 31, 1996, Mr. Hermreck would have received
approximately $210,000 pursuant to the employment agreement's change in control
provision. See "Management--Employment Agreements" for a more detailed
description of this agreement and the other employment agreements to be entered
into with other officers of the Bank.
Employee Stock Ownership Plan. The Board of Directors of the Bank has
adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Bank. The ESOP intends to buy up to 8%
of the Common Stock issued in the Conversion (approximately $714,000 to $966,000
of the Common Stock based on the issuance of the minimum (892,500) shares) and
the maximum (1,207,500 shares) of the Estimated Valuation Range and the $10.00
per share Purchase Price). The ESOP will purchase the shares with funds
borrowed from the Holding Company, and it is anticipated that the ESOP will
repay the loans through periodic tax-deductible contributions from the Bank over
a ten-year period. These contributions will increase the compensation expense
of the Bank. The Bank's contributions to the ESOP will be allocated among
participants on the basis of their compensation. See "Management - Benefit
Plans - Employee Stock Ownership Plan" for a description of this plan.
Other Stock Benefit Plans. The Board of Directors of the Holding
Company intends to adopt a Stock Option and Incentive Plan ("Stock Option Plan")
and a Recognition and Retention Plan ("RRP") to become effective upon approval
by stockholders no earlier than six months following the Conversion. It is
anticipated that certain of the directors and executive officers of the Holding
Company and the Bank will receive awards under these plans. It is currently
anticipated that the Stock Option Plan and the RRP will be funded by shares
subsequently reacquired and held as treasury shares or through the issuance of
authorized but unissued stock of the Holding Company,
8
<PAGE>
representing 10% and 4%, respectively, of the shares sold in the Conversion. To
the extent the Stock Option Plan and RRP are funded from authorized but unissued
shares, the funding of such plans will dilute existing shareholders by an
aggregate of 12.3%. See "Management - Benefit Plans" for a description of these
plans. The Stock Option Plan and the RRP may be submitted for stockholder
approval at an annual or special meeting of stockholders following the
Conversion, provided such meeting is at least six months following the
Conversion, or alternatively such approval may not be sought until after one
year following the Conversion. If such plans are adopted during the first year
following Conversion, they would be subject to certain allocation and other
requirements of the OTS which might not apply after one year.
Stock Option and Incentive Plan. Specifically, it is intended that
the directors and executive officers will be granted options to purchase under
the Stock Option Plan, subject to approval by stockholders and OTS, and vesting
provisions, of up to 89,250 to 138,862 shares of Common Stock (based on the
minimum and 15% above the maximum of the Estimated Valuation Range,
respectively). Included in such totals is a proposed grant to Larry E.
Hermreck, Chief Executive Officer of the Bank, and all executive officers of the
Bank as a group (5 persons), of options to purchase 2.2% (19,635 to 30,550
shares at the minimum and 15% above the maximum, respectively, of the Estimated
Valuation Range) and 5.5% (49,088 to 76,374 shares at the minimum and 15% above
the maximum, respectively, of the Estimated Valuation Range) of the Common Stock
sold in the Conversion, respectively. Also included in such totals is a
proposed grant to all directors of the Holding Company as a group (6 persons) of
options to purchase 3.0% (26,775 to 41,659 shares at the minimum and 15% above
the maximum, respectively, of the Estimated Valuation Range) of the Common Stock
sold in the Conversion. Under certain circumstances, such options may be
exercised and sold on the same day, thereby eliminating any risk to officers and
directors in exercising options in the event the market price exceeds the
exercise price. There is no risk to officers and directors in the event the
market price is less than the exercise price, since the holder may choose not to
exercise the options. See "Management - Benefits - Stock Option and Incentive
Plan" for additional information regarding the proposed Stock Option Plan.
Recognition and Retention Plan. It is also intended that directors
and executive officers will be granted (without any requirement of payment by
the grantee) from 35,700 to 55,545 restricted shares of Common Stock under the
RRP (based on the minimum and 15% above the maximum of the Estimated Valuation
Range, respectively), subject to approval by the stockholders following the
Conversion, and vesting provisions, with a total value of approximately $357,000
to $555,450, respectively, based on the original Purchase Price of $10.00 per
share. Included in such totals is a proposed award of restricted stock to Larry
E. Hermreck, Chief Executive Officer of the Bank, equal to 0.88% of the Common
Stock sold in the Conversion, or 7,854 to 12,220 shares (based upon the minimum
and 15% above the maximum, respectively, of the Estimated Valuation Range), with
a total value of approximately $78,540 to $122,200, respectively, based on the
original Purchase Price of $10.00 per share, and a proposed award of restricted
stock to all executive officers as a group (5 persons), equal to 2.2% of the
Common Stock sold in the Conversion or 19,635 to 30,550 shares (based upon the
minimum and 15% above the maximum, respectively, of the Estimated Valuation
Range) with a total value of approximately $196,350 to $305,500, respectively,
based upon the original Purchase Price of $10.00 per share. In addition, such
totals include a proposed award of restricted stock to all directors of the
Holding Company as a group (6 persons) equal to 1.2% of the Common Stock sold in
the Conversion, or 10,710 to 16,664 shares (based upon the minimum and 15% above
the maximum, respectively, of the Estimated Valuation Range) with a total value
of approximately $107,100 to $166,640, respectively, based upon the original
Purchase Price of $10.00 per share. See "Management--Benefit Plans--Recognition
and Retention Plan" for additional information regarding the Recognition and
Retention Plan and the proposed awards of restricted stock.
Dividends
Although no decision has been made yet regarding the payment of
dividends, the Holding Company may consider a policy of paying cash dividends on
the Common Stock following the Conversion. Dividends, when and if paid, will be
subject to determination and declaration by the Board of Directors in its
discretion, which will take into account the Holding Company's consolidated
financial condition and results of operations, tax considerations, industry
standards, economic conditions, regulatory restrictions on dividend payments by
the Bank to the Holding
9
<PAGE>
Company, general business practices and other factors. See "Dividends,"
"Regulation--Regulatory Capital Requirements" and "--Limitations on Dividends
and Other Capital Distributions."
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. Although the
Holding Company has received conditional approval to trade the Common Stock on
the Nasdaq SmallCap Market under the symbol "CBES," there can be no assurance
that the Holding Company will meet Nasdaq SmallCap Market listing requirements,
which include a minimum market capitalization, a minimum of 300 stockholders
immediately upon the closing of the Offerings and a minimum of two market makers
in the Common Stock. Trident Securities has indicated its intention to make a
market in the Common Stock upon consummation of the Conversion, and the Bank
anticipates that it will be able to secure at least one additional market maker
for the Common Stock although no additional market makers have been obtained as
of the date hereof. However, there can be no assurance that an active or liquid
trading market will develop, or that if a market develops, it will continue. A
public market having the desirable characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace of both willing buyers
and sellers of the Common Stock at any given time, which is not within the
control of the Holding Company or any market maker. Accordingly, there can be
no assurance that purchasers will be able to sell their shares at or above the
Purchase Price. See "Market for Common Stock."
Risk Factors
See "Risk Factors" for information regarding the increased credit and other
risks associated with the Bank's emphasis on construction and land lending,
geographical concentration of loans and risks of economic downturn in the Bank's
primary market area, credit risks and risks to collateral values associated with
automobile lending, potential inadequacy of the Bank's allowance for loan
losses, the Bank's reduced return on equity ratios after the Conversion,
interest rate risk exposure, potential discouragement of takeover attempts
resulting from takeover defensive provisions, potential operational restrictions
associated with regulatory oversight, disparity between BIF and SAIF insurance
premiums, pending legislation limiting deduction of bad debt, competition,
potential increased costs of Conversion resulting from delayed offering, absence
of active market for the common stock and possible consequences of amendment to
plan of conversion, which factors should be considered by prospective investors
prior to investing in the Common Stock.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
Set forth below are selected consolidated financial and other data of the
Bank at and for the periods indicated. Financial data as of March 31, 1996 and
for the nine months ended March 31, 1996 and 1995 are unaudited. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included. The results of operations
and other data for the nine months ended March 31, 1996 are not necessarily
indicative of the results of operations that may be expected for the fiscal year
ending June 30, 1996. The selected consolidated financial and other data does
not purport to be complete and is qualified in its entirety by reference to the
detailed information and Consolidated Financial Statements and Notes thereto
presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At June 30,
At March 31, ------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ------- -------- -------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.............................. $ 86,168 $ 93,100 $ 68,543 $ 66,158 $ 65,260 $ 66,125
Loans receivable, net (1)................. 77,273 78,880 53,453 46,723 42,480 42,509
Mortgage-backed securities, held to
maturity................................. 549 3,870 4,834 6,406 6,382 3,953
Investment securities..................... 1,981 3,041 3,032 4,631 3,452 9,450
Deposits.................................. 67,916 68,274 60,180 58,751 58,666 60,275
FHLB advances............................. 9,000 15,877 -- -- -- --
Total equity - substantially restricted... 7,883 7,481 6,981 6,309 5,500 4,833
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Twelve Months Ended June 30,
---------------------- ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operations Data:
Interest income........................... $ 5,131 $ 4,127 $ 5,818 $ 4,655 $ 4,914 $ 5,722 $ 6,038
Interest expense.......................... 3,089 2,102 3,146 2,093 2,472 3,462 4,265
--------- -------- ---------- -------- --------- --------- --------
Net interest income..................... 2,042 2,025 2,672 2,562 2,442 2,260 1,773
Provision for loan losses................. 188 143 171 33 28 91 38
--------- -------- ---------- -------- --------- --------- --------
Net interest income after provision for
loan losses........................... 1,854 1,882 2,501 2,529 2,414 2,169 1,735
Fees and service charges.................. 218 198 267 266 175 174 210
Gain (loss) on sales of loans and
mortgage-backed and investment
securities (2)........................... 193 (309) (272) 4 202 (64) --
Other noninterest income.................. 93 77 102 103 112 111 176
--------- -------- ---------- -------- --------- --------- --------
Total noninterest income......... 504 (34) 97 373 489 221 386
Total noninterest expense................. 1,761 1,609 2,133 1,849 1,729 1,643 1,524
--------- -------- ---------- -------- --------- --------- --------
Earnings before income taxes.............. 597 239 465 1,053 1,174 747 597
Income taxes.............................. 207 211 301 352 424 289 224
--------- -------- ---------- -------- --------- --------- --------
Net earnings.............................. $ 390 $ 28 $ 164 $ 701 $ 750 $ 458 $ 373
========= ======== ========== ======== ========= ========= ========
</TABLE>
- ---------------------
(1) Loans receivable, net is comprised of total loans less allowance for loan
losses, deferred loan fees and the undisbursed portion of loans in process.
(2) Includes writedown of investment in mutual funds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
11
<PAGE>
<TABLE>
<CAPTION>
At and For the
Nine Months Ended
March 31, At and For the Twelve Months Ended June 30,
------------------ ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios
and Other Data:
Performance ratios:
Return on assets (2)..... 0.60% 0.05% 0.21% 1.04% 1.15% 0.70% 0.58%
Return on total equity
(3)..................... 6.74 0.52 2.27 10.52 12.75 8.77 8.11
Interest rate spread
information:
Average during period.. 2.77 3.30 3.11 3.60 3.52 3.18 2.37
End of period.......... 2.90 2.30 2.19 3.42 3.66 3.34 2.17
Net interest margin (4).. 3.18 3.71 3.52 3.96 3.86 3.60 2.84
Ratio of noninterest
expense to average
total assets............ 2.62 2.84 2.70 2.75 2.64 2.52 2.37
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............. 108.45 110.56 109.79 110.91 108.68 107.68 107.00
Asset quality ratios:
Non-performing assets to
total assets at
end of period (5)....... 0.38 0.35 0.17 0.55 0.79 0.38 1.06
Allowance for loan
losses to
non-performing loans.... 109.46 96.70 150.67 57.80 31.06 186.49 24.90
Allowance for loan
losses to loans
receivable, net......... 0.45 0.28 0.29 0.30 0.32 0.32 0.31
Net charge-offs during
the period to average
loans outstanding
during the period....... 0.11 0.21 0.16 0.04 0.04 0.21 0.22
Capital ratios:
Total equity to total
assets at end of period. 9.15 8.50 8.04 10.18 9.54 8.43 7.31
Average total equity to
average assets.......... 8.60 9.48 9.13 9.92 8.98 8.02 7.15
Other data:
Number of full-service
offices................. 2 2 2 1 1 1 1
Loans serviced for
others.................. $30,967 $24,339 $25,743 $25,581 $13,472 $8,495 $10,871
</TABLE>
- ----------------
(1) Ratios for the nine month periods are annualized.
(2) Ratio of net earnings to average total assets.
(3) Ratio of net earnings to average total equity.
(4) Net interest income as a percentage of average interest-earning
assets.
(5) Non-performing assets include non-accrual loans, foreclosed real estate and
other repossessed assets.
12
<PAGE>
RECENT FINANCIAL DATA
Set forth below are selected consolidated financial and other data of the
Bank at and for the periods indicated. Financial data at June 30, 1996 and March
31, 1996, and for the three and twelve months ended June 30, 1996 and the three
months ended June 30, 1995 are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation have been included. The selected consolidated financial and other
data do not purport to be complete and are qualified in their entirety by
reference to the detailed information and Consolidated Financial Statements and
Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At June 30, At March 31, At June 30,
1996 1996 1995
----------- ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Selected Financial
Condition Data:
Total assets............... $ 89,711 $ 86,168 $ 93,100
Loans receivable, net (1).. 79,313 77,273 78,880
Mortgage-backed
securities, held to
maturity.................. 400 549 3,870
Investment securities,
held for investment....... 100 -- --
Investment securities,
available for sale........ 1,975 1,981 3,041
Deposits................... 68,171 67,916 68,274
FHLB advances.............. 12,000 9,000 15,877
Total equity -
substantially restricted.. 8,066 7,883 7,481
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Twelve Months
June 30, Ended June 30,
------------------------ ---------------------
1996 1995 1996 1995
----------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Selected Operating Data:
Interest income............ $ 1,693 $ 1,691 $ 6,824 $5,818
Interest expense........... 916 1,044 4,006 3,146
------- ------- ------- ------
Net interest income...... 777 647 2,818 2,672
Provision for loan losses.. 48 28 236 171
------- ------- ------- ------
Net interest income
after provision for
loan losses............. 729 619 2,582 2,501
Fees and service charges... 71 69 290 267
Gain (loss) on sales of
loans and mortgage-backed
and investment
securities (2)............ 46 37 239 (272)
Other noninterest income... 34 26 127 102
------- ------- ------- ------
Total noninterest
income............... 151 132 656 97
Total noninterest expense.. 577 524 2,338 2,133
------- ------- ------- ------
Earnings before income
taxes..................... 303 227 900 465
Income taxes............... 116 91 323 301
------- ------- ------- ------
Net earnings............... $ 187 $ 136 $ 577 $ 164
======= ======= ======= ======
</TABLE>
- ---------------------
(1) Loans receivable, net is comprised of total loans less allowance for loan
losses, deferred loan fees and the undisbursed portion of loans in process.
(2) Includes writedown of investment in mutual funds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
13
<PAGE>
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Ended Twelve Months Ended
June 30, June 30,
------------------------ ----------------------
1996 1995 1996 1995
----------- ----------- ----------- ---------
Key Financial Ratios and Other Data:(1)........................ (Dollars In Thousands)
<S> <C> <C> <C> <C>
Performance ratios:
Return on assets (2)............................................ 0.85% 0.61% 0.65% 0.21%
Return on total equity (3)...................................... 9.39 7.36 7.42 2.27
Interest rate spread information:
Average during period......................................... 3.34 2.65 2.90 3.11
End of period................................................. 4.12 2.19 4.12 2.19
Net interest margin (4)......................................... 3.73 3.02 3.31 3.52
Ratio of noninterest expense to average total assets............ 2.63 2.34 2.61 2.70
Ratio of average interest-earning assets to average
interest-bearing liabilities.................................. 108.90 107.62 108.56 109.79
Asset quality ratios:
Non-performing assets to total assets at end of period (5)...... 0.73 0.17 0.73 0.17
Allowance for loan losses to non-performing loans............... 60.34 150.67 60.34 150.67
Allowance for loan losses to loans receivable, net.............. 0.49 0.29 0.49 0.29
Net charge-offs during the period to average loans
outstanding during the period................................. 0.04 0.04 0.09 0.16
Capital ratios:
Total equity to total assets at end of period................... 8.99 8.04 8.99 8.04
Average total equity to average assets.......................... 9.07 8.24 8.69 9.13
Other data:
Number of full-service offices.................................. 2 2 2 2
Loans serviced for others....................................... $31,088 $25,743 $31,088 $25,743
</TABLE>
- ----------------
(1) Ratios for the three month periods are annualized.
(2) Ratio of net earnings to average total assets.
(3) Ratio of net earnings to average total equity.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Non-performing assets include non-accrual loans, foreclosed real estate and
other repossessed assets.
14
<PAGE>
Management's Discussion and Analysis of Recent Developments
Financial Condition
Total assets increased $3.5 million, or 4.1%, to $89.7 million at June
30, 1996 from $86.2 million at March 31, 1996 due primarily to increases of $2.0
million in loans receivable, net and $1.5 million in other interest-earning
assets. Savings deposits increased by $255,000, or 0.4%, to $68.2 million at
June 30, 1996 from $67.9 million at March 31, 1996. FHLB advances increased by
$3.0 million, or 33.3%, to $12.0 million at June 30, 1996, primarily to fund
$2.0 million in one- to four-family construction loans, and to increase
liquidity.
Non-performing assets increased $327,000 to $655,000 at June 30, 1996
from $328,000 at March 31, 1996. Non-performing loans of $644,000 included
$555,000 in single family mortgage loans to 12 borrowers. Management monitors
non-performing assets on a monthly basis and does not anticipate any significant
losses.
At June 30, 1996, the Bank continued to exceed all regulatory capital
requirements with tangible capital of $8.1 million (8.99% of adjusted total
assets); core capital of $8.1 million (8.99% of adjusted total assets); and
risk-based capital of $8.1 million (11.72% of risk-weighted assets).
Comparison of Operating Results for the Three Months Ended June 30, 1996 and
1995
Performance Summary. Net earnings for the three months ended June 30,
1996 was $187,000 compared to $136,000 for the same period in 1995. The $51,000
increase in net earnings during the period was primarily due to a $130,000
increase in net interest income, and a $19,000 increase in non-interest income,
offset by a $20,000 increase in the provision for loan losses, a $53,000
increase in non-interest expense, and a $25,000 increase in income taxes.
Net Interest Income. The $130,000 increase in net interest income was
primarily the result of an increase in the average interest rate spread during
the three month period ended June 30, 1996 when compared to the same period in
1995. The average interest rate spread during the three months ended June 30,
1996 was 3.34% compared to 2.65% during the same period in 1995.
Interest Income. Interest income for the three months ended June 30,
1996 increased by $2,000 from the same period in 1995. This resulted from a
decrease in average interest earning assets of $2.0 million and an increase of
22 basis points in rates paid on interest earning assets.
Interest Expense. Interest expense for the three months ended June
30, 1996 decreased $127,000 compared to the same period in 1995. This was
primarily due to a decrease in FHLB advances outstanding and the repricing of
maturing FHLB advances to lower rates. Rates on certificate accounts adjusted
downward decreasing interest expense $30,000.
Provision for Loan Losses. During the three months ended June 30,
1996, the Bank charged $48,000 against earnings as a provision for loan losses
compared to a provision of $28,000 for the three months ended June 30, 1995. The
charge resulted in an allowance for loan losses of $388,000, or 0.49% of loans
receivable, net at June 30, 1996, compared to $347,000, or 0.45% of loans
receivable, net at March 31, 1996.
Non-Interest Income. Non-interest income increased $19,000 to
$151,000 for the three months ended June 30, 1996 compared to the same period in
1995. Gains on the sale of loans originated for sale were $46,000 on sales of
$3.5 million and $37,000 on sales of $3.6 million for the three months ended
June 30, 1996 and 1995, respectively. Other non-interest income increased $8,000
for the three months ended June 30, 1996 when compared with the same period in
1995, primarily due to an increase of $7,000 in dividends on the Bank's
investment in its former computer service bureau.
15
<PAGE>
Non-Interest Expense. Non-interest expense increased $53,000 for the
three months ended June 30, 1996 as compared to the same period in 1995.
Personnel costs increased $17,000, or 6.0%, for the three months ended June 30,
1996 compared to the same period in 1995, primarily resulting from annual pay
increases. For the three months ended June 30, 1996, losses on the sale of real
estate owned and repossessed assets were $3,000, compared to gains of $3,000 for
the three months ended June 30, 1995. Other operating expense increased $31,000
for the three months ended June 30, 1996 compared to the same period in 1995 due
to an increase in the purchase of office supplies of $9,000 and other normal
operating expenses.
Income Taxes. The $25,000 increase in income taxes for the three
months ended June 30, 1996 as compared to the same period in 1995 was due to an
increase of $76,000 in pre-tax income for the comparable periods.
Comparison of Operating Results for the Twelve Months Ended June 30, 1996 and
1995
Performance Summary. Net earnings for the year ended June 30, 1996
increased by $413,000, or 251.8%, to $577,000 from $164,000 for the year ended
June 30, 1995. The increase was primarily due to the combined effects of a
$146,000 increase in net interest income and a $559,000 increase in non-interest
income, which more than offset a $65,000 increase in the provision for loan
losses, a $205,000 increase in noninterest expense, and a $22,000 increase in
income taxes for the 1996 period as compared to the 1995 period. For the year
ended June 30, 1996 and 1995, the returns on average assets were 0.65% and
0.21%, respectively, while the returns on average equity were 7.42% and 2.27%,
respectively.
Net Interest Income. For the year ended June 30, 1996, net interest
income increased by $146,000, or 5.5%, to $2.8 million from $2.7 million for the
year ended June 30, 1995. The increase reflected an increase of $1.0 million in
interest income to $6.8 million from $5.8 million which more than offset an
increase of $860,000 in interest expense to $4.0 million from $3.1 million. The
Bank's average interest rate spread was 2.90% for the year ended June 30, 1996
compared to 3.11% for the earlier year period. The average net interest margin
was 3.31% for the year ended June 30, 1996 compared to 3.52% for the year ended
June 30, 1995.
Provision for Loan Losses. During the year ended June 30, 1996, the
Bank charged $236,000 against earnings as a provision for loan losses compared
to a provision of $171,000 for the year ended June 30, 1995. The charge
resulted in an allowance for loan losses of $388,000, or 0.49% of loans
receivable, net at June 30, 1996, compared to $226,000, or 0.29% of loans
receivable, net at June 30, 1995.
Non-Interest Income. For the year ended June 30, 1996, non-interest
income increased $559,000 to $656,000 from $97,000 for the year ended June 30,
1995. Included in non-interest income was the gain on the sale of loans
originated for sale. During the year ended June 30, 1996, the Bank sold $16.1
million of such loans with a gain of $185,000. During the year ended June 30,
1995, the Bank sold $4.7 million of such loans with a gain on sale of loans of
$42,000. During the year ended June 30, 1996, the Bank recognized a gain of
$54,000 on the sale of mortgage-backed and investment securities. There were no
sales of securities during the year ended June 30, 1995; however, management
determined its investment in mutual funds had an other than temporary decline in
value and wrote down its investment by $314,000 during the year ended June 30,
1995. Other non-interest income increased $25,000 for the year ended June 30,
1996 when compared with the year ended June 30, 1995, primarily due to an
increase of $17,000 in dividends on the Bank's investment in its former computer
service bureau.
Non-Interest Expense. Non-interest expense increased by $205,000 to
$2.3 million for the year ended June 30, 1996 from $2.1 million for the year
ended June 30, 1995. Compensation expense increased $122,000 to $1.2 million
for the year ended June 30, 1996 from $1.1 million for the year ended June 30,
1995, due to an increase in employees to staff the new branch office in Kearney,
Missouri and to increase the mortgage loan processing staff due to an increase
in originations of loans held for sale. Other increases in noninterest expense
principally related to the new branch location in Kearney, Missouri.
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Income Taxes. Income taxes increased by $22,000 to $323,000 for the
year ended June 30, 1996 from $301,000 for the year ended June 30, 1995.
Exclusive of the mutual fund write down in 1995, the effective tax rates were
35.9% and 38.7% for the year ended June 30, 1996 and 1995, respectively.
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RISK FACTORS
The following factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Conversion.
Increased Credit and Other Risks Associated with Construction and Land Lending
In response to the rapid growth in the Bank's primary market area, and
particularly the suburban Kansas City area, the Bank has invested a significant
proportion of its loan portfolio in construction and land loans for single-
family residential properties. At March 31, 1996, the Bank had $21.5 million in
construction and land loans, representing 25.0% of its total loan portfolio, as
compared to $18.2 million, or 21.3% of its total loan portfolio at June 30, 1995
and $8.4 million, or 14.5% of its total loan portfolio at June 30, 1994. At
March 31, 1996, the Bank had $17.9 million in construction loans, of which
approximately $12.3 million were "speculative" loans, meaning that, at the time
the loan was made, generally there was no sale contract or permanent loan in
place for the finished home. Although construction and land loans afford the
Bank the opportunity to achieve higher interest rates and fees with shorter
terms to maturity than do its one- to four-family permanent mortgage loans, such
loans are generally considered to involve a higher degree of risk than one- to
four-family permanent mortgage loans due to (i) the concentration of principal
among relatively few borrowers, (ii) the increased difficulty at the time the
loan is made of estimating the building costs and selling price of the residence
to be built, (iii) the increased difficulty and costs of monitoring the loan,
(iv) the higher degree of risk associated with residential sales activity in
changing real estate market conditions, and (v) the increased difficulty of
working out problem loans. Speculative construction loans have the added risk
associated with identifying an end-purchaser for the finished home.
The Bank's portfolio of construction and land loans exhibits several
of these risk characteristics. At March 31, 1996, the Bank's construction loans
were concentrated among approximately 45 builders. At that time, the Bank had
two borrowers where aggregate speculative construction loans outstanding
exceeded $1.0 million. Additionally, a majority of the Bank's construction
loans are secured by properties located in the suburban Kansas City area. A
concentration of loans secured by properties in any single area presents the
risk that any adverse change in regional economic or employment conditions may
result in increased delinquencies and loan losses. Construction loans are also
more difficult to evaluate than are permanent loans. At the time the loan is
made, the value of the collateral securing the loan must be estimated on the
basis of a projected selling price at the time the residence is completed,
typically six to 12 months later, and of estimated building and other costs
(including interest costs). Changes in the demand for new housing in the area
and higher-than-anticipated building costs may cause actual results to vary
significantly from those estimated. Accordingly, the Bank may be confronted, at
the time the residence is completed, with a loan balance exceeding the value of
the collateral. Because construction loans require active monitoring of the
building process, including cost comparisons and on-site inspections, these
loans are more difficult and costly to monitor. Increases in market rates of
interest may have a more pronounced effect on construction loans by rapidly
increasing the end-purchasers' borrowing costs, thereby reducing the overall
demand for new housing. Additionally, working out of problem construction loans
is complicated by the fact that in-process homes are difficult to sell and
typically must be completed in order to be successfully sold. This may require
the Bank to advance additional funds and/or contract with another builder to
complete the residence.
The Bank has sought to address the foregoing risks of its construction
lending by developing and strictly adhering to underwriting policies,
disbursement procedures, and monitoring practices. Specifically, the Bank (i)
seeks to lend to builders with which the Bank has a long-standing history of
satisfactory performance, (ii) limits the exposure to new builders until a
satisfactory record of performance is demonstrated, (iii) seeks to diversify
loans among several development projects, (iv) evaluates and documents the
creditworthiness of the borrower and the viability of the proposed project, (v)
limits loan-to-value ratios to specified levels on the basis of loan size and
risk characteristics of the borrower and the proposed project, (vi) controls the
disbursements of construction loan proceeds on the basis of a comparison of
estimated costs versus actual costs and of on-site inspections by Bank
personnel, and (vii) monitors over time the accuracy of borrowers in estimating
their building costs and independent appraisers in estimating projected selling
prices.
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Geographical Concentration of Loans and Risks of Economic Downturn in Primary
Market Area
At March 31, 1996, virtually all of the Bank's real estate mortgage
loans were secured by properties located in the Bank's primary market area of
Ray and Clay Counties, and, to a lesser extent, surrounding counties in
Missouri. While the Bank currently believes that its loans are adequately
secured or reserved for, in the event that real estate prices in the Bank's
market area substantially weaken or economic conditions in Missouri deteriorate,
reducing the value of properties securing the Bank's loans, some borrowers may
default and the value of the real estate collateral may be insufficient to fully
secure the loan. In either event, the Bank may experience increased levels of
delinquencies and related losses having an adverse impact on net income.
Credit Risks and Risks to Collateral Values Associated with Automobile Lending
At March 31, 1996, the Bank's automobile loan portfolio totaled $8.8
million, or 10.2% of the Bank's total loan portfolio. Automobile loans provide
for shorter terms and higher yields as compared to residential mortgage loans,
but generally carry higher risks of default. Moreover, automobile loans are
secured by assets that depreciate rapidly, and repossessed automobiles may not
provide an adequate source of repayment for the outstanding loan. Of the Bank's
automobile loan portfolio, $2.3 million, or 26.3%, consisted of "indirect"
automobile loans at March 31, 1996, for which applications are taken by
employees of automobile dealerships. However, such loans are made pursuant to
the Bank's "direct" automobile underwriting standards, and must be approved by a
Bank employee before disbursement of loan proceeds.
Potential Inadequacy of Allowance for Loan Losses
At March 31, 1996, the Bank's allowance for loan losses was $347,000,
or 0.45% of loans receivable, net. Although the allowance for loan losses is
maintained at a level which management considers adequate to provide for
potential loan losses, because future events affecting borrowers and loan
collateral cannot be predicted with any degree of certainty, there can be no
assurance that the Bank's allowance for loan losses will be adequate to absorb
all future loan losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Lending Activities--
Construction and Land Lending," and "--Asset Quality."
Reduced Return on Equity After Conversion
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Bank's
return on equity for the fiscal year ended June 30, 1995 was, and the Holding
Company's post-Conversion return on equity will be, less than the average return
on equity for publicly traded thrift institutions and their holding companies.
See "Selected Consolidated Financial Information" for numerical information
regarding the Bank's historical return on equity and "Capitalization" for a
discussion of the Holding Company's estimated pro forma consolidated
capitalization as a result of the Conversion. In addition, the expenses
associated with the ESOP and the RRP (see "Pro Forma Data"), along with other
post-Conversion expenses, are expected to contribute initially to reduced
earnings levels. The Bank intends to deploy the net proceeds of the Offerings
to increase earnings per share and book value per share, without assuming undue
risk, with the goal of achieving a return on equity comparable to the average
for publicly traded thrift institutions and their holding companies. This goal
will likely take a number of years to achieve and no assurances can be given
that this goal can be attained. Consequently, for the foreseeable future,
investors should not expect a return on equity that will meet or exceed the
average return on equity for publicly traded thrift institutions.
Interest Rate Risk Exposure
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Changes in the level of interest rates also affect
the amount of loans originated by the Bank and, thus, the amount of loan and
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commitment fees, as well as the market value of the Bank's interest-earning
assets. Moreover, increases in interest rates also can result in
disintermediation, which is the flow of funds away from savings institutions
into direct investments, such as corporate securities and other investment
vehicles, which, because of the absence of federal insurance premiums, may yield
higher rates of return than those paid by savings institutions.
In addition, changes in interest rates also can affect the market
value of the Bank's interest-earning assets, which are comprised of fixed- and
adjustable-rate instruments with various terms to maturity. Generally, the
value of fixed-rate, longer-term instruments fluctuates inversely with changes
in interest rates. See "Business - Lending Activities - One- to Four-Family
Mortgage Loans." Increases in interest rates also can affect the type (fixed-
rate or adjustable-rate) and amount of loans originated by the Bank and the
average life of loans and securities, which can adversely impact the yields
earned on the Bank's loan and securities portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Asset/Liability Management."
The OTS utilizes a net portfolio value methodology to measure the
interest rate risk exposure of savings associations. Effective March 31, 1995,
for purposes of calculating risk-based capital, institutions with more than
normal interest rate risk, as defined by OTS regulations, are required to make a
deduction from capital equal to 50% of their interest rate risk exposure
multiplied by the present value of their assets. Based upon this methodology,
at March 31, 1996, the Bank's interest rate risk exposure to a 200 basis point
increase in interest rates was considered "normal" under this regulation.
However, because the Bank has total assets of less than $300 million and risk-
based capital in excess of 12%, the Bank is exempt from this rule unless
otherwise notified by the OTS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management."
Potential Discouragement of Takeover Attempts Resulting from Takeover Defensive
Provisions
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
These provisions provide for, among other things, limiting voting rights of
beneficial owners of more than 10% of the Common Stock, staggered terms for
directors, noncumulative voting for directors, limits on the calling of special
meetings, a fair price/supermajority vote requirement for certain business
combinations and certain notice requirements. The 10% vote limitation would not
affect the ability of an individual who is not the beneficial owner of more than
10% of the Common Stock to solicit revocable proxies in a public solicitation
for proxies for a particular meeting of stockholders and to vote such proxies.
In addition, provisions in the Bank's federal stock Charter that have an anti-
takeover effect could also be applicable to changes in control of the Holding
Company as the sole shareholder of the Bank. The Bank's Charter includes a
provision applicable for five years which prohibits acquisitions and offers to
acquire, directly or indirectly, the beneficial ownership of more than 10% of
the Bank's securities. Any person violating this restriction may not vote the
Bank's securities in excess of 10%. Any or all of these provisions may
discourage potential proxy contests and other takeover attempts, particularly
those which have not been negotiated with the Board of Directors. In addition,
the Holding Company's Certificate of Incorporation also authorizes preferred
stock with terms to be established by the Board of Directors which may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, may have full or limited voting rights and may have a dilutive effect on
the ownership interests of holders of the Common Stock. The Board of Directors
of the Holding Company has the ability to waive certain restrictions on
acquisition, provided that the acquisition is approved in advance by a majority
of the disinterested Board of Directors. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions."
Regulatory and Statutory Provisions. Federal regulations prohibit,
for a period of three years following the completion of the Conversion, any
person from offering to acquire or acquiring the beneficial ownership of more
than 10% of the stock of a converted savings institution or its holding company
without prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
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Employment Agreements and Other Benefit Plans; Voting Control of
Directors and Officers and Possible Dilutive Effects. The employment
agreements, the proposed Stock Option Plan and the proposed RRP also contain
provisions that could have the effect of discouraging takeover attempts of the
Holding Company.
The Bank intends to enter into employment contracts with Chief
Executive Officer Larry E. Hermreck and three other executive officers. These
employment agreements provide for a payment equal to 299% of the employee's base
compensation in the case of Mr. Hermreck, and equal to 150% of the employee's
prior years' compensation in the case of the three other executive officers, in
the event that his or her employment is involuntarily terminated as a result of
a change in control of the Holding Company or the Bank. These provisions may
have the effect of increasing the cost of, and thereby discouraging, a future
attempt to takeover the Holding Company or the Bank. Assuming involuntary
termination of the employment of such employees occurred following a change in
control as of March 31, 1996, such employees would have received approximately
$410,000 in the aggregate pursuant to the employment agreements' change in
control provisions. See "Management--Employment Agreements."
Additionally, if the Holding Company issues additional shares pursuant
to the proposed Stock Option Plan and RRP (as opposed to funding such plans with
shares subsequently reacquired and held as treasury shares) the percentage of
ownership of the Holding Company of those persons purchasing Common Stock in the
Conversion will be diluted. Assuming exercise of all options available under the
Stock Option Plan, the interest of stockholders will be diluted by approximately
9.1%. The award of all shares available under the RRP will dilute the interests
of stockholders by approximately 3.8%. See "Pro Forma Data," "Management -
Benefit Plans - Stock Option and Incentive Plan," and "- Recognition and
Retention Plan" and "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." For financial accounting purposes, certain incentive
grants under the proposed RRP will result in the recording of compensation
expense over the period of vesting. See "Pro Forma Data."
The directors and officers of the Bank are anticipated to purchase an
aggregate of approximately $1,050,000 or approximately 8.7% of the shares
offered in the Conversion at the maximum of the Estimate Valuation Range, or
7.6% at 15% above the maximum of the Estimated Valuation Range, or 11.8% of the
shares offered in the Conversion at the minimum of the Estimated Valuation
Range. Directors and executive officers will also receive awards under the
proposed Stock Option Plan and the proposed RRP. Assuming the purchase of
$1,050,000 of Common Stock in the Conversion by directors and officers in the
aggregate (15 persons), the full vesting of the restricted stock to be awarded
under the proposed RRP and the exercise of all options to be awarded under the
proposed Stock Option Plan in connection with the Conversion, approval of the
Stock Option Plan and the RRP by the stockholders, and the acquisition by the
Holding Company of shares to fund such plans in open-market purchases, the
shares owned by the directors and executive officers in the aggregate would
amount from approximately 21.6% (at 15% above the maximum of the Estimated
Valuation Range) to 25.8% (at the minimum of the Estimated Valuation Range) of
the outstanding shares. In addition, the ESOP is expected to purchase 8% of the
shares sold in the Conversion. This stock ownership, if voted as a block, could
defeat takeover attempts favored by other stockholders. See "Management -
Benefit Plans - Employee Stock Ownership Plan."
Potential Operational Restrictions Associated with Regulatory Oversight
The Bank is subject to extensive regulation, supervision and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Des Moines
and is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of the Bank, the Holding Company will be subject to regulation
and oversight by the OTS. See "Regulation." Such regulation and supervision
governs the activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking industry, including the imposition of
restrictions on the operation of an institution, the classification of assets by
the institution and the adequacy of an institution's allowance for losses on
loans. See "Regulation - Federal Regulation of Savings Associations" and "-
Regulatory Capital Requirements." Any change in such regulation and
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oversight, whether by the OTS, the FDIC or Congress, could have a material
impact on the Holding Company, the Bank and their respective operations.
The Bank's last regular examination by the OTS and by the FDIC was in
May 1995 and April 1991, respectively. Such examinations did not result in any
material changes to the operations, personnel, or finances of the Bank.
Recapitalization of SAIF, Disparity between BIF and SAIF Premiums
Deposits of the Bank are currently insured by the SAIF of the FDIC.
The FDIC also maintains another insurance fund, the Bank Insurance Fund, which
primarily insures commercial bank deposits. For the first three quarters of
1995, both SAIF member institutions and BIF member institutions paid deposit
insurance premiums based on a schedule of from $0.23 to $0.31 per $100 of
deposits. Applicable law requires that both the SAIF and BIF funds be
recapitalized to a ratio of 1.25% of reserves to deposits. The FDIC has
announced that the BIF reached the required reserve ratio during May 1995, but
the SAIF is not expected, absent the changes in law described below, to achieve
that reserve ratio before 2002. The SAIF reserves have not grown as quickly as
the BIF reserves due to a number of factors, including the fact that a
significant portion of SAIF premiums have been and are currently being used to
make payments on bonds ("FICO bonds") issued in the late 1980s by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation.
In August 1995, the FDIC issued final regulations to reduce the
assessment rates for the BIF. Under the revised assessment schedule, which
became effective on June 1, 1995, BIF-insured institutions paid an average of
0.045% of deposits, with the new assessment rates ranging from 0.04% of deposits
to 0.31% of deposits. The FDIC refunded any assessments that it had collected
during 1995 in excess of those due under the revised schedule. On November 14,
1995, the FDIC voted to reduce annual assessments to the legal minimum of
$2,000, effective January 1, 1996 for BIF-insured institutions except for
institutions that were not well-capitalized or were assigned to the higher
supervisory risk categories. The FDIC estimated that 92% of the BIF-insured
institutions would pay only the minimum annual assessment. SAIF-insured
institutions will continue to pay assessments at the current assessment rates
until the SAIF attains the 1.25% reserve ratio.
As a result of the BIF premium reduction, SAIF-insured institutions,
such as the Bank, are likely to be subject to a significant competitive
disadvantage relative to BIF-insured institutions, pending any legislative
action to remedy the disparity. The FDIC has recognized that the disparity may
have adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in capital markets and to attract deposits.
Further, it is not currently known whether SAIF members will be required to pay
higher deposit insurance premiums in the future. In anticipation of the
disparity in BIF and SAIF premiums, the holding companies of several SAIF-
insured institutions have filed applications to charter separate national or
state commercial bank subsidiaries insured by the BIF, which are to be used to
attract and reduce those holding companies' SAIF-insured deposits and reduce
their overall liability for deposit insurance premiums. If this trend expands or
continues, it may result in a reduction in the number and size of OTS-regulated
thrifts, which may, in turn, result in increased OTS assessments for those
institutions that remain regulated by the OTS. It may also accelerate Congress'
consideration of the consolidation of the OTS into one of the other federal
banking regulators.
The proposed Balanced Budget Act of 1995 (the "Budget Act"), which was
vetoed by the President, included provisions that focused on a resolution of the
financial problems of the SAIF. Under the provisions of the Budget Act, all SAIF
member institutions would pay a special assessment to recapitalize the SAIF, and
the assessment base for the payments on the FICO bonds would be expanded to
include the deposits of both BIF- and SAIF-insured institutions. The amount of
the special assessment required to recapitalize the SAIF has been estimated to
be approximately 80 basis points of the SAIF-assessable deposits. This estimate
of the special SAIF assessment is less than the assessment of 85 to 90 basis
points that had been previously estimated. The special assessment would have
been imposed on the first business day of January 1, 1996, or on such other date
prescribed by the FDIC not later than 60 days after enactment of the Budget Act,
based on the amount of SAIF deposits on March 1, 1995. The Budget Act would have
also permitted
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BIF-insured institutions with deposits subject to SAIF assessments to reduce
such SAIF-deposits by 20% in computing those institutions' special assessment.
If an 85 or a 90 basis point assessment were assessed against the Bank's
deposits as of March 31, 1996, the Bank's aggregate special SAIF assessment
would be approximately $577,000 or $611,000, respectively, and an assessment of
80 basis points would be $543,000. The Budget Act also would have provided that
the BIF could not assess regular insurance assessments when it has a reserve
ratio of 1.25% or more except on those of its member institutions that have been
found to have "moderately severe" or "unsatisfactory" financial, operational, or
compliance weaknesses.
The Budget Act also provided for the merger of the BIF and SAIF on
January 1, 1998, with such merger being conditioned upon the prior elimination
of the thrift charter. Congressional leaders had also agreed that Congress
should consider and act upon separate legislation to eliminate the thrift
charter as early as possible in 1996. If adopted, such legislation would require
that the Bank, as a federal savings bank, convert to a bank charter. Such a
requirement to convert to a bank charter could cause the Association to lose the
favorable tax treatment for its bad debt reserves that it currently enjoys under
section 593 of the Internal Revenue Code of 1986, as amended (the "Code") and to
have all or part of its existing bad debt reserves recaptured into income. The
Bank's tax bad debt reserve totalled $1.7 million at March 31, 1996.
The above-described provisions of the Budget Act were not the basis
for the President's veto, and Congressional leaders have indicated that these
provisions will be the basis for future legislation to recapitalize the SAIF. If
enacted by Congress, such legislation would have the effect of reducing the
capital of SAIF member institutions by the after-tax cost of the special SAIF
assessment, plus any related additional tax liabilities. The legislation would
also have the effect of reducing any differential that may otherwise be required
in the assessment rates for the BIF and SAIF.
Management cannot predict whether the above legislation or any other
legislative proposal will be enacted as described above, or, if enacted, the
amount of any special SAIF assessment, whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums or whether, if thrifts are
required to convert to bank charters, there will be any relief from the
additional tax liabilities that would be incurred upon the recapture of their
bad debt reserves. It also cannot be predicted whether some other legislative
action will be taken to address the BIF/SAIF premium disparity and what
consequences such action could have for SAIF members. A significant increase in
SAIF insurance premiums, either absolutely or relatively to BIF premiums, a
significant one-time fee to recapitalize the SAIF or a significant tax liability
associated with the recapture of the bad debt reserve could have an adverse
effect on the operating expenses and results of operations of the Bank. See
"Regulation--Regulation of Federal Savings Associations" and "--Insurance of
Accounts and Regulation by the FDIC."
Pending Legislation Limiting Deduction of Bad Debt
Under section 593 of the Code, thrift institutions such as the Bank,
which meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a tax reserve for bad
debts and to make annual additions thereto, which additions may, within
specified limitations, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, may currently be computed using
an amount based on the Bank's actual loss experience (the "Experience Method"),
or a percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
See "Regulation--Federal and State Taxation--Federal Taxation."
Under pending legislative proposals, the PTI Method would be repealed
and the Bank would be permitted to use only the Experience Method of computing
additions to its bad debt reserve. In addition, the Bank would be required to
recapture (i.e., take into income) over a multi-year period the excess of the
balance of its bad debt reserves as of September 30, 1996 over the greater of
(a) the balance of such reserves as of September 30, 1988 or (b) an amount that
would have been the balance of such reserves as of September 30, 1996 had the
Bank always computed the additions to its reserves using the experience method.
If the Bank were or becomes a "large bank," (i.e., if the basis
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of its assets exceeds $500 million), which it now is not, it would be unable to
make additions to its tax bad debt reserve, would be permitted to deduct bad
debts only as they occur and would additionally be required to recapture over a
multi-year period the excess of the balance of its bad debt reserves as of
September 30, 1996 over the balance of such reserves as of September 30, 1988,
or over a lesser amount if the Bank's loan portfolio has decreased since
September 30, 1988. However, under the proposed legislation, such recapture
requirements would be suspended for each of two successive taxable years
beginning October 1, 1997 if the principle amount of residential loans made by
the Bank during each such year is not less than the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
October 1, 1996. In calculating the average principal amount of loans made each
year, the years with the highest and the lowest principal amount of loans may be
eliminated from the calculation if the Bank so elects. Similar consequences
would result under present law if the Bank later becomes a large bank and fails
to satisfy the qualifying thrift definitional test. However, under present law,
the Bank would be required to recapture its entire bad debt reserves and not
only the excess over the September 30, 1988 balance of its reserves, and there
would be no two-year suspension of the recapture. See "Regulation" and
"Regulation--Federal and State Taxation--Federal Taxation."
Competition
The Bank experiences strong competition in its local market area in
both originating loans and attracting deposits. This competition arises, with
respect to originating loans, from mortgage bankers and to a lesser extent from
commercial banks, savings institutions and credit unions, and with respect to
attracting deposits, from securities firms and mutual funds and from other
financial institutions in its market area. In Clay County alone, where the
Bank's two offices are located, there are 36 commercial banks, 44 credit unions
and ten savings associations, in addition to the Bank. See "Business--Lending
Activities" and "--Market Area and Competition."
Potential Increased Costs of Conversion Resulting from Delayed Offering
The Subscription Offering will expire at noon, Excelsior Springs,
Missouri Time on September __, 1996 unless extended by the Bank and the Holding
Company. If the Offerings are extended beyond __________, 1996, all subscribers
will have the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest. There can be no assurance that the
Offerings will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the Community or Syndicated Community Offering may result in a
significant increase in the costs in completing the Conversion. Significant
changes in the Bank's operations and financial condition, the aggregate market
value of the shares to be issued in the Conversion and general market conditions
may occur during such material delay. In the event the Conversion is not
consummated within 24 months after the date of the Special Meeting, OTS
regulations would require the Bank to charge accrued Conversion costs to then-
current period operations. See "The Conversion - Risk of Delayed Offering."
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock. Consequently, there is not at this time any market for the
Common Stock. The Common Stock has received conditional approval for trading on
the Nasdaq SmallCap Market under the symbol "CBES." However, there can be no
assurance that the Bank will meet Nasdaq SmallCap Market listing requirements,
which include a minimum market capitalization, at least two market makers, and
at least 300 stockholders. The Holding Company will seek to encourage and
assist at least two market makers to make a market in the Common Stock upon
consummation of the Conversion. Trident Securities has indicated its intention
to make a market in the Common Stock, and the Bank anticipates that it will be
able to secure at least one additional market maker for the Common Stock.
However, there can be no assurance that market makers will be obtained, that an
active and liquid market for the Common Stock will develop or be maintained or
that resales of the Common Stock can be made at or above the Purchase Price.
See "Market for Common Stock."
24
<PAGE>
Possible Consequences of Amendment to Plan of Conversion
The Plan of Conversion provides that, if deemed necessary or desirable
by the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended (including an amendment to eliminate the
formation of the holding company as part of the Conversion) by a two-thirds vote
of the respective Boards of Directors of the Bank and the Holding Company, as a
result of comments from regulatory authorities or otherwise, at any time with
the concurrence of the OTS. Moreover, if the Plan of Conversion is amended,
subscriptions which have been received prior to such amendment will not be
refunded unless otherwise required by the OTS. If the Plan of Conversion is
amended in a manner that is deemed to be material to the subscribers by the
Holding Company, the Bank and the OTS, such subscriptions will be resolicited.
No such amendments are currently contemplated, although the Bank reserves the
right to increase or decrease purchase limitations. See "The Conversion -
Approval, Interpretation, Amendment and Termination."
25
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
Community Bank is a federally chartered mutual savings bank
headquartered in Excelsior Springs, Missouri. Community Bank was originally
chartered as a Missouri savings and loan association in 1931 under the name
Excelsior Springs Savings and Loan Association. In 1991, the Bank changed its
name to its current form, and in 1995, the Bank amended its charter to become a
federal mutual savings bank. Its deposits are insured up to the maximum
allowable amount by the SAIF of the FDIC. Through its main office in Excelsior
Springs and its branch office in Kearney, Community Bank primarily serves
communities located in Clay and Ray Counties and to a lesser extent in
surrounding counties in the State of Missouri. At March 31, 1996, Community
Bank had total assets of $86.2 million, deposits of $67.9 million and total
equity of $7.9 million.
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At March 31, 1996, the Bank's total loan
portfolio was $86.0 million, of which 61.0% were one- to four-family residential
mortgage loans, 25.0% were construction and land loans (the vast majority of
which related to single-family residential properties), and 12.4% were consumer
loans. During the nine months ended March 31, 1996 and the fiscal year ended
June 30, 1995, the Bank originated and sold $12.6 million and $4.7 million,
respectively, of one-to four-family residential mortgage loans in the secondary
market. See "Business - Lending Activities."
To a substantially lesser extent, the Bank invests in various
investment securities, including mortgage-backed securities. The Bank utilizes
such investments primarily to provide and maintain liquidity within regulatory
guidelines, to maintain a balance of high quality, diversified investments to
reduce credit risk, and to absorb liquidity when loan demand is low and provide
liquidity when loan demand is high. See "Business - Investment Activities."
Community Bank's executive office is located at 1001 North Jesse James
Road, Excelsior Springs, Missouri 64024. Its telephone number at that address
is (816) 630-6711.
CBES BANCORP, INC.
CBES Bancorp, Inc. was organized in June 1996 by Community Bank for
the purpose of acquiring all of the outstanding capital stock of Community Bank
to be issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Holding Company will be the capital stock of the Bank,
the note evidencing its loan to fund the Bank's ESOP and approximately 50% of
the net proceeds from the Conversion (less the amount to fund the ESOP loan).
Upon Conversion, the Holding Company initially will be a unitary savings and
loan holding company. See "Regulation - Holding Company Regulation" and "Use of
Proceeds." The business of the Holding Company initially will consist only of
the business of Community Bank. The Holding Company has not engaged and, prior
to the Conversion, will not engage in any material operations.
The initial activities of the Holding Company are anticipated to be
funded by such retained proceeds and the income thereon and dividends from
Community Bank, if any. See "Dividends," "Use of Proceeds," "Regulation -
Holding Company Regulation" and "Regulation - Federal and State Taxation."
Thereafter, activities of the Holding Company may also be funded through sales
of additional securities, through borrowings and through income generated by
other activities of the Holding Company. At this time, there are no plans
regarding any other activities.
The executive office of the Holding Company is located at 1001 North
Jesse James Road, Excelsior Springs, Missouri 64024. Its telephone number at
that address is (816) 630-6711.
26
<PAGE>
CAPITALIZATION
The table below sets forth the capitalization, including deposits and
borrowings, of Community Bank as of March 31, 1996 and the pro forma
capitalization of the Holding Company at the minimum, the midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, after giving effect to
the Conversion and based on other assumptions set forth in the table and under
the caption "Pro Forma Data."
<TABLE>
<CAPTION>
Holding Company - Pro Forma Based
Upon Sale at $10.00 Per Share
----------------------------------------------------
Bank's 892,500 1,050,000 1,207,500 1,388,625
Historical Shares Shares Shares Shares
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Deposits/(1)/...................................... $ 67,916 $ 67,916 $ 67,916 $ 67,916 $ 67,916
FHLB advances...................................... 9,000 9,000 9,000 9.000 9,000
-------- -------- -------- --------- --------
Total deposits and borrowings.................. $ 76,916 $ 76,916 $ 76,916 $ 76,916 $ 76,916
======== ======== ======== ======== ========
Capital stock:
Preferred Stock, $.01 par value per share:
authorized - 500,000 shares; assumed
outstanding - none.............................. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value per share:
authorized - 3,500,000 shares; shares to
be outstanding - as shown/(5)/.................. -- 9 11 12 14
Additional paid-in capital........................ -- 8,391 9,965 11,538 13,347
Less common shares acquired by:
ESOP/(3)/........................................ -- (714) (840) (966) (1,111)
RRP.............................................. -- (357) (420) (483) (555)
------- ------- ------- ------- ------
Retained earnings, substantially restricted/(2)/.. 7,896 7,896 7,896 7,896 7,896
------- ------- ------- ------- ------
Unrealized (losses) on available-for-sale
securities, net of tax.......................... (13) (13) (13) (13) (13)
Total stockholders' equity..................... $ 7,883 $ 15,212 $ 16,599 $ 17,984 $ 19,578
======== ======== ========= ======== ========
</TABLE>
----------------------------
/(1)/ No effect has been given to withdrawals from savings
accounts for the purpose of purchasing Common Stock in the
Conversion. Any such withdrawals will reduce pro forma
deposits by the amount of such withdrawals.
/(2)/ See Notes 10, 11 and 12 of the Notes to Consolidated
Financial Statements for information regarding restrictions
on retained income, "Dividends" and "Regulation -
Limitations on Dividends and Other Capital Distributions"
regarding restrictions on future dividend payments and "The
Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Bank" regarding the
liquidation account to be established upon Conversion. Does
not take into account Holding Company dividends, if any,
which may be paid subsequent to the Conversion. See
"Dividends."
/(3)/ Assumes that 8% of the shares issued in the Conversion will
be acquired by the ESOP and that the ESOP will be funded by
the Holding Company. The Bank intends to make contributions
to the ESOP sufficient to service and ultimately retire its
debt. Since the Holding Company will finance the ESOP debt,
the ESOP debt will be eliminated through consolidation and
no liability will be reflected on the Holding Company's
consolidated financial statements. Accordingly, the amount
of stock acquired by the ESOP is shown in this table as a
reduction of total stockholders' equity. See "Management -
Benefit Plans -Employee Stock Ownership Plan."
/(4)/ While management does not currently intend to do so,
following OTS and stockholder approval, shares utilized to
fund the RRP could be obtained from newly issued shares. In
the event RRP shares are obtained from authorized but
unissued shares, the existing ownership of current
stockholders would be diluted by approximately 3.8%.
However, there would be no impact on stockholders' equity.
/(5)/ Does not reflect the shares of Common Stock that may be
reserved for issuance pursuant to the proposed Stock Option
Plan and the proposed RRP. See "Management--Benefit Plans."
27
<PAGE>
\\ PRO FORMA DATA
The following table sets forth the historical consolidated net
earnings, total equity and per share data of the Bank at and for the nine months
ended March 31, 1996 and at and for the year ended June 30, 1995, and after
giving effect to the Conversion, the pro forma consolidated net income,
stockholders' equity and per share data of the Holding Company at and for the
same period. The pro forma data is computed on the assumptions that (i) the
specified number of shares of Common Stock were sold at the beginning of the
specified period and yielded net proceeds to the Holding Company as indicated
and (ii) such net proceeds were invested by the Bank and the Holding Company at
the beginning of the period to yield a return of 5.38% and 5.63% for the nine
months ended March 31, 1996 and the fiscal year ended June 30, 1995,
respectively. The assumed return is based on the yield on one-year U.S.
Government securities at March 31, 1996 and June 30, 1995, respectively, which
is deemed by management to more accurately reflect pro forma reinvestment rates
than the arithmetic average of the Bank's weighted average yield on all
interest-earning assets and the weighted average rate paid on deposits. After
adjusting for applicable federal and state taxes totaling 40%, the after-tax
yields were equal to 3.23% and 3.38% for the nine months ended March 31, 1996
and the fiscal year ended June 30, 1995, respectively. The table also assumes
that the proposed RRP awards equal to 4% of the shares sold in the Conversion
were purchased by the RRP at $10.00 per share in the open market and fixed
expenses (including a management fee of $150,000 payable to Trident Securities)
were $525,000. No effect has been given to the stock reserved for issuance
under the Stock Option Plan. Actual Conversion expenses may be more or less than
those estimated because fees paid may vary depending upon whether selected
broker-dealers are used, market conditions and other factors. The pro forma net
earnings amounts derived from the assumptions set forth herein should not be
considered indicative of the actual results of operations of the Holding Company
that would have been attained for any period if the Conversion had been actually
consummated at the beginning of such period, and the assumptions regarding
investment yields should not be considered indicative of the actual yields
expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased to reflect changes in market and financial conditions
prior to the close of the Offerings. However, if the aggregate Purchase Price
of the Common Stock actually sold in the Conversion is below $8,925,000 or more
than $13,886,250 (15% above the maximum of the Estimated Valuation Range)
subscribers will be offered the opportunity to modify or cancel their
subscriptions. See "The Conversion - Stock Pricing and Number of Shares to be
Issued."\\
28
<PAGE>
<TABLE>
<CAPTION>
\\ At or For the Nine Months Ended March 31, 1996
-------------------------------------------------------------------------
892,500 1,050,000 1,207,500 1,388,625
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
(Minimum) (Midpoint) (Maximum) (Supermax)/(1)/
---------- ----------- ---------- ---------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C>
Gross proceeds......................................... $ 8,925 $ 10,500 $ 12,075 $ 13,886
Less estimated expenses................................ 525 525 525 525
-------- ---------- ---------- ----------
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by ESOP.................... (714) (840) (966) (1,111)
Less Common Stock acquired by RRP..................... (357) (420) (483) (555)
-------- ---------- ---------- ----------
Estimated net proceeds available for
investment.......................................... $ 7,329 $ 8,715 $ 10,101 $ 11,695
======== ========== ========== ==========
Consolidated net earnings:
Historical............................................ $ 390 $ 390 $ 390 $ 390
Pro forma adjustments:
Net earnings from proceeds/ (2)/..................... 177 211 245 283
Less pro forma ESOP adjustment /(3)/................. (32) (38) (43) (50)
Less pro forma RRP adjustment /(4)/.................. (32) (38) (43) (50)
-------- ---------- ---------- ----------
Pro forma net earnings............................. $ 503 $ 525 $ 549 $ 573
======== ========== ========== ==========
Consolidated net earnings per share: /(5)(6)/
Historical............................................ $ 0.47 $ 0.40 $ 0.35 $ 0.30
Pro forma adjustments:
Net earnings from proceeds /(2)/..................... 0.22 0.22 0.22 0.23
Less pro forma ESOP adjustment /(3)/................. (0.04) (0.04) (0.04) (0.04)
Less pro forma RRP adjustment /(4)/.................. (0.04) (0.04) (0.04) (0.04)
-------- ---------- ---------- ----------
Pro forma earnings per share....................... $ 0.61 $ 0.54 $ 0.49 $ 0.45
======== ========== ========== ==========
Consolidated stockholders' equity (book value):/(7)/
Historical............................................ $ 7,883 $ 7,883 $ 7,883 $ 7,883
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by:
ESOP................................................. (714) (840) (966) (1,111)
RRP /(4)/............................................ (357) (420) (483) (555)
-------- ---------- ---------- ----------
Pro forma stockholders' equity..................... $ 15,212 $ 16,598 $ 17,984 $ 19,578
======== ========== ========== ==========
Consolidated stockholders' equity per share: /(6)(8)/
Historical............................................ $ 8.83 $ 7.51 $ 6.53 $ 5.68
Estimated net Conversion proceeds..................... 9.41 9.50 9.56 9.62
Less Common Stock acquired by:
ESOP................................................. (0.80) (0.80) (0.80) (0.80)
RRP /(4)/............................................ (0.40) (0.40) (0.40) (0.40)
-------- ---------- ---------- ----------
Pro forma stockholders' equity/(9)/................ $ 17.04 $ 15.81 $ 14.89 $ 14.10
======== ========== ========== ==========
Pro forma price to book value.......................... 58.69% 63.25% 67.16% 70.92%
======== ========== ========== ==========
Pro forma price to earnings (P/E ratio) /(10)/......... 12.30 13.89 15.31 16.67
======== ========== ========== ==========
Number of shares used in calculating
earnings per share.................................... 826,455 972,300 1,118,145 1,285,867
======== ========== ========== ==========
Number of shares used in calculating
equity per share...................................... 892,500 1,050,000 1,207,500 1,388,625
======== ========== ========== ==========
</TABLE>
(footnotes begin on second following page)\\
29
<PAGE>
<TABLE>
<CAPTION>
\\ At or For the Year Ended June 30, 1995
------------------------------------------------------------------------
892,500 1,050,000 1,207,500 1,388,625
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
(Minimum) (Midpoint) (Maximum) (Supermax)/(1)/
--------- ---------- ---------- --------------
(In thousands, except per share amount)
<S> <C> <C> <C> <C>
Gross proceeds......................................... $ 8,925 $ 10,500 $ 12,075 $ 13,886
Less estimated expenses................................ 525 525 525 525
-------- ---------- ---------- ----------
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by ESOP.................... (714) (840) (966) (1,111)
Less Common Stock acquired by RRP..................... (357) (420) (483) (555)
--------- ---------- ---------- ----------
Estimated net proceeds available for
investment.......................................... $ 7,329 $ 8,715 $ 10,101 $ 11,695
======== ========== ========== ==========
Consolidated net earnings:
Historical............................................ $ 164 $ 164 $ 164 $ 164
Pro forma adjustments:
Net earnings from proceeds/ (2)/..................... 248 294 341 395
Less pro forma ESOP adjustment /(3)/................. (43) (50) (58) (67)
Less pro forma RRP adjustment /(4)/.................. (43) (50) (58) (67)
-------- ---------- ---------- ----------
Pro forma net earnings............................. $ 326 $ 358 $ 389 $ 425
======== ========== ========== ==========
Consolidated net earnings per share: /(5)(6)/
Historical............................................ $ 0.20 $ 0.17 $ 0.15 $ 0.13
Pro forma adjustments:
Net earnings from proceeds /(2)/..................... 0.30 0.30 0.30 0.31
Less pro forma ESOP adjustment /(3)/................. (0.05) (0.05) (0.05) (0.05)
Less pro forma RRP adjustment /(4)/.................. (0.05) (0.05) (0.05) (0.05)
-------- ---------- ---------- ----------
Pro forma earnings per share....................... $ 0.40 $ 0.37 $ 0.35 $ 0.34
======== ========== ========== ==========
Consolidated stockholders' equity (book value):/(7)/
Historical............................................ $ 7,481 $ 7,481 $ 7,481 $ 7,481
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by:
ESOP................................................. (714) (840) (966) (1,111)
RRP /(4)/............................................ (357) (420) (483) (555)
-------- ---------- ---------- ----------
Pro forma stockholders' equity..................... $ 14,810 $ 16,196 $ 17,582 $ 19,176
======== ========== ========== ==========
Consolidated stockholders' equity per share: /(6)(8)/
Historical............................................ $ 8.38 $ 7.12 $ 6.20 $ 5.39
Estimated net Conversion proceeds..................... 9.41 9.50 9.57 9.62
Less Common Stock acquired by:
ESOP................................................. (0.80) (0.80) (0.80) (0.80)
RRP /(4)/............................................ (0.40) (0.40) (0.40) (0.40)
-------- ---------- ---------- ----------
Pro forma stockholders' equity per share/(9)/...... $ 16.59 $ 15.42 $ 14.57 $ 13.81
======== ========== ========== ==========
Pro forma price to book value.......................... 60.28% 64.85% 68.63% 72.41%
======== ========== ========== ==========
Pro forma price to earnings (P/E ratio) /(10)/......... 25.00 27.03 28.57 29.41
======== ========== ========== ==========
Number of shares used in calculating
earnings per share.................................... 828,240 974,400 1,120,560 1,288,644
======== ========== ========== ==========
Number of shares used in calculating
equity per share...................................... 892,500 1,050,000 1,207,500 1,388,625
======== ========== ========== ==========
</TABLE>
(footnotes begin on following page)\\
30
<PAGE>
\\_____________________
/(1)/ Gives effect to the sale of an additional 181,125 shares in the
Conversion, which may be issued as a result of an increase in the pro
forma market value of the Holding Company and the Bank as converted,
without the resolicitation of subscribers or any right of cancellation.
The issuance of such additional shares will be conditioned on a
determination of the independent appraiser that such issuance is
compatible with its determination of the estimated pro forma market
value of the Holding Company and the Bank as converted. See "The
Conversion--Stock Pricing and Number of Shares to be Issued."
/(2)/ No effect has been given to withdrawals from accounts for the purpose
of purchasing Common Stock in the Conversion.
/(3)/ It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire
such shares will be borrowed by the ESOP (at an interest rate equal to
the prime rate as published in The Wall Street Journal on the closing
date of the Conversion, which rate is currently 8.25%), from the net
proceeds from the Conversion retained by the Holding Company. The
amount of this borrowing has been reflected as a reduction from gross
proceeds to determine estimated net proceeds. The Bank intends to make
contributions to the ESOP in amounts at least equal to the principal
and interest requirement of the debt. As the debt is paid down,
stockholders' equity will be increased. The Bank's payment of the ESOP
debt is based upon equal installments of principal over a 10-year
period, assuming a combined federal and state tax rate of 40%. Interest
income earned by the Holding Company on the ESOP debt offsets the
interest paid by the Bank on the ESOP loan. No reinvestment is assumed
on proceeds contributed to fund the ESOP. The ESOP expense reflects
adoption of Statement of Position ("SOP") 93-6, which will require
recognition of expense based upon shares committed to be released and
the exclusion of unallocated shares from earnings per share
computations. The valuation of shares committed to be released would be
based upon the average market value of the shares during the year,
which, for purposes of this calculation, was assumed to be equal to the
$10.00 per share Purchase Price. See "Management of the Bank--Benefits
--Employee Stock Ownership Plan."
/(4)/ In calculating the pro forma effect of the RRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the RRP at the beginning of the period presented in open
market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance
of authorized but unissued shares of the Common Stock instead of open
market purchases would dilute the voting interests of existing
stockholders by approximately 3.85% and pro forma net income per share
would be $0.59, $0.53, $0.48 and $0.44 for the nine months ended March
31, 1996 and $0.39, $0.36, $0.35 and $0.33 for the fiscal year ended
June 30, 1995 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the nine months ended
March 31, 1996 and for the fiscal year ended June 30, 1995,
respectively, and pro forma stockholders' equity per share would be
$16.77, $15.58, $14.71 and $13.94 at March 31, 1996 and $16.34, $15.22,
$14.39 and $13.63 at June 30, 1995 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range at March 31,
1996 and June 30, 1995, respectively. Shares issued under the RRP vest
20% per year and, for purposes of this table, compensation expense is
recognized on a straight-line basis over each vesting period. In the
event the fair market value per share is greater than $10.00 per share
on the date of stockholder approval of the RRP, total RRP expense would
increase. No effect has been given to the shares reserved for issuance
under the proposed Stock Option Plan. If stockholders approve the Stock
Option Plan following the Conversion, the Holding Company will have
reserved for issuance under the Stock Option Plan authorized but
unissued shares of Common Stock representing an amount of shares equal
to 10% of the shares sold in the Conversion. If all of the options were
to be exercised utilizing these authorized but unissued shares rather
than treasury shares (which could be acquired), the voting interests of
existing stockholders would be diluted by approximately 9.1%. See
"Management of the Bank--Benefits--1996 Stock Option Plan" and "--
Management Recognition Plan."
/(5)/ Per share amounts are based upon shares outstanding of 826,455,
972,300, 1,118,145 and 1,285,867, and of 828,240, 974,400, 1,120,560
and 1,288,644 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the nine months ended
March 31, 1996 and the fiscal year ended June 30, 1995, respectively,
which includes the shares of Common Stock sold in the Conversion less
the number of shares assumed to be held by the ESOP not committed to be
released within the first two months and year, respectively, following
the Conversion.
/(6)/ Historical per share amounts have been computed as if the shares of
Common Stock expected to be issued in the Conversion had been
outstanding at the beginning of the period or on the date shown, but
without any adjustment of historical net income or historical retained
earnings to reflect the investment of the estimated net proceeds of the
sale of shares in the Conversion, the additional ESOP expense or the
proposed RRP expense, as described above.
31
<PAGE>
/(7)/ "Book value" represents the difference between the stated amounts of
the Bank's assets and liabilities. The amounts shown do not reflect the
liquidation account that will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in
the Conversion, or the federal income tax consequences of the
restoration to income of the Bank's special bad debt reserves for
income tax purposes, which would be required in the unlikely event of
liquidation. See "The Conversion--Effects of Conversion to Stock Form
on Depositors and Borrowers of the Bank" and "Taxation." The amounts
shown for book value do not represent fair market values or amounts
distributable to stockholders in the unlikely event of liquidation.
/(8)/ Per share amounts are based upon shares outstanding of 892,500,
1,050,000, 1,207,500 and 1,388,625 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range,
respectively.
/(9)/ Neither represents, nor is intended to represent, possible future price
appreciation or depreciation of the Common Stock.
/(10)/ Annualized.\\
32
<PAGE>
\\
PRO FORMA REGULATORY CAPITAL
Set forth below is a summary of the Bank's compliance with the
regulatory capital standards as of March 31, 1996, on an historical and a pro
forma basis assuming that the indicated number of shares were sold as of such
date.
<TABLE>
<CAPTION>
Pro Forma Based Upon Sale of
-------------------------------------------------------------------------------------------------
892,500 Shares 1,050,000 Shares
(Minimum of Estimated (Midpoint of Estimate
Historical Valuation Range) Valuation Range)
------------------------- ----------------------------- ------------------------------
Amount Percent/(1)/ Amount/(2)/ Percent/(1)(2)/ Amount/(2)/ Percent/(1)(2)/
---------- ------------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles..................... $7,883 9.15% $11,012 12.23% $11,611 12.80%
====== ===== ======= ===== ======= =====
Tangible capital/(2)/........... $7,896 9.15% $11,025 12.23% $11,624 12.79%
Tangible capital requirement/(5)/ 1,295 1.50 1,353 1.50 1,364 1.50
------ ----- ------- ----- ------- -----
Excess........................ $6,601 7.65% $ 9,672 10.73% $10,260 11.29%
====== ===== ======= ===== ======= =====
Core capital/(2)/............... $7,896 9.15% $11,025 12.23% $11,624 12.79%
Core capital requirement/(3)(5)/ 2,591 3.00 2,705 3.00 2,727 3.00
------ ----- ------- ----- ------- -----
Excess........................ $5,305 6.15% $ 8,321 9.23% 8,896 9.79%
====== ===== ======= ===== ======= =====
Risk-based capital/(2)(4)/...... $7,725 12.04% $10,854 16.71% $11,453 17.60%
Risk-based capital
requirement/(5)(6)/............ 5,133 8.00 5,195 8.00 5,207 8.00
------ ----- ------- ----- ------- -----
Excess........................ $2,592 4.04% $ 5,659 8.71% $ 6,247 9.60%
====== ===== ======= ===== ======= =====
- ---------------------------
<CAPTION>
1,388,625 Shares
1,207,500 Shares (15% Above the
(Maximum of Estimated (Maximum of Estimated
Valuation Range) Valuation Range)
---------------------------- ----------------------------
Amount/(2)/ Percent/(1)(2)/ Amount/(2)/ Percent/(1)(2)/
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles..................... $12,209 13.35% $12,897 13.97%
======= ===== ======= =====
Tangible capital/(2)/........... $12,222 13.34% $12,910 13.96%
Tangible capital requirement/(5)/ 1,374 1.50 1,387 1.50
------- ----- ------- -----
Excess........................ $10,848 11.84% $11,523 12.46%
======= ===== ======= =====
Core capital/(2)/............... $12,222 13.34% $12,910 13.96%
Core capital requirement/(3)(5)/ 2,749 3.00 2,774 3.00
------- ----- ------- -----
Excess........................ $ 9,473 10.34% $10,137 10.96%
======= ===== ======= =====
Risk-based capital/(2)(4)/...... $12,051 18.48% $12,739 19.48%
Risk-based capital
requirement/(5)(6)/............ 5,218 8.00 5,231 8.00
------- ----- ------- -----
Excess........................ $ 6,833 10.48% $ 7,508 11.48%
======= ===== ======= =====
- ---------------------------
</TABLE>
/(1)/ Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
/(2)/ Assumes retention by the Holding Company of 50% of the net Conversion
proceeds (less the amount of the loan made to the ESOP from the Holding
Company's portion of the net Conversion proceeds). The remaining 50% of
the net Conversion proceeds will be provided to the Bank. For regulatory
capital purposes, the Bank's capital will be reduced by the anticipated
purchases by the ESOP of 8% of the shares of Common Stock sold in the
Conversion and the proposed issuance of 4% of the shares of Common Stock
sold in the Conversion for the RRP. For purposes of calculating regulatory
capital, the valuation allowance applicable to investment securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
115 has been excluded from capital ($13,000 at March 31, 1996). See Note
11 of Notes to Consolidated Financial Statements.
/(3)/ In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective December 31, 1990. The proposal calls for an OTS core capital
requirement of at least 3% of total adjusted assets for thrifts that
receive the highest supervisory rating for safety and soundness, with a 4%
to 5% core capital requirement for all other thrifts. If adopted as
proposed, management would expect the Bank to be subject to a 4% to 5%
core capital requirement. See "Regulation - Regulatory Capital
Requirements."
/(4)/ Includes $347,000 of general valuation allowances which qualify as
supplementary capital, reduced by $518,000 of assets required to be
deducted, representing land loans in excess of 80% loan-to-value. See
"Regulation - Regulatory Capital Requirements."
/(5)/ Assumes investment of net proceeds in U.S. Government agency securities
which have a 20% risk weight.
/(6)/ The OTS utilizes a net market value methodology to measure the interest
rate risk exposure of savings associations. Effective March 31, 1996,
institutions with more than normal interest rate risk, as defined by OTS
regulations, are required to make a deduction from capital equal to 50% of
its interest rate risk exposure multiplied by the present value of its
assets. Based upon this methodology, at March 31, 1996, the latest date
for which such information is available, the Bank's interest rate risk
exposure to a 200 basis point increase in interest rates was considered
"normal" under this regulation. However, since the Bank has assets of less
than $300 million and a total risk-based capital ratio in excess of 12%,
it is exempt from this requirement unless the OTS determines otherwise.
See "Regulation - Regulatory Capital Requirements."
\\
33
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of Common Stock in the Conversion, based on
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, are estimated at $8.4 million, $10.0 million, $11.6 million and
$13.4 million, respectively. See "Pro Forma Data." The Holding Company will
retain up to 50% of the net Conversion proceeds as its initial capitalization
and will use the balance of the net Conversion proceeds to purchase all of the
common stock of the Bank to be issued upon Conversion. The Holding Company
intends to lend a portion of the net proceeds retained by it to the ESOP to
facilitate its purchase of 8% of the Common Stock in the Conversion. It is
anticipated that the funds will be borrowed by the ESOP at an interest rate
equal to the prime rate as published in the Wall Street Journal on the closing
date of the Conversion, which rate is currently 8.25%. It is anticipated that
the ESOP loan will have a term of 10 years. Based upon the issuance of shares
at the minimum and maximum of the Estimated Valuation Range, the loan to the
ESOP to purchase 8% of the Common Stock would be $714,000 and $966,000,
respectively. See "Management - Benefit Plans - Employee Stock Ownership Plan."
The remainder of the proceeds will be invested on an interim basis in short- and
intermediate-term securities. These funds would be available for general
corporate purposes which may include expansion of operations through
acquisitions of other financial service organizations and diversification into
other related or unrelated businesses, or for investment purposes. See
"Regulation - Holding Company Regulation" for a discussion of OTS activity
restrictions. Currently, there are no specific plans being considered for the
expansion of the business of the Holding Company. In addition, the funds may be
used to infuse additional capital to the Bank when and if appropriate.
The net proceeds retained by the Holding Company may also be used to
repurchase the Holding Company's Common Stock as permitted by the OTS. Upon
completion of the Conversion, the Board of Directors will have the authority to
adopt stock repurchase plans, subject to statutory and regulatory requirements.
Since the Holding Company has not yet issued stock, there is currently
insufficient information upon which an intention to repurchase stock could be
based.
Based upon facts and circumstances which may arise following Conversion, the
Board of Directors may determine to repurchase stock in the future. Such facts
and circumstances may include but are not limited to: (i) market and economic
factors such as the price at which the stock is trading in the market, the
volume of trading, the attractiveness of other investment alternatives in terms
of the rate of return and risk involved in the investment, the ability to
increase the book value or earnings per share of the remaining outstanding
shares, and the effect on the Holding Company's return on equity; (ii) the
avoidance of dilution to stockholders by not having to issue additional shares
to cover the exercise of stock options or to fund employee stock benefit plans;
and (iii) any other circumstances in which repurchases would be in the best
interests of the Holding Company and its shareholders.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Holding Company and the Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that capital will be adequate taking into account, among other things, the level
of non-performing assets and other loans of concern, the Holding Company's and
the Bank's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
Subject to certain exceptions, no repurchases may be implemented within the
first year following Conversion pursuant to OTS regulations. A stock repurchase
program may have the effect of: (i) reducing the overall market value of the
Holding Company, (ii) increasing the cost of capital and (iii) promoting a
temporary demand for Common Stock.
Should the Holding Company implement a restricted stock plan (i.e., the RRP)
following the Conversion, a portion of the net proceeds may be used to fund the
purchase by the plan of Common Stock in an amount up to 4% of the shares sold
in the Conversion. The actual cost of such purchase will depend on the number
of shares sold in the Conversion and the market price at the time of purchase.
Based upon the minimum and the maximum of the Estimated Valuation Range and on a
$10.00 per share purchase price, the cost would be approximately $357,000 and
$483,000, respectively.
34
<PAGE>
The net proceeds from the sale of the Common Stock in the Conversion will
substantially increase the capital of Community Bank. Community Bank will use
the net proceeds for general corporate business purposes, such as lending and
investment activities in the ordinary course of business. A portion of the
proceeds may be used to repay FHLB advances. On an interim basis, the proceeds
will be invested by the Bank in short- and intermediate-term securities. OTS
regulations permit Tier 1 associations, such as the Bank, to make capital
distributions, subject to certain limitations. See "Regulation--Limitations on
Dividends and Other Capital Distributions." Assuming net proceeds from the sale
of Common Stock in the Conversion are $10.0 million (representing the midpoint
of the Estimated Valuation Range), and assuming net income for the Bank of
$93,000 for the three months ended March 31, 1996, the Bank would be permitted
to make a capital distribution of $3.2 million to the Holding Company.
Notwithstanding the foregoing, the Holding Company and the Bank reserve the
right to use the proceeds in any manner authorized by law.
The actual net proceeds may be more or less than the estimated net proceeds
calculated as shown under "Pro Forma Data," above. Additionally, the actual
expenses may be more or less than those estimated. See "The Conversion - Stock
Pricing and Number of Shares to be Issued."
DIVIDENDS
Although no decision has been made yet regarding the payment of dividends,
the Holding Company may consider a policy of paying cash dividends on the Common
Stock following the Conversion. Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors in its discretion, which
will take into account the Holding Company's consolidated financial condition
and results of operations, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors. Therefore, no assurances can be made as to the future ability of the
Holding Company to pay dividends. Delaware law generally limits dividends of
the Holding Company to an amount equal to the excess of its net assets (the
amount by which total assets exceeds total liabilities) over its paid-in capital
or, if there is no excess, to its net profits for the current and immediately
preceding fiscal year.
It is presently anticipated that the Holding Company will not conduct
significant operations independent of those of the Bank for some time following
the Conversion. As such, the Holding Company does not expect to have any
significant source of income other than earnings on the net Conversion proceeds
retained by the Holding Company and dividends from Community Bank, if any.
Consequently, the ability of the Holding Company to pay cash dividends to its
stockholders will be dependent upon such retained proceeds and earnings thereon,
and upon the ability of the Bank to pay dividends to the Holding Company.
Management believes that, upon completion of the Conversion, the Bank will
qualify as a Tier 1 institution, and thereby be entitled to make capital
distributions without OTS approval in an amount not exceeding 100% of its net
income year-to-date plus 50% of the Bank's capital surplus, as measured at the
beginning of the calendar year. See "Regulation - Regulatory Capital
Requirements" and "- Limitations on Dividends and Other Capital Distributions."
Assuming only the minimum number of shares are sold in the Conversion, the
purchase of the Bank's stock by the Holding Company in exchange for
substantially all the net proceeds from the Conversion (less 50% to be retained
by the Holding Company) and the investment of such proceeds in 20% risk-weighted
assets, on a pro forma basis as of March 31, 1996, the Bank would have had risk-
based capital of $5.7 million above its fully phased-in, risk-based capital
requirement. The 50% of net proceeds retained by the Holding Company would be
immediately available for the payment of dividends. See "Regulation -
Regulatory Capital Requirements" and "- Limitations on Dividends and Other
Capital Distributions." Earnings appropriated to the Bank's "excess" bad debt
reserves and deducted for federal income tax purposes cannot be used by the Bank
to pay cash dividends to the Holding Company without adverse tax consequences.
See "Regulation - Federal and State Taxation."
MARKET FOR COMMON STOCK
35
<PAGE>
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock and no assurance
can be given that an established and liquid trading market for the Common Stock
will develop. Depending on the number of shares sold, it is expected that
following the Conversion, the Common Stock will be traded in the over-the-
counter market. The Holding Company has applied to list the Common Stock on the
Nasdaq SmallCap Market under the symbol "CBES." However, there can be no
assurance that the Holding Company will meet Nasdaq SmallCap Market listing
requirements, which include a minimum market capitalization, at least two market
makers, and at least 300 stockholders. At the close of the Conversion, the
Holding Company, assisted by Trident Securities, will use its best efforts to
encourage and assist market makers to establish and maintain a market for the
Common Stock and to list the Common Stock on the Nasdaq SmallCap Market,
although there can be no assurance that it will succeed in doing so. Trident
Securities has indicated its intention to make a market in the Holding Company's
Common Stock upon consummation of the Conversion, depending upon the volume or
trading activity in the Common Stock and subject to compliance with applicable
laws and other regulatory requirements.
The development of a public market that has depth, liquidity and orderliness
depends upon the presence in the marketplace of a sufficient number of willing
buyers and sellers at any given time, over which neither the Holding Company nor
any market maker has any control. Accordingly, there can be no assurance that
an active or liquid trading market for the Common Stock will develop, or that if
a market develops, it will continue. Furthermore, there can be no assurance that
purchasers will be able to sell their shares at or above the Purchase Price.
See "The Conversion - Stock Pricing and Number of Shares to be Issued."
36
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
CONSOLIDATED STATEMENTS OF EARNINGS
The following Consolidated Statements of Earnings of the Bank for the fiscal
years ended June 30, 1995 and 1994 have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, whose report thereon appears elsewhere
herein. The Consolidated Statements of Earnings for the nine months ended March
31, 1996 and 1995 are unaudited and have been prepared in accordance with the
requirements for a presentation of interim financial statements and are in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments, consisting of normal recurring adjustments, that
are necessary for a fair presentation of the interim periods, have been
reflected. The results of operations for the nine months ended March 31, 1996
are not necessarily indicative of the results of operations that may be expected
for the fiscal year ending June 30, 1996. These Statements should be read in
conjunction with the Consolidated Financial Statements of the Bank and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Nine Months ended Year ended
March 31, June 30,
----------------------- ------------------------
1996 1995 1995 1994
--------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable.................................... $4,811,056 $3,712,366 $5,249,045 $3,882,043
Mortgage-backed securities.......................... 129,261 233,026 304,343 398,903
Investment securities............................... 78,407 128,838 173,022 191,603
Loans held for sale................................. 51,631 792 25,820 32,125
Other............................................... 60,505 51,910 65,633 149,979
---------- ---------- ---------- ----------
Total interest income............................. 5,130,860 4,126,932 5,817,863 4,654,653
---------- ---------- ---------- ----------
Interest expense:
Deposits (note 6)................................... 2,484,979 1,782,516 2,577,149 2,090,280
FHLB advances....................................... 604,241 319,314 568,783 2,461
---------- ---------- ---------- ----------
Total interest expense............................ 3,089,220 2,101,830 3,145,932 2,092,741
---------- ---------- ---------- ----------
Net interest income............................... 2,041,640 2,025,102 2,671,931 2,561,912
Provision for loan losses (note 4)................... 188,341 143,056 171,277 33,590
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................................. 1,853,299 1,882,046 2,500,654 2,528,322
---------- ---------- ---------- ----------
Noninterest income:
Gain on sales of loans, net......................... 139,277 4,948 42,106 140,331
Customer service charges............................ 147,046 143,214 193,017 203,041
Loan servicing fees................................. 71,545 54,516 73,774 63,470
Net realized gain (loss) on sale of investment and
mortgage-backed securities available-for-sale...... 54,205 -- -- (135,933)
Writedown of investment in mutual fund (note 2)..... -- (314,148) (314,148) --
Other............................................... 93,022 76,576 101,940 103,269
---------- ---------- ---------- ----------
Total noninterest income.......................... 505,095 (34,894) 96,689 374,178
---------- ---------- ---------- ----------
Noninterest expense:
Compensation, payroll taxes and fringe benefits..... 914,857 809,447 1,080,572 952,462
Office property and equipment....................... 201,325 174,783 245,411 213,257
Data processing..................................... 128,246 119,034 162,722 152,215
Federal insurance premiums.......................... 118,058 104,274 139,020 136,103
Advertising......................................... 50,642 41,182 55,875 34,780
Real estate owned and repossessed assets............ 11,404 25,502 23,243 1,161
Other............................................... 336,733 334,596 425,704 359,812
---------- ---------- ---------- ----------
Total noninterest expense......................... 1,761,265 1,608,818 2,132,547 1,849,790
---------- ---------- ---------- ----------
Earnings before income taxes...................... 597,129 238,334 464,796 1,052,710
Income taxes (note 8)................................ 207,098 210,650 301,238 352,000
---------- ---------- ---------- ----------
Net earnings........................................ $ 390,031 $ 27,684 $ 163,558 $ 700,710
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This discussion is intended to assist in understanding the financial
condition and results of operations of the Bank. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto and the other sections contained in
this Prospectus.
The Holding Company has only recently been formed and, accordingly,
has no results of operations. The following discussion relates only to the
financial condition and results of operations of the Bank.
The earnings of the Bank depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage and consumer loans and other
investments, and the interest paid on interest-bearing liabilities, consisting
of deposits and FHLB advances. Net interest income is a function of the Bank's
"interest rate spread," which is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest-bearing liabilities. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Bank, like other financial
institutions, is subject to interest-rate risk to the degree that its interest-
earning assets mature or reprice at different times, or on different bases, than
its interest-bearing liabilities. The Bank's operating results are also
affected by the amount of its non-interest income, including gain on the sales
of loans, service charges, loan servicing income and other income. Non-interest
expense consists principally of employee compensation and benefits, occupancy
expense, data processing, federal insurance premiums, advertising, real estate
owned operations, and other operating expenses. The Bank's operating results
are significantly affected by general economic and competitive conditions, in
particular, the changes in market interest rates, government policies and
actions by regulatory authorities.
Financial Condition
Total assets decreased $6.9 million, or 7.4%, to $86.2 million at
March 31, 1996 from $93.1 million at June 30, 1995. This was primarily the
result of decreases of $3.3 million in mortgage-backed securities, $1.5 million
in loans receivable, net and $2.0 million in investment securities and other
interest-earning assets. Additionally, deposits decreased by $358,000 and FHLB
advances by $6.9 million, partially offset by an increase of total equity of
$402,000.
Mortgage-backed securities decreased $3.3 million, or 85.8%, to
$549,000 at March 31, 1996 from $3.9 million at June 30, 1995 reflecting the
sale of $2.9 million of fixed rate securities in December 1995.
Loans receivable, net decreased by $1.6 million, or 2.0%, to $77.3
million at March 31, 1996 from $78.9 million at June 30, 1995 due to reductions
in one- to four-family portfolio loans of $2.8 million and consumer loans of
$600,000, partially offset by an increase in land loans of $1.6 million due to
an increase in demand for the construction of single-family housing.
Investment securities decreased $1.1 million, or 34.9%, to $2.0
million at March 31, 1996 from $3.0 million at June 30, 1995 due to the sale of
$1.1 million of mutual funds which were reinvested in loans.
Deposits decreased $358,000, or 0.5%, to $67.9 million at March 31,
1996 from $68.3 million at June 30, 1995. Interest credited during the nine
months ended March 31, 1996 totaled $2.0 million, while withdrawals exceeded
deposits by $2.4 million.
38
<PAGE>
FHLB advances decreased $6.9 million, or 43.3%, to $9.0 million at
March 31, 1996 from $15.9 million at June 30, 1995. Cash flows from the sale of
mortgage-backed securities and mutual funds along with principal paydowns from
portfolio loans were used to pay down advances.
Total equity increased $402,000, or 5.4%, to $7.9 million at March 31,
1996 due to $390,000 of net earnings during the nine months ended March 31, 1996
and a $12,000 unrealized gain on investment securities available for sale.
Analysis of Net Interest Income
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
39
<PAGE>
The following table presents for the periods indicated the total
dollar amount of interest income from average interest-earning assets and the
resultant yields as well as the total dollar amount of interest expense on
average interest-bearing liabilities and the resultant rates. The average
yields include loan fees which are considered adjustments to yields. The amount
of interest income resulting from the recognition of loan fees was $211,000,
$220,000, $313,000 and $123,000 for the nine months ended March 31, 1996 and
1995 and for the fiscal years ended June 30, 1995 and 1994, respectively. No
tax equivalent adjustments were made. All average balances are monthly average
balances. The Bank's management does not believe that the use of monthly
balances instead of daily balances has caused a material difference in the
information presented. Non-accruing loans have been included in the table as
loans carrying a zero yield.
<TABLE>
<CAPTION>
Nine Months Ended March 31,
----------------------------------------------------------------------------
1996 1995
-------------------------------------- ------------------------------------
At March 31, 1996
------------------------ Average Average
Outstanding Outstanding Interest Outstanding Interest
Balance Yield/Rate Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
----------- ----------- ----------- ------------ ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)........... $77,273 8.03% $77,834 $ 4,863 8.33% $62,632 $ 3,713 7.90%
Mortgage-backed securities..... 549 6.93 2,482 129 6.93 4,405 233 7.05
Investment securities.......... 1,981 4.48 2,309 78 4.50 3,026 129 5.68
Investments in other financial
institutions.................. 1,316 0.52 2,158 17 1.05 2,172 20 1.23
FHLB stock..................... 811 6.71 801 44 7.32 532 32 8.02
------- ------- ------- ------- -------
Total interest-earning
assets (1).................. 81,930 7.80 85,584 5,131 7.99 72,767 4,127 7.56
------- -------
Noninterest-earning assets...... 4,239 4,155 2,815
------- ------- -------
Total assets................. $86,169 $89,739 $75,582
======= ======= =======
Interest-bearing liabilities:
Savings deposits............... $ 3,656 2.25 3,587 60 2.23 3,827 64 2.23
Demand and NOW deposits........ 13,697 2.28 13,291 216 2.17 14,438 239 2.21
Certificate accounts........... 49,042 5.65 49,586 2,209 5.94 41,623 1,480 4.74
FHLB advances.................. 9,000 5.91 12,451 604 6.47 5,927 319 7.18
------- ------- ------- ------- -------
Total interest-bearing
liabilities................. 75,395 4.90 78,915 3,089 5.22 65,815 2,102 4.26
------- -------
Noninterest-bearing liabilities. 2,891 3,113 2,599
------- ------- -------
Total liabilities............ $78,286 $82,028 $68,414
======= ======= =======
Net interest income............. $ 2,042 $ 2,025
======= =======
Net interest rate spread (2).... 2.90% 2.77% 3.30%
==== ==== ====
Net earning assets.............. $ 6,535 $ 6,669 $ 6,952
======= ======= =======
Net yield on average interest-
earning assets (3)............. 3.18% 3.71%
==== ====
Average interest-earning
assets to average interest-
bearing liabilities............ 108.45% 110.56%
======= =======
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------
1995 1994
---------------------------------------------- --------------------------------------
Average Average
Outstanding Interest Outstanding Interest
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------------------- ------------ ----------- ----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)............ $66,107 $ 5,275 7.98% $49,380 $ 3,914 7.93%
Mortgage-backed securities...... 4,307 304 7.06 5,624 399 7.09
Investment securities........... 3,033 173 5.70 3,738 192 5.14
Investments in other financial
institutions................... 1,992 22 1.10 5,471 107 1.96
FHLB stock...................... 577 44 7.63 521 43 8.25
------- ------- ------- -------
Total interest-earning
assets (1)................... 76,016 5,818 7.65 64,734 4,655 7.19
------- -------
Noninterest-earning assets....... 3,110 2,406
------- -------
Total assets................ $79,126 $67,140
======= =======
Interest-bearing liabilities:
Savings deposits................ 3,819 85 2.23 3,719 83 2.23
Demand and NOW deposits......... 14,187 312 2.20 16,031 369 2.30
Certificate accounts............ 43,315 2,180 5.03 38,558 1,638 4.25
FHLB advances................... 7,919 569 7.19 57 3 5.26
------- ------- ------- -------
Total interest-bearing
liabilities.................. 69,240 3,146 4.54 58,365 2,093 3.59
------- -------
Noninterest-bearing liabilities.. 2,657 2,169
------- -------
Total liabilities........... $71,897 $60,534
======= =======
Net interest income.............. $ 2,672 $ 2,562
======= =======
Net interest rate spread (2)..... 3.11% 3.60%
==== ====
Net earning assets............... $ 6,776 $ 6,369
======= =======
Net yield on average interest-
earning assets (3).............. 3.52% 3.96%
==== ====
Average interest-earning
assets to average interest-
bearing liabilities............. 109.79% 110.91%
======= =======
</TABLE>
- ----------------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loan loss reserves.
(2) Net interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
41
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes due to
changes in outstanding balances and those due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior interest rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
Nine Months Ended March 31, Years Ended June 30,
--------------------------------- -------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------------- -------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
------------------ Increase ----------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ----- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $ 940 $210 $1,150 $1,336 $ 25 $1,361
Mortgage-backed securities............ (100) (4) (104) (93) (2) (95)
Investment securities................. (27) (24) (51) (39) 20 (19)
Investments in other financial
institutions......................... -- (3) (3) (50) (35) (85)
FHLB stock............................ 17 (5) 12 4 (3) 1
----- ---- ------ ------ ----- ------
Total interest-earning assets...... $ 830 $174 $1,004 $1,158 $ 5 $1,163
===== ==== ------ ====== ===== ------
Interest-bearing liabilities:
Savings deposits...................... $ (4) $ -- $ (4) $ 2 $ -- $ 2
Demand and NOW deposits............... (19) (4) (23) (41) (16) (57)
Certificate accounts.................. 314 415 729 218 324 542
FHLB advances......................... 339 (54) 285 565 1 566
----- ---- ------ ------ ----- ------
Total interest-bearing liabilities.. $ 630 $357 987 $ 744 $ 309 1,053
===== ==== ------ ====== ===== ------
Net interest income..................... $ 17 $ 110
====== ======
</TABLE>
42
<PAGE>
Comparison of Operating Results for the Nine Months Ended March 31, 1996 and
1995
Performance Summary. Net earnings for the nine months ended March 31,
1996 increased by $362,000, or 1292.9%, to $390,000 from $28,000 for the nine
months ended March 31, 1995. The increase was primarily due to the combined
effects of a $17,000 increase in net interest income, a $538,000 increase in
non-interest income, and a $4,000 decrease in income taxes for the 1996 period
as compared to the 1995 period, which more than offset a $45,000 increase in the
provision for loan losses and a $152,000 increase in noninterest expense. For
the nine months ended March 31, 1996 and 1995, the returns on average assets
were 0.60% and 0.05%, respectively, while the returns on average equity were
6.74% and 0.52%, respectively.
Net Interest Income. For the nine months ended March 31, 1996, net
interest income increased by $17,000, or 0.8%, to $2.04 million from $2.03
million for the nine months ended March 31, 1995. The increase reflected an
increase of $1.0 million in interest income to $5.1 million from $4.1 million
which more than offset an increase of $987,000 in interest expense to $3.1
million from $2.1 million. The increase in interest income reflected increased
balances of loans receivable, primarily adjustable rate mortgage loans and
consumer loans originated in fiscal 1995 and construction lending on single-
family residences. Interest expense increased by $987,000, or 47.0%, as a
result of an $8.0 million, or 19.1%, increase in average certificate accounts
due principally to a special certificate promotion as well as increased
certificate rates, primarily due to higher market interest rates, and increased
borrowings to fund loan demand.
For the nine months ended March 31, 1996 the average yield on
interest-earning assets was 7.99% compared to 7.56% for the nine months ended
March 31, 1995. The average cost of interest-bearing liabilities was 5.22% for
the nine months ended March 31, 1996, an increase from 4.26% for the same period
ended March 31, 1995. The average balance of interest-earning assets increased
by $12.8 million to $85.6 million for the nine months ended March 31, 1996 from
$72.8 million for the nine months ended March 31, 1995. During this same
period, average interest-bearing liabilities increased by $13.1 million to $78.9
million for the nine months ended March 31, 1996 from $65.8 million for the same
period ended March 31, 1995.
The Bank's average interest rate spread was 2.77% for the nine months
ended March 31, 1996 compared to 3.30% for the earlier year period. The average
net interest margin was 3.18% for the nine months ended March 31, 1996 compared
to 3.71% for the nine months ended March 31, 1995.
Provision for Loan Losses. During the nine months ended March 31,
1996, the Bank charged $188,000 against earnings as a provision for loan losses
compared to a provision of $143,000 for the nine months ended March 31, 1995.
This charge resulted in an allowance for loan losses of $347,000, or 0.45% of
loans receivable, net at March 31, 1996, compared to $205,000, or 0.28% of loans
receivable, net at March 31, 1995. The allowance for loan losses as a
percentage of non-performing loans increased to 109.46% at March 31, 1996 from
96.70% at March 31, 1995. The ratio increased due to the provision for loan
losses for the nine months ended March 31, 1996 exceeding net charge-offs. The
allowance for loan losses is based on a detailed review of non-performing and
other problem loans, prevailing economic conditions, actual loss experience and
other factors, which, in management's view, recognizes the changing composition
of the Bank's loan portfolio and the inherent risk associated with different
types of loans.
Management will continue to monitor its allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Bank maintains its allowance for loan
losses at a level which it considers to be adequate to provide for potential
losses, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
Non-Interest Income. For the nine months ended March 31, 1996, non-
interest income increased $538,000 to $504,000 from ($34,000) for the same
period ended March 31, 1995. Included in non-interest income was the gain on
the sale of loans originated for sale; during the nine months ended March 31,
1996, the Bank sold $12.6
43
<PAGE>
million of such loans with a gain of $139,000. During the nine months ended
March 31, 1995, the gain on sale of loans was $5,000 represented by $1.2 million
of sold loans. Customer service charges, primarily relating to fees on
transaction accounts, were $147,000 for the nine months ended March 31, 1996 and
$143,000 for the same period ended March 31, 1995. During the nine months ended
March 31, 1996, the Bank recognized a gain of $54,000 on the sale of mortgage-
backed and investment securities. There were no sales of securities during the
nine months ended March 31, 1995; however, management determined its investment
in mutual funds had an other than temporary decline in value and wrote down its
investment by $314,000 during the nine months ended March 31, 1995. Other
income included late charges on loans of $46,000 and $38,000 for the nine months
ended March 31, 1996 and 1995, respectively.
Non-Interest Expense. Non-interest expense increased by $152,000 to
$1.8 million for the nine months ended March 31, 1996 from $1.6 million for the
nine months ended March 31, 1995. Compensation expense increased $105,000 to
$915,000 for the nine months ended March 31, 1996 from $809,000 for the same
period ended March 31, 1995, due to an increase in employees to staff the new
branch office in Kearney, Missouri and to increase the mortgage loan processing
staff due to an increase in originations of loans held for sale. Federal
insurance premiums increased $14,000 to $118,000 from $104,000 due to an
increase in deposits. Other increases in noninterest expense principally relate
to the new branch location in Kearney, Missouri.
Income Taxes. Income taxes increased by $4,000 to $207,000 for the
nine months ended March 31, 1996 from $211,000 for the nine months ended March
31, 1995. Exclusive of the mutual fund write down in 1995, the effective tax
rates were 34.7% and 38.1% for the nine months ended March 31, 1996 and 1995,
respectively.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1995 and
1994
Performance Summary. Net earnings for the year ended June 30, 1995
decreased by $537,000, or 76.7%, to $164,000 from $701,000 for the year ended
June 30, 1994. The decrease was primarily due to a reduction in noninterest
income of $277,000, an increase in the provision for loan losses of $138,000,
and an increase in noninterest expense of $283,000, which was only partially
offset by an increase of $110,000 in net interest income and lower income taxes.
For the fiscal years ended June 30, 1995 and 1994, the returns on average assets
were 0.21% and 1.04%, respectively, while the returns on average equity were
2.27% and 10.52%, respectively.
Net Interest Income. For the year ended June 30, 1995, net interest
income increased by $110,000 to $2.7 million from $2.6 million for fiscal 1994.
The increase reflected an increase of $1.2 million in interest income to $5.8
million from $4.7 million, which more than offset an increase of $1.1 million in
interest expense to $3.1 million from $2.1 million. The increase in interest
income reflected the increase in loans receivable due to favorable economic
conditions and increased demand for single-family homes in communities northeast
of Kansas City, Missouri and management's aggressive pursuit of these markets.
Interest expense increased primarily due to increased borrowings to meet loan
demand and an increase in certificate balances and rates. Net interest income
increased primarily as a result of the increase in the average balance of
interest-bearing assets in fiscal 1995, as compared to the increase in the
average balance of interest-bearing liabilities.
For the year ended June 30, 1995 the average yield on interest-bearing
assets was 7.65% compared to 7.19% for fiscal 1994. The average cost of
interest-bearing liabilities was 4.54% for the year ended June 30, 1995, an
increase from 3.59% for fiscal 1994. The average balance of interest-earning
assets increased by $11.3 million to $76.0 million for the year ended June 30,
1995 compared to $64.7 million for fiscal 1994. During this same period, the
average balance of interest-bearing liabilities increased by $10.9 million to
$69.2 million for the year ended June 30, 1995 from $58.4 million for fiscal
1994.
Due to these higher funding costs, the average interest rate spread
was 3.11% for the year ended June 30, 1995 compared to 3.60% a year earlier.
The average net interest margin was 3.52% for the year ended June 30, 1995
compared to 3.96% for the year ended June 30, 1994.
44
<PAGE>
Provision for Loan Losses. During the year ended June 30, 1995 the
Bank charged $171,000 against earnings as a provision for loan losses compared
to $33,000 for the year ended June 30, 1994. The increase in the fiscal 1995
provision for loan losses resulted primarily from an increase in net charge-offs
on consumer loans of $86,000 and an increase in construction lending. The
consumer loan losses were principally due to loans made to customers purchasing
automobiles from one specific used-car dealer. The Bank has identified all
these loans. The allowance for loan losses was $226,000, or 0.29% of loans
receivable at June 30, 1995, compared to $163,000, or 0.30% of loans receivable
at June 30, 1994. The allowance for loan losses as a percentage of non-
performing loans increased to 150.67% at June 30, 1995 from 57.80% at June 30,
1994.
Non-Interest Income. For the year ended June 30, 1995 non-interest
income decreased by $276,000 to $97,000 from $373,000 for fiscal 1994. Included
in non-interest income is gain on sales of loans originated for sale which
decreased $98,000 during fiscal 1995 due to consumers' lack of demand for fixed
rate product and increased demand for adjustable rate mortgages which the Bank
retains in its own portfolio. During the year ended June 30, 1995 management
recorded a write down of $314,000 for a mutual fund investment as it determined
an other-than-temporary decline in value existed. During fiscal 1994, mutual
funds were sold with a loss of $136,000 to offset taxable capital gains of a
like amount.
Non-Interest Expense. Non-interest expense increased by $284,000 to
$2.1 million for the year ended June 30, 1995 from $1.8 million for the year
ended June 30, 1994. The increase reflected normal salary increases as well as
an increase of $128,000 in compensation, payroll taxes and fringe benefits due
to an increase in the number of employees to obtain and process mortgage loan
applications and to staff the opening of the Kearney, Missouri branch. Other
increases principally related to the new branch location in Kearney, Missouri
and the addition of mortgage lending personnel.
Income Taxes. Income taxes decreased by $51,000 to $301,000 for the
year ended June 30, 1995 from $352,000 for the year ended June 30, 1994. The
effective tax rates, exclusive of the mutual fund write down, were 38.6% and
33.4% for the years ended June 30, 1995 and 1994, respectively.
Asset/Liability Management
Savings institutions such as the Bank are subject to interest rate
risk to the extent their interest-bearing liabilities (consisting primarily of
deposit accounts, FHLB advances and other borrowings) mature or reprice more
rapidly, or on a different basis, than their interest-earning assets (consisting
predominantly of intermediate and long-term real estate loans and investments
held for investment and liquidity purposes). Having interest-bearing
liabilities that mature or reprice more frequently on average than assets may be
beneficial in times of declining interest rates, although such an
asset/liability structure may result in declining net interest earnings during
periods of rising interest rates. Conversely, having interest-earning assets
that mature or reprice more frequently on average than liabilities may be
beneficial in times of rising interest rates, although this asset/liability
structure may result in declining net interest earnings during periods of
falling interest rates.
45
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1996, which are expected
to reprice or mature in each of the future time periods shown, assuming a 43.27%
annual pre-payment rate for fixed rate real estate loans, a 9.41% annual pre-
payment rate for mortgage-backed securities, a 15.15% annual pre-payment rate
for adjustable rate real estate loans, and a 51.05% annual pre-payment rate for
consumer loans. Except for deposits, which are classified as repricing in the
"within 1 year" category, the amounts of assets and liabilities shown which
reprice or mature during a particular period were determined in accordance with
the earlier of term to repricing or the contractual terms of the asset
liability. For information regarding the contractual maturities of the Bank's
loans, investments and deposits, see "Business--Lending Activities,"
"-- Investment Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
Amounts Maturing or Repricing at March 31, 1996
---------------------------------------------------------------------------------
Within Over
1 Year 1-3 Years 3-5 Years 5-10 Years 10 Years Total
------ --------- --------- ---------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................... $66,145 $10,036 $ 739 $ 340 $ 13 $77,273
Mortgage-backed securities.................. 43 405 31 66 4 549
Investment securities....................... 1,981 -- -- -- -- 1,981
Investments in other financial institutions. 1,316 -- -- -- -- 1,316
FHLB stock.................................. 811 -- -- -- -- 811
------- ------- ------- ------- ------- -------
Total interest-earning assets (1).......... $70,296 $10,441 $ 770 $ 406 $ 17 $81,930
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Savings deposits............................ $ 3,656 $ -- $ -- $ -- $ -- $ 3,656
Demand and NOW deposits..................... 13,697 -- -- -- -- 13,697
Certificate accounts........................ 39,947 5,611 1,377 2,107 -- 49,042
FHLB advances............................... 4,000 2,000 3,000 -- -- 9,000
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities......... $61,300 $7,611 $ 4,377 $ 2,107 $ -- $75,395
======= ======= ======= ======= ======= =======
Interest sensitivity gap..................... $ 8,996 $ 2,830 $(3,607) $(1,701) $ 17 $ 6,535
======= ======= ======= ======= ======= =======
Cumulative interest sensitivity gap.......... $ 8,996 $11,826 $ 8,219 $ 6,518 $ 6,535 $ 6,535
======= ======= ======= ======= ======= =======
Ratio of interest-earning assets to
interest-bearing liabilities................ 114.68% 137.18% 17.59% 19.27% --% 108.67%
======= ======= ======= ======= ======= =======
Ratio of cumulative gap to total assets...... 10.44% 13.72% 9.54% 7.56% 7.58% 7.58%
======= ======= ======= ======= ======= =======
</TABLE>
- -------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loan loss reserves.
46
<PAGE>
Net Portfolio Value. In order to measure its interest rate risk, the Bank
computes the amounts by which the net present value of the Bank's cash flows
from assets, liabilities and off-balance sheet items, if any (the institution's
Net Portfolio Value, or NPV), would change in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on the
Bank's NPV of instantaneous and permanent 1% to 4% increases and decreases in
market interest rates. The Board of Directors has established maximum increases
and decreases in NPV. The table below indicates the Board limits and the
estimates of projected changes in NPV in the event of 1%, 2%, 3% and 4%
instantaneous and permanent increases and decreases in market interest rates,
respectively.
The Net Portfolio Value method of calculating interest rate risk originated
in a rule adopted by the OTS for the purpose of incorporating an interest rate
risk ("IRR") component into its risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its NPV to changes in interest rates. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts. An institution's IRR is measured as
the change to its NPV as a result of a hypothetical 200 basis point change in
market interest rates. A resulting change in NPV of more than 2% of the
estimated market value of its assets will require the institution to deduct from
its capital 50% of that excess change. The rule provides that the OTS will
calculate the IRR component quarterly for each institution. The Bank, based on
asset size and risk-based capital, has been informed by the OTS that it is
exempt from this rule. Nevertheless, the following table presents the Bank's NPV
at March 31, 1996, as calculated by the OTS, based on information provided to
the OTS by the Bank.
As another measure to calculate its interest rate risk, the Bank computes
the amounts by which Net Interest Income (NII) would change in the event of a
range of changes in interest rates. These computations estimate the effect on
the Bank's NII of instantaneous and permanent 1% to 4% increases and decreases
in interest rates. The Board has established maximum increases and decreases in
NII. The following table indicates the Board limits and the estimates of
projected changes in NII in the event of 1%, 2%, 3% and 4% instantaneous and
permanent increases and decreases in interest rates, respectively.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
<TABLE>
<CAPTION>
Board Board
Change in Amount of Percent Limit of Amount of Percent Limit of
Interest Rates Estimated Change Change Change Net Interest Change Change Change
(basis points) NPV in NPV in NPV in NPV Income in NII in NII in NII
- -------------- --------- --------- ------- -------- ------------ --------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
+400bp $7,713 $(3,126) (28.84) (40.0) $2,993 $(369) (10.98) (30.0)
+300bp 8,843 (1,996) (18.41) (30.0) 3,148 (214) (6.37) (20.0)
+200bp 9,843 (996) (9.19) (20.0) 3,297 (65) (1.93) (20.0)
+100bp 10,547 (292) (2.69) (10.0) 3,427 65 1.93 (20.0)
0bp 10,839 -- -- -- 3,362 -- -- --
-100bp 10,724 (115) (1.06) (10.0) 3,299 (63) (1.87) (20.0)
-200bp 10,444 (395) (3.64) (20.0) 3,236 (126) (3.75) (20.0)
-300bp 10,291 (548) (5.06) (30.0) 3,180 (182) (5.41) (20.0)
-400bp 10,351 (488) (4.50) (40.0) 3,125 (237) (7.05) (30.0)
</TABLE>
Although the OTS has informed the Bank that it is not subject to the IRR
component discussed above, the Bank is still subject to interest rate risk and,
as can be seen above, rising interest rates will reduce the Bank's NPV. The
47
<PAGE>
OTS has the authority to require otherwise exempt institutions to comply with
the rule concerning interest rate risk. See "Regulation--Regulatory Capital
Requirements."
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in the prior table
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, adjustable-rate mortgages have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The proportion of adjustable-rate loans could be reduced in future
periods if market interest rates would decrease and remain at lower levels for a
sustained period, due to increased refinance activity. Further, in the event of
a change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the table. Finally, the ability of
many borrowers to service their adjustable-rate debt may decrease in the event
of a sustained interest rate increase.
The Bank's Board of Directors has formulated an Asset/Liability Policy
designed to promote long-term profitability while managing interest rate risk.
The Asset/Liability Policy is designed to reduce the impact of changes in
interest rates on the Bank's net interest income by achieving a more favorable
match between the maturity or repricing dates of its interest-earning assets and
interest-bearing liabilities. The Bank has sough to reduce exposure of its
earnings to changes in market interest rates by increasing the interest rate
sensitivity of the Bank's assets through the origination of loans with interest
rates subject to periodic adjustment to market conditions. Accordingly, the Bank
has emphasized the origination of adjustable-rate mortgage ("ARM") loans and
consumer loans for retention in its portfolio. The Bank also generally sells its
long-term fixed-rate loans in the secondary market. The Bank has also increased
its portfolio of construction loans which generally have shorter maturities and
higher yields. Finally, the Bank has sought to maintain a strong base of less
interest sensitive and lower costing "core deposits" in the form of passbook
accounts, NOW accounts, money market accounts and noninterest-bearing demand
accounts, and by promoting longer-term certificates of deposit in an effort to
extend the maturity of its liabilities.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, FHLB advances, repayments
on and sales of loans, the maturity of investment securities and interest
income. Although maturity and scheduled amortization of loans are relatively
predictable sources of funds, deposit flows and prepayments on loans are
influenced significantly by general interest rates, economic conditions and
competition.
The primary investing activity of the Bank is the origination of loans to
be held for investment. For the nine months ended March 31, 1996 and the fiscal
year ended June 30, 1995, the Bank originated loans for portfolio in the amount
of $33.9 million and $52.8 million, respectively. There were no purchases of
loans during these periods. The Bank also originates loans for sale in the
secondary market. For the nine months ended March 31, 1996 and the fiscal year
ended June 30, 1995, the Bank originated $12.0 million and $6.1 million,
respectively, of mortgage loans for sale in the secondary market. For the nine
months ended March 31, 1996 and the fiscal year ended June 30, 1995, these
activities were funded primarily by principal repayments of $33.0 million and
$26.4 million, respectively, and proceeds from the sale of loans of $12.6
million and $4.7 million, respectively.
The Bank is required to maintain minimum levels of liquid assets under the
OTS regulations. Savings institutions are required to maintain an average daily
balance of liquid assets (including cash, certain time deposits, and specified
U.S. Government, state or federal agency obligations) of not less than 5.0% of
its average daily balance of net withdrawal accounts plus short-term borrowings.
It is the Bank's policy to maintain its liquidity portfolio in excess of
regulatory requirements. The Bank's eligible liquidity ratios were 5.96% and
9.53%, respectively, at March 31, 1996 and at June 30, 1995.
48
<PAGE>
The Bank's most liquid assets are cash and cash equivalents, which include
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At March 31, 1996 and at June 30, 1995, cash and cash equivalents were $2.1
million and $3.1 million, respectively. The decrease in cash and cash
equivalents in 1996 compared to 1995 resulted primarily from the use of cash to
fund loans. The principal component of cash provided during the nine months
ended March 31, 1996 and the fiscal year ended June 30, 1995 was the proceeds
from loan repayments, sales of loans, deposit activity, and investment
maturities. The Bank may initially maintain a somewhat higher level of liquidity
following consummation of the Conversion until appropriate investments are
identified for the proceeds raised. See "Use of Proceeds."
Liquidity management for the Bank is both an ongoing and long-term function
of the Bank's asset/liability management strategy. Excess funds generally are
invested in overnight deposits at the FHLB of Des Moines. Should the Bank
require funds beyond its ability to generate them internally, additional sources
of funds are available through FHLB of Des Moines advances. The Bank would
pledge its FHLB of Des Moines stock or certain other assets as collateral for
such advances. For the nine months ended March 31, 1996, the Bank had an
average balance of $12.5 million in FHLB advances.
At March 31, 1996, the Bank had outstanding loan commitments of $1.4
million, unused lines of credit of $428,000 and undisbursed loans in process of
$8.1 million. The Bank anticipates it will have sufficient funds available to
meet its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit which
are scheduled to mature in one year or less at March 31, 1996 were $39.4
million. Management believes that a significant portion of such deposits will
remain with the Bank.
Following consummation of the Conversion, the Holding Company initially
will have no business other than holding the capital stock of the Bank and the
investment of the net proceeds from the Conversion retained by it. Management
believes the net proceeds will provide sufficient funds for the Holding
Company's operations.
Under federal law, the Bank is required to meet certain tangible, core and
risk based capital requirements. For information regarding the Bank's regulatory
capital compliance, see "Pro Forma Regulatory Capital" and "Regulation -
Regulatory Capital Requirements."
Recent Accounting Developments
Statement of Financial Accounting Standards No. 119, Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments,
requires disclosures of information such as credit and market risks, cash
requirements and accounting policies about derivative financial instruments.
SFAS No. 119 is effective for financial statements issued for fiscal years
ending after December 15, 1994, except for entities with less than $150 million
in total assets. For those entities, SFAS No. 119 is effective for financial
statements issued for fiscal years ending after December 15, 1995. SFAS No. 119
is effective for the Bank for the fiscal year ending June 30, 1996.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 107,
Disclosure about Fair Value of Financial Instruments, which generally requires
disclosure of the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the balance sheets. The FASB has
also issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan -Income
Recognition and Disclosures. SFAS No. 107, SFAS No. 114 and SFAS No. 118 are
effective for fiscal years beginning after December 15, 1994. SFAS No. 114, as
amended by SFAS No. 118, requires that impaired loans be measured at the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Homogeneous
loans, such as single-family loans and most categories of consumer loans, are
excluded from this requirement. Adoption of these statements will be effective
for the fiscal year beginning July 1, 1995. Management does not expect the
adoption of SFAS Nos. 114 and 118 will have a material adverse impact on the
Bank's financial position or results of operations.
49
<PAGE>
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which is effective for fiscal years beginning
after December 15, 1993 and which applies to shares of capital stock of
sponsoring employers acquired by ESOPs after December 31, 1992 that have not
been committed to be released as of the beginning of the year in which the ESOP
is adopted. The SOP requires that shares to be released in an accounting period
should be reflected in the consolidated financial statements as compensation
expense equal to the fair value of the shares at the time of release. Thus, as
shares increase or decrease in value, earnings will be affected relative to the
shares to be released in that period. Additionally, the SOP requires that
outstanding shares for purposes of computing both primary and fully diluted
earnings per share include only those shares scheduled to be released in that or
prior periods. Thus, as additional shares are released by the ESOP in future
periods, earnings per share may be diluted. Shares of Common Stock of the
Holding Company to be acquired by the ESOP are scheduled to be released over a
ten-year period commencing with the consummation of the Conversion. However,
the effect on net income and book value per share for 1996 cannot be predicted
due to the uncertainty of the fair value of the shares subsequent to their
issuance.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
fiscal years beginning after December 15, 1995. This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock option plans. These plans include all
arrangements by which employees receive shares of stock or other equity
investments of the employer or where an employer issues its equity instruments
to acquire goods and services from nonemployees. This statement will require pro
forma disclosures in fiscal 1997 of net income and earnings per share as if a
new accounting method based on the estimated fair value of employee stock
options had been adopted. The Bank has not yet determined whether the optional
accounting treatment proposed by SFAS No. 123 will be adopted.
SFAS No. 122, Accounting for Mortgage Servicing Rights, will be effective
for the Bank for the year beginning July 1, 1996 and generally requires entities
that sell or securitize loans and retain the mortgage servicing rights to
allocate the total cost of the mortgage loans to the mortgage servicing right
and the loan based on their relative fair value. Costs allocated to mortgage
servicing rights should be recognized as a separate asset and amortized over the
period of estimated net servicing income and evaluated for impairment based on
fair value. The adoption of this statement is not expected to have a material
effect on the Consolidated Financial Statements.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" supersedes SFAS No. 122 and will be
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguished transfers of financial assets that are sales from transfers that
are secured borrowings.
Under the financial-components approach, after a transfer of financial
assets, an entity recognizes all financial assets it no longer controls and
liabilities that have been extinguished. The financial-components approach
focuses on the assets and liabilities that exist after the transfer. Many of
these assets and liabilities are components of financial assets that existed
prior to the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with a pledge of collateral.
The adoption of this statement is not expected to have a material effect on the
consolidated financial statements.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of, is effective for the fiscal year beginning July
1, 1996. The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the asset.
Management does not expect the implementation of SFAS No. 121 to have a material
impact on the Bank's consolidated financial position or results of operations.
50
<PAGE>
In April 1995, the FASB issued SOP 94-6, Disclosure of Certain
Significant Risks and Uncertainties. This SOP applies to financial statements
prepared in conformity with generally accepted accounting principles by all
nongovernmental entities. The disclosure requirements in SOP 94-6 focus
primarily on risks and uncertainties that could significantly affect the amounts
reported in the financial statements in the near-term functioning of the
reporting entity. The risks and uncertainties discussed in SOP 94-6 stem from
the nature of the entity's operations, from the necessary use of estimates in
the preparation of the entity's financial statements, and from significant
concentrations in certain aspects of the entity's operations. SOP 94-6 is
effective for financial statements issued for fiscal years ending after June 30,
1995 and is not expected to have any impact on the Bank's operations.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which generally requires 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 impact
of inflation is reflected in the increased cost of the Bank's operations. Nearly
all the assets and liabilities of the Bank are financial, unlike most industrial
companies. As a result, the Bank's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
The Bank's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on the
Bank's performance. Changes in interest rates do not necessarily move to the
same extent as changes in the price of goods and services. In the current
increasing interest rate environment, liquidity and the maturity structure of
the Bank's assets and liabilities are critical to the maintenance of acceptable
performance levels.
BUSINESS
General
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At March 31, 1996, the Bank's total loan
portfolio was $86.0 million, of which 61.0% were one- to four-family residential
mortgage loans, 25.0% were construction and land loans (the vast majority of
which related to single-family residential properties), and 12.4% were consumer
loans. During the nine months ended March 31, 1996 and the fiscal year ended
June 30, 1995, the Bank originated and sold $12.6 million and $4.7 million,
respectively, of one-to four-family residential mortgage loans in the secondary
market. See "Lending Activities."
At March 31, 1996, substantially all of the Bank's real estate
mortgage loans were secured by properties located in the Bank's market area. See
"Risk Factors - Geographical Concentration of Loans." To a substantially lesser
extent, the Bank invests in various investment securities, including mortgage-
backed securities.
The Bank currently offers a variety of deposit accounts, which include
passbook savings, NOW, noninterest bearing demand, money market and certificate
accounts. The Bank generally solicits deposits in its primary market area. The
Bank does not accept any brokered deposits.
Current Business Strategy
51
<PAGE>
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community savings institution dedicated primarily to
home-mortgage lending. In recent years, in response to significant growth in its
primary market area, the Bank has implemented this strategy by (i) increasing
its construction and land lending in response to the increased demand for such
loans; (ii) increasing its origination of one- to four-family residential
mortgage loans for sale in the secondary mortgage market; and (iii) increasing
the origination of adjustable-rate one-to four-family residential mortgage loans
for retention in its portfolio. The Bank has sought to increase such lending
activity while simultaneously (1) maintaining asset quality, (2) managing
interest rate risk exposure, (3) maintaining acceptable levels of capital, (4)
controlling operating expenses, and (5) maintaining and, if possible, increasing
the Bank's profitability.
The highlights of the Bank's business strategy are as follows:
. Increasing Construction and Land Lending. In order to take
advantage of significant new real estate development in the north
Kansas City area, the Bank has substantially increased its
origination of construction and land loans in recent years. At
March 31, 1996 and at June 30, 1995, construction and land loans
constituted 25.0% and 21.3%, respectively, of the Bank's total loan
portfolio. By comparison, at June 30, 1994, construction and land
loans constituted 14.5% of the Bank's total loan portfolio.
. Originating Single-Family Loans for Secondary Market Sale. Also in
response to market demand, the Bank has increased its originations
and sales of single-family fixed-rate mortgage loans into the
secondary mortgage market. The sale of such loans into the
secondary mortgage market reduces the Bank's interest rate risk and
permits the Bank to generate non-interest income from servicing
such loans. For the nine months ended March 31, 1996, the Bank
originated $14.3 million of fixed-rate one- to four-family
residential mortgage loans and sold $12.6 million, or 87.6%, of
such loans into the secondary mortgage market.
. Originating for Portfolio Adjustable-Rate Single Family Loans. The
Bank has sought to increase its portfolio of adjustable-rate single
family mortgage loans. For the nine months ended March 31, 1996,
the Bank originated $4.5 million in adjustable-rate single family
mortgage loans. The Bank's ability to originate adjustable-rate
mortgage loans to a certain extent is dependent upon relative
customer demand for such loans, which is affected by the interest
rate environment, among other factors.
. Asset Quality. The Bank's non-performing assets have ranged between
0.17% and 0.55% of total assets during the last two fiscal years
and represented 0.38% of total assets at March 31, 1996. The Bank's
allowance for loan losses at March 31, 1996 totalled $347,000, or
0.45% of total loans receivable, net.
. Managing Interest Rate Risk. Management of the Bank has attempted
to reduce interest rate risk by: (i) emphasizing the origination of
adjustable rate mortgages for retention in its portfolio;
(ii) originating virtually all of its long-term fixed rate loans
for sale in the secondary mortgage market; (iii) originating for
retention in its portfolio construction loans and non-mortgage
consumer loans, which have shorter terms; (iv) maintaining a strong
base of less interest rate sensitive "core deposits" and promoting
longer-term certificates of deposit, where practical; and
(v) utilizing FHLB borrowings to lengthen the maturity of its
liabilities. For the nine months ended March 31, 1996, of the $6.3
million in one- to four-family mortgage loans originated by the
Bank for its portfolio, $4.5 million, or 71.0%, had adjustable
interest rates. In addition, of the $14.3 million in fixed-rate
one- to four-family residential mortgage loans originated by the
Bank, $12.6 million of such loans, or 88.1%, were sold in the
secondary mortgage market. The Bank's base of core deposit accounts
consisting of passbook accounts, demand deposits and money market
deposit accounts amounted to $18.9 million at March 31, 1996, or
27.8% of the Bank's total deposits.
52
<PAGE>
. Capital Strength. At March 31, 1996, the Bank exceeded all of its
regulatory capital requirements with tangible and core capital of
9.14% of adjusted total assets and risk-based capital of 12.04% of
total risk-weighted assets. As a result of the Conversion and based
on the assumptions stated herein, at the midpoint of the Estimated
Valuation Range at March 31, 1996, the Bank would have had pro
forma equity of approximately $11.6 million, or 12.8% of total
assets.
. Controlling Operating Expense. The Bank's management monitors
operating expenses on an ongoing basis and places significant
emphasis on controlling such costs. The Bank's noninterest expense
totaled $1.8 million in the nine months ended March 31, 1996, $2.1
million in fiscal 1995, and $1.8 million in fiscal 1994. The Bank's
ratio of noninterest expense to average total assets was 2.62% for
the nine months ended March 31, 1996, and 2.70% and 2.75% for
fiscal 1995 and 1994, respectively. In recent years, the Bank's
operating expenses have increased as a result of the increase in
personnel hired to originate one- to four-family and construction
and land loans in response to the increased demand for such loans
in the Bank's primary market area. The increase in operating
expenses also reflects the opening in 1995 of the Bank's Kearney
branch office.
. Profitability. Although no assurance can be made regarding future
profitability, the Bank has been profitable during recent years.
The Bank had net earnings of $164,000 in fiscal 1995 and $701,000
in fiscal 1994. The Bank's average interest rate spread was 2.77%,
3.11% and 3.60%, respectively, for the nine months ended
March 31, 1996 and for fiscal 1995 and 1994. The Bank is attempting
to increase its net earnings by increasing its servicing fees on
loans originated for sale into the secondary market, and by
increasing its interest rate spread by increasing its portfolio of
higher-yielding construction and land loans, particularly for new
home construction in the area around the Bank's Kearney branch
office, and by increasing the origination of higher-yielding
consumer loans. See "Business--Lending Activities" and "Risk
Factors--Construction and Land Lending."
Market Area and Competition
Community Bank serves communities located in Clay and Ray Counties and
in surrounding counties in Missouri from its main office in Excelsior Springs
and its branch office in Kearney. Both Excelsior Springs and Kearney are located
in Clay County, which is part of the Kansas City Metropolitan Statistical Area.
Excelsior Springs and Kearney are small towns with 1990 populations estimated at
11,000 and 2,000, respectively. Clay County has a relatively large population
(estimated at 166,000 as of 1995), and the northern portion of Clay County is a
combination of suburban and rural areas containing a number of small towns,
including Excelsior Springs and Kearney. Southern Clay County is a rapidly
developing suburban market, and is home to a large number of people who commute
to jobs in areas closer to Kansas City.
Most of the employment in Clay County is provided by light
manufacturing, services and retail trade. Included among the largest employers
in Clay County are a number of hospitals (Liberty Hospital, Excelsior Springs
Medical Center, North Kansas City Hospital, and St. Luke's Northland Hospital),
local school districts and two community colleges. Employers in the
manufacturing sector include Ford Motor Company, Farmland Industries and Wilcox
Electric. In the immediate Excelsior Springs area, the largest employers are
American Italian Pasta, Precise Technology Incorporated, Douglas & Lomason and
Gilmour Manufacturing.
The Bank's business and operating results are significantly affected
by the general economic conditions present in the Bank's market area. As of
April 1996, the latest date for which statistical data are available, the
unemployment rate in Clay County was 2.6% and the unemployment rate in Ray
County was 3.5%.
The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, from
other corporate and government securities funds and from brokerage funds and
insurance companies. The Bank also faces significant competition in the
origination of loans from savings institutions, mortgage banking companies,
credit unions
53
<PAGE>
and commercial banks. In Clay County alone, where the Bank's two offices are
located, there are 36 commercial banks, 44 credit unions, and 10 savings
institutions.
Lending Activities
General. The Bank has emphasized and will continue to emphasize the
origination of one- to four-family residential mortgage loans. In recent years,
subject to market conditions, the Bank has emphasized the origination for
portfolio of ARM loans and the origination and sale of fixed-rate residential
mortgage loans. Due to the high level of construction activity in southern Clay
County in recent years, and in an effort to improve the yield on overall
interest-earning assets, the Bank has increased its portfolio of residential
construction loans. The Bank also originates land loans secured by vacant land
or building lots for which the borrower intends to ultimately construct a
residential property. The Bank also originates commercial real estate and multi-
family residential loans, which are generally offered on a case-by-case basis as
an accommodation to existing Bank customers. The Bank's non-mortgage loans
consist primarily of automobile loans, which are originated on a direct and on
an indirect basis.
Under OTS regulations, a thrift institution's loans-to-one borrower
limit is generally limited to the greater of 15% of unimpaired capital and
surplus or $500,000. See "Regulation - Federal Regulation of Savings
Associations." At March 31, 1996, the maximum amount which the Bank could have
lent under this limit to any one borrower and the borrower's related entities
was approximately $1.2 million. At March 31, 1996, the Bank had no loans or
groups of loans to related borrowers with outstanding balances in excess of this
amount. The Bank's largest lending relationship at March 31, 1996 was
approximately $1.0 million in loans to a residential builder for the
construction of single-family residences and was secured by real estate located
in Clay County, Missouri. At March 31, 1996, all of these loans were performing
in accordance with their terms.
Loan Portfolio Composition. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At March 31, At June 30,
----------------- ------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential..... $52,471 61.00% $55,257 64.46% $39,001 67.32%
Multi-family........................ 321 0.37 134 0.16 163 0.28
Commercial.......................... 1,025 1.19 818 0.95 317 0.55
Land................................ 3,641 4.23 1,992 2.32 545 0.94
Construction........................ 17,888 20.80 16,221 18.93 7,857 13.56
------- ------ ------- ------ ------- ------
Total real estate loans.............. 75,346 87.59 74,422 86.82 47,883 82.65
------- ------ ------- ------ ------- ------
Consumer loans:
Direct automobile loans............. 6,452 7.50 6,426 7.50 5,240 9.05
Indirect automobile loans........... 2,302 2.68 2,960 3.45 3,090 5.33
Deposit accounts.................... 536 0.62 524 0.61 445 0.77
Home improvement.................... 236 0.27 279 0.33 292 0.50
Other............................... 1,150 1.34 1,107 1.29 985 1.70
------- ------ ------- ------ ------- ------
Total consumer loans............. 10,676 12.41 11,296 13.18 10,052 17.35
------- ------ ------- ------ ------- ------
Total loan portfolio............. 86,022 100.00% 85,718 100.00% 57,935 100.00%
====== ====== ======
Less:
Loans in process.................... 8,143 6,391 4,068
Deferred loan origination fees and
discounts on loans, net........... 259 221 251
Allowance for loan losses........... 347 226 163
------- ------- -------
Total loans receivable, net....... $77,273 $78,880 $53,453
======= ======= =======
</TABLE>
54
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At June 30,
---------------------- ------------------------------------
1996 1995 1994
---------------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------------ -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family............. $ 6,887 8.01% $ 6,924 8.08% $ 4,458 7.70%
Multi-family.................... 34 0.04 44 0.05 64 0.11
Commercial...................... 80 0.09 -- -- -- --
Land............................ 312 0.36 280 0.33 145 0.25
Construction.................... 17,888 20.80 16,221 18.93 7,857 13.56
------- ------ ------- ------ ------- -------
Total real estate loans.......... 25,201 29.30 23,469 27.38 12,524 21.62
------- ------ ------- ------ ------- -------
Consumer loans.................... 10,469 12.17 11,296 13.18 10,052 17.35
------- ------ ------- ------ ------- -------
Total fixed-rate loans....... 35,670 41.47 34,765 40.56 22,576 38.97
------- ------ ------- ------ ------- -------
Adjustable Rate Loans:
Real estate:
One- to four-family............. $45,584 52.99% $48,333 56.39% $34,543 59.62%
Multi-family.................... 287 0.33 90 0.10 99 0.17
Commercial...................... 945 1.10 818 0.95 317 0.55
Land............................ 3,329 3.87 1,712 2.00 400 0.69
Construction.................... -- -- -- -- -- --
------- ------ ------- ------ ------- -------
Total real estate loans.......... 50,145 58.29 50,953 59.44 35,359 61.03
------- ------ ------- ------ ------- -------
Consumer loans.................... 207 0.24 -- -- -- --
------- ------ ------- ------ ------- -------
Total adjustable-rate loans.. 50,352 58.53 50,953 59.44 35,359 61.03
------- ------ ------- ------ ------- -------
Total loan portfolio......... 86,022 100.00% 85,718 100.00% 57,935 100.00%
====== ====== =======
Less:
Loans in process................ 8,143 6,391 4,068
Deferred fees and discounts..... 259 221 251
Allowance for losses............ 347 226 163
------- ------- -------
Total loans receivable, net... $77,273 $78,880 $53,453
======= ======= =======
</TABLE>
One- to Four-Family Mortgage Loans. The Bank's primary lending
activity is the origination of one- to four-family, owner-occupied, residential
mortgage loans secured by property located in the Bank's market area. Loans are
generated through the Bank's marketing efforts, its existing customers and
referrals, real estate brokers, builders and local businesses. The Bank also
employs its Chairman of the Board as a full-time loan originator to solicit
loans. The Bank generally has limited its real estate loan originations to the
financing of properties located within its market area and will not make out-of-
state loans. At March 31, 1996, the Bank had $52.5 million, or 61.0% of its loan
portfolio, invested in mortgage loans secured by one- to four-family residences.
The Bank originates fixed-rate residential one- to four-family loans
with terms of 15 and 30 years. Such loans may either be retained in portfolio or
sold in the secondary mortgage market depending on the yield on such loans and
the Bank's asset/liability management objectives. Currently, the Bank's policy
is to sell into the secondary market fixed-rate residential real estate loans.
As of March 31, 1996, $6.9 million, or 8.0% of the Bank's loan portfolio,
consisted of fixed-rate residential one- to four-family loans. The Bank's fixed-
rate mortgage loans amortize monthly with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option.
55
<PAGE>
Fixed-rate residential one- to four-family loans originated for sale
in the secondary mortgage market are underwritten in conformity with the
criteria established by the Federal Home Loan Mortgage Corporation ("FHLMC") for
sale primarily to FHLMC. Such loans are sold on a non-recourse basis. The Bank
retains servicing rights on a portion of such loans, depending upon customer
preferences and competitive conditions. For the nine months ended March 31,
1996, of the $14.3 million in fixed-rate residential one- to four-family loans
originated by the Bank, $12.6 million of such loans, or 88.1%, were sold in the
secondary mortgage market.
The Bank also offers ARM loans for terms ranging up to 30 years. The
Bank currently offers ARM loans that adjust every year, with interest rate
adjustment limitations up to two percentage points per year and with a cap of up
to six percentage points on total interest rate increases over the life of the
loan, although a majority of the ARM loans in the Bank's portfolio have
adjustment limitations of one percentage point and five percentage point
interest rate caps. In a rising interest rate environment, such rate limitations
may prevent ARM loans from repricing to market interest rates, which would have
an adverse effect on net interest income. The Bank has used different interest
indices for ARM loans in the past, and currently uses the one year U.S. Treasury
Index adjusted to a constant maturity, with margins of 275 basis points for
agency-conforming ARM loans and 300 basis points for non-conforming ARM loans.
ARM loans secured by residential one- to four-family real estate totaled $45.6
million, or 53.0% of the Bank's total loan portfolio at March 31, 1996. The
origination of fixed-rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Bank's interest rate gap position and loan
products offered by the Bank's competitors. Particularly in a relatively low
interest rate environment, borrowers may prefer fixed-rate loans to ARM loans.
During the nine months ended March 31, 1996, the Bank originated $14.3 million
in fixed-rate residential mortgage loans and $4.5 million of ARM loans. During
1995, the Bank originated $6.6 million of fixed-rate residential mortgage loans
and $19.7 million of ARM loans.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management. ARM loans carry increased credit
risk associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, during periods of
rising interest rates, that the risk of delinquencies and defaults on ARM loans
may increase due to the upward adjustment of interest costs to the borrower,
resulting in increased loan losses.
The Bank's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are a means of imposing assumption
fees and increasing the interest rate on the Bank's mortgage portfolio during
periods of rising interest rates.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ("LTV") ratio of 95% for residential property
(and 100% for loans guaranteed by the Veterans Administration) and 90% for all
other real estate loans. The Bank's lending policies, however, generally limit
the maximum LTV ratio on fixed-rate and ARM loans to 80% of the lesser of the
appraised value or the purchase price of the property securing the loan in the
case of loans secured by one- to four-family owner-occupied properties. On
conventional one-to four-family loans, the Bank will lend up to a 95% LTV ratio;
however, any loans with LTV ratios in excess of 80% require private mortgage
insurance. The maximum LTV ratio on other types of real estate loans is
generally the lesser of 80% of the appraisal value or the purchase price of the
property.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's employment, income and credit history. The Bank's
policy is to obtain credit reports and financial statements on all borrowers and
guarantors, and to verify references. Properties securing real estate loans are
appraised by Bank-approved independent appraisers. Appraisals are subsequently
reviewed by the Bank's Loan Committee, as applicable.
56
<PAGE>
Management believes that stability of income, past credit history and adequacy
of the proposed security are integral parts in the underwriting process.
Generally, the applicant's total monthly mortgage payment, including all escrow
amounts, is limited to 28% of the applicant's total monthly income. In
addition, total monthly obligations of the applicant, including mortgage
payments, should not generally exceed 36% of total monthly income. Written
appraisals are always required on real estate property offered to secure an
applicant's loan. The Bank requires fire and casualty insurance on all
properties securing real estate loans, as well as title insurance.
Construction and Land Lending. The Bank invests a significant
proportion of its loan portfolio in construction and land loans. Prompted by
increased residential development in Clay County in recent years, such lending
has been a growing part of the Bank's loan portfolio. Substantially all of the
Bank's construction and land loans are secured by residential properties located
in Clay County.
The Bank originates four basic types of construction and land loans:
1. "Speculative" construction loans are made to home builders for the
construction principally of one- to four-family residences and
residential development projects and, to a lesser extent, multi-
family residences (primarily duplexes). Speculative construction
loans generally do not have a sale contract or permanent loan in
place for the finished home, and the purchasers for the finished
homes may be identified either during or following the
construction period.
2. "Contract" construction loans are made to builders who have a
signed contract to build a new home.
3. "Construction" loans are made to individuals who have contracted
with a builder to construct their personal residence.
4. "Land acquisition" loans ("land loans") are made by the Bank to
individuals and builders for the acquisition of land upon which
the borrower can then build.
The table below presents information on the Bank's construction and
land loans at March 31, 1996:
<TABLE>
<CAPTION>
Outstanding Percent of
Loan Balance/(1)/ Total
----------------- -----------
(Millions)
<S> <C> <C>
Speculative....................... $14,054 65.3%
Contract.......................... 1,447 6.7
Construction...................... 2,387 11.1
------- -------
Total construction.............. 17,888 83.1
Land.............................. 3,641 16.9
------- -------
Total construction and land... $21,529 100.0%
======= =======
</TABLE>
---------------------
/(1)/Includes loans in process.
At March 31, 1996, the Bank's $17.9 million of construction loans and
$3.6 million of land loans represented 20.8% and 4.2%, respectively, of total
loans receivable. At the same time, the Bank's $12.3 million of speculative
construction loans represented 14.3% of total loans receivable.
Construction and land lending affords the Bank the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than does
its single-family permanent mortgage lending. Construction and land lending,
57
<PAGE>
however, is generally considered to involve a higher degree of risk than single-
family permanent mortgage lending due to (i) the concentration of principal
among relatively few borrowers and development projects, (ii) the increased
difficulty at the time the loan is made of estimating building costs and the
selling price of the residence to be built, (iii) the increased difficulty and
costs of monitoring the loan, (iv) the higher degree of risk associated with
residential sales activity in changing real estate market conditions, and (v)
the increased difficulty of working out problem loans. Speculative construction
loans have the added risk associated with identifying an end-purchaser for the
finished home. See "Risk Factors -Construction and Land Lending." The Bank has
sought to address these risks by developing and adhering to underwriting
policies, disbursement procedures, and monitoring practices.
The Bank seeks to make construction loans to those builders with which
it has a long-standing history of satisfactory performance. New builders
typically borrow from the Bank in limited amounts and may borrow additional
amounts based on proven experience with the Bank. At March 31, 1996, the Bank
had one borrower for which speculative construction loans outstanding totaled
more than $1.0 million. The foregoing builder with speculative construction and
land loans totaling more than $1.0 million has been a customer of the Bank for
more than two years.
While substantially all of the Bank's construction and land loans are
secured by properties located in southern Clay County, the Bank also seeks to
diversify its construction and land lending risks among several subdivisions. At
March 31, 1996, the Bank had speculative construction loans secured by
properties in 61 subdivisions of which two represented an exposure to a single
subdivision of more than $1.0 million.
One- to Four-Family Construction Loans. Loans for the construction of
one- to four-family residences are generally made for terms of six to 12 months.
The Bank's loan policy includes maximum loan-to-value ratios of up to 85% for
speculative construction loans and up to 80% for construction loans. Prior to
preliminary approval of a construction loan application, Bank personnel inspect
the site, review the existing or proposed improvements, identify the market for
the proposed project, analyze the pro forma data and assumptions on the project,
and satisfy themselves with the experience and expertise of the builder. After
preliminary approval has been given, the application is processed. Processing
includes obtaining credit reports, financial statements and tax returns on the
borrowers and guarantors, if any, an independent appraisal of the project, and
any other expert reports necessary to evaluate the proposed project.
The Bank requires that construction loan proceeds be disbursed in
increments as construction progresses based upon inspections by Bank personnel.
To control the disbursement process, the Bank requires that builders and their
subcontractors and vendors submit invoices to the Bank for payment. In the
event of cost overruns, depending on the circumstances (i.e., whether due to
"add-ons" not included in the original plans or due to unanticipated changes in
building costs) the Bank may seek to require the borrower to deposit funds with
the Bank for additional disbursements, increase the loan amount on the basis of
an increased appraisal and disburse additional loan proceeds consistent with the
original loan-to-value ratio, or become more active in the monitoring and
progress of the project.
The Bank regularly monitors the accuracy of assumptions made in its
construction loan business over time. In particular, the Bank tracks the
accuracy of its independent appraisers by comparing actual selling prices with
the appraised value estimated in connection with the loan approval.
Additionally, the Bank tracks the performance of its builder customers by
comparing actual costs with those estimated in the loan application.
Commercial and Multi-family Construction Loans. Occasionally, the
Bank originates loans for the construction of commercial buildings and multi-
family residences on terms similar to those on one- to four-family construction
loans.
Land Loans. At March 31, 1996, the Bank had total land loans of $3.6
million. In making land loans, the Bank follows similar underwriting policies
as for construction loans. The Bank originates land loans with similar terms
and at similar rates as construction loans, except that the initial term on
conventional land loans is typically five to ten years (not to exceed 30 years)
as opposed to the term of up to 12 months that is typical of construction loans.
58
<PAGE>
Multi-Family and Commercial Real Estate Lending. The Bank also
originates loans secured by multi-family and commercial real estate. At
March 31, 1996, $1.3 million, or 1.6%, of the Bank's loan portfolio consisted of
multi-family loans and commercial real estate loans.
Multi-family and commercial real estate loans originated by the Bank
may be either fixed- or adjustable-rate loans with terms to maturity and
amortization schedules of up to 30 years. Rates on such ARM loans generally
adjust annually to specified spreads over the one-year U.S. Treasury securities
index adjusted to a constant maturity of one year, subject to annual and life-
of-loan interest rate caps. Multi-family and commercial real estate loans are
written in amounts of up to 80% of the lesser of the appraised value of the
property or the sales price.
The Bank's commercial real estate portfolio consists primarily of
loans on small office buildings located in the Bank's primary market area.
Multi-family loans generally are secured by duplexes. Appraisals on properties
which secure multi-family and commercial real estate loans are performed by an
independent appraiser designated by the Bank before the loan is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Bank's management. In underwriting such loans, the Bank primarily considers the
cash flows generated by the real estate to support the debt service, the
financial resources and income level of the borrower and the Bank's experience
with the borrower. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, an analysis of the borrower's
income, financial statements and banking relationships, a review of the
borrower's property management experience and references, and a review of the
property, including cash flow projections and historical operating results. The
Bank seeks to ensure that the property securing the loans will generate
sufficient cash flow to adequately cover operating expenses and debt service
payments.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger, more difficult to evaluate and monitor
and, therefore generally, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan might be impaired. The Bank has attempted to minimize these risks by
lending primarily to the ultimate user of the property or on existing income-
producing properties.
Consumer Lending. Community Bank offers a variety of consumer loans,
including automobile and home improvement loans, second mortgage home equity
loans, lines of credit secured by first or second mortgage loans, and loans
secured by deposits. The Bank currently originates substantially all of its
consumer loans in its primary market area generally to its existing customers.
At March 31, 1996, the Bank's consumer loan portfolio totaled $10.7 million, or
12.4% of its loan portfolio.
The primary component of the Bank's consumer loan portfolio consists
of automobile loans secured by both new and used cars and light trucks. The
Bank originates automobile loans on a direct basis, where the Bank extends
credit directly to the borrower, and on an indirect basis through automobile
dealerships. Although applications for indirect automobile loans are taken by
employees of the dealer, the loans are made pursuant to the Bank's underwriting
standards using the Bank's documentation. All such indirect automobile loans
must be approved by a Bank loan officer before disbursement of loan proceeds.
The Bank seeks to limit the credit risk of indirect automobile lending by doing
business with local dealers with which it has had a satisfactory prior
relationship, and through strict adherence to its underwriting standards.
The Bank's automobile loans generally have terms that do not exceed
five years and carry a fixed-rate of interest. Generally, loans on new vehicles
are made in amounts up to 80% of dealer cost and loans on used vehicles are made
in amounts up to 80% of the vehicle's published NADA value. Collision and
comprehensive insurance and vendor single-interest coverage is required on all
automobile loans. At March 31, 1996, the Bank's indirect
59
<PAGE>
automobile loans totaled $2.3 million, or 2.7% of the Bank's loan portfolio and
direct automobile loans totalled $6.5 million, or 7.5% of the Bank's loan
portfolio.
Community Bank also originates Federal Housing Administration ("FHA")
Title I home improvement loans. Generally, such loans have a maximum term of ten
years, have fixed rates and may be originated up to a 100% loan-to-value ratio.
While the Bank retains a portion of such loans in portfolio, the majority of its
FHA Title I home improvement loans are originated for sale in the secondary
market. At March 31, 1996, the Bank's FHA Title I home improvement loans totaled
$210,000, or 0.2% of the Bank's loan portfolio.
The Bank also originates for portfolio second mortgage/home equity
loans. These loans are generally limited to 80% or less of the appraised value
of the property securing the loan. These loans are originated as fixed-rate
loans and generally have maximum terms of 15 years. At March 31, 1996, the
Bank's second mortgage/home equity loans totaled $732,000, or 0.9% of the Bank's
loan portfolio.
The Bank also originates for portfolio lines of credit secured by
first or second mortgages. Such loans are adjustable-rate loans, adjust
annually, and may be originated up to an 80% loan-to-value ratio, with a maximum
term of five years. At March 31, 1996, the Bank's lines of credit secured by
first or second mortgages totaled $1.2 million, or 1.5% of the Bank's loan
portfolio.
Consumer loan terms vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower. The
underwriting standards employed by the Bank for consumer loans include an
application, a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, 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. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At March 31, 1996, $32,000 in consumer loans were non-performing.
See "Asset Quality--Delinquent Loans and Non-performing Assets." There can be
no assurances, however, that delinquencies will not increase in the future.
60
<PAGE>
Loan Maturity Schedule
The following schedule illustrates the contractual maturity and
weighted average rates of the Bank's total loan portfolio at June 30, 1995.
Mortages which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is due. The schedule does not
reflect the effects of scheduled payments, possible prepayments or enforcement
of due-on-sale clauses. The total amount of loans due after June 30, 1996 that
have predetermined interest rates is $16.5 million, and that have floating or
adjustable rates is $49.8 million.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------------------------------------
Multi-Family
One- to Four-Family and Commercial Land Construction
------------------- ----------------- ------------------ -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending June 30,
- --------------------------------
1996............................ $ 445 8.48% $ -- --% $ 264 8.23% $16,221 7.03%
1997............................ 131 9.60 -- -- 3 8.50 -- --
1998............................ 212 7.41 48 9.00 8 8.45 -- --
1999 and 2000................... 777 8.01 84 8.19 25 9.68 -- --
2001 to 2005.................... 3,847 7.99 149 8.65 132 8.28 -- --
2006 to 2020.................... 20,117 7.70 239 8.76 587 8.50 -- --
2021 and following.............. 29,728 7.14 432 7.19 973 8.47 -- --
------- ----- ------ -------
$55,257 7.43 $ 952 7.99 $1,992 8.45 $16,221 7.03
======= ===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Consumer Total
------------------ ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due During Years Ending June 30,
- --------------------------------
1996........................... $ 2,482 9.61% $19,412 7.41%
1997........................... 1,301 10.91 1,435 10.79
1998........................... 2,561 10.05 2,829 9.83
1999 and 2000.................. 4,780 9.49 5,666 9.26
2001 to 2005................... 161 10.27 4,289 8.11
2006 to 2020................... 11 11.51 20,954 7.74
2021 and following............. -- -- 31,133 7.18
-------
$11,296 9.82 $85,718 7.70
======= =======
</TABLE>
61
<PAGE>
Origination of Loans
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
third-party sources. The Bank also employs its Chairman of the Board as a full-
time loan originator to solicit loans. The Board of Directors of the Bank has
authorized certain officers to originate loans within specified underwriting
limits. Each of the Chief Executive Officer and the Mortgage Lending Officer
have authority to make secured real estate loans up to $203,000 and secured
installment loans up to $30,000. Unsecured installment loans may be approved by
the Chief Executive Officer up to $15,000 and by the Mortgage Lending Officer up
to $10,000. All loans in excess of these limitations must be approved by the
Board of Directors. The Bank has established a Loan Audit Committee which
reviews loans made or denied by officers of the Bank. The Loan Audit Committee
meets monthly and consists of the Chief Executive Officer as well as three
members of the Board of Directors.
While the Bank originates both adjustable-rate and fixed-rate loans,
its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the nine months ended March
31, 1996, the Bank originated $38.5 million in fixed-rate loans and $7.4 million
in adjustable-rate loans. For the year ended June 30, 1995, the Bank originated
$37.7 million in fixed-rate loans and $21.3 million in adjustable-rate loans.
In recent years, the Bank has not purchased loans. For the nine months
ended March 31, 1996 and for the year ended June 30, 1995, the Bank purchased no
loans. The Bank has recently expanded its mortgage banking operations and
expects such operations to expand further in the future. For the nine months
ended March 31, 1996, the Bank sold $12.6 million in conforming residential one-
to four-family loans, compared to $1.2 million for the nine months ended March
31, 1995. The residential loans sold by the Bank are fixed-rate residential
loans with maturities of 15 and 30 years.
Set forth below is a table showing the Bank's loan originations, sales
and repayments for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Year Ended June 30,
---------------------- ---------------------
1996 1995 1995 1994
----------- --------- ----------- --------
Originations by type: (In Thousands)
<S> <C> <C> <C> <C>
Adjustable rate:
Real estate -
One- to four-family residential................... $ 4,499 $15,759 $19,693 $ 8,305
Multi-family...................................... 52 -- -- --
Commercial........................................ 383 252 382 89
Land.............................................. 2,247 817 1,176 379
Consumer........................................... 187 -- -- --
------- ------- ------- -------
Total adjustable rate............................... 7,368 16,828 21,251 8,773
------- ------- ------- -------
Fixed rate:
Real estate -
One- to four-family residential................... 14,333 2,865 6,605 16,776
Land.............................................. 126 156 198 151
Construction...................................... 17,755 14,685 19,903 9,509
Consumer........................................... 6,305 7,809 10,956 10,169
------- ------- ------- -------
Total fixed rate.................................... 38,519 25,515 37,662 36,605
------- ------- ------- -------
Total loans originated.............................. 45,887 42,343 58,913 45,378
Sales and Repayments:
Real Estate -
One- to four-family residential.................... 12,561 1,156 4,721 15,809
------- ------- ------- -------
Total loans sold................................... 12,561 1,156 4,721 15,809
Principal repayments................................ 33,022 19,629 26,409 19,913
------- ------- ------- -------
Total sales and repayments......................... 45,583 20,785 31,130 35,722
Decrease (increase) in other items, net.............. (1,911) (2,558) (2,356) (2,927)
------- ------- ------- -------
Net (decrease) increase............................ $(1,607) $19,000 $25,427 $ 6,729
======= ======= ======= =======
</TABLE>
62
<PAGE>
Asset Quality
The Bank's collection procedures provide that when a loan is past due,
a first notice is sent to the borrower requesting payment ten days (for consumer
loans) and 16 days (for real estate loans) after the due date. A second notice
is sent 16 days (for consumer loans) and 30 days (for real estate) after the due
date. At the time of the second notice, phone calls are made by the Bank with
personal letter backups. If the loan remains delinquent for 30 days, a
telephone contact is made. If the loan becomes 60 days delinquent, a right-to-
cure letter generally is sent and the borrower is notified of the availability
of financial or counseling aid. If consumer loans are not resolved by 90 days,
the account is put on non-accrual status and repossession and/or legal action is
normally initiated. If a real estate loan is past due 60 days or more, the loan
is presented to the Board of Directors for future disposition. In most cases,
the Board of Directors authorizes the initiation of foreclosure proceedings. At
March 31, 1996, and at June 30, 1995 and 1994 the percentage of total loans
delinquent 90 days or more to net loans receivable were 0.42%, 0.21% and 0.71%,
respectively.
Delinquent Loans and Non-performing Assets. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Mortgage loans
are placed on non-accrual status when principal is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. The loan will remain on non-accrual status
until the loan is brought current.
Real estate acquired through foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan, or its fair value, less estimated selling
expenses. Any further write-down of real estate owned is charged against
earnings. At March 31, 1996, the Bank has no property classified as real estate
owned.
The following table sets forth information with respect to the Bank's
delinquent loans at March 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For
--------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 10 $ 733 1.40% 5 $ 285 0.54% 15 $ 1,018 1.94%
Consumer................. 10 61 0.57 6 24 0.23 16 85 0.80
------ ------ ------ ------ ------ --------
Total................. 20 $ 794 1.03 11 $ 309 0.40 31 $ 1,103 1.43
====== ====== ====== ====== ====== ========
</TABLE>
63
<PAGE>
The following table sets forth information regarding non-performing
loans and real estate owned by the Bank at the dates indicated. As of the dates
indicated, the Bank did not have any material restructured loans within the
meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At June 30,
At March 31, -----------------------
1996 1995 1994
------------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 70 $ 81 $ 221
Consumer....................................... 25 52 53
----- ----- -----
Total....................................... 95 133 274
----- ----- -----
Accruing loans delinquent more than 90 days:/(1)/
One- to four-family............................ 215 17 --
Consumer....................................... 7 -- 8
----- ----- -----
Total....................................... 222 17 8
----- ----- -----
Foreclosed assets:
One- to four-family............................ -- -- 68
Land........................................... -- -- 13
Consumer....................................... 11 12 16
----- ----- -----
Total....................................... 11 12 97
----- ----- -----
Total non-performing assets........................ $ 328 $ 162 $ 379
===== ===== =====
Total loans delinquent 90 days or more
to net loans receivable.......................... 0.41% 0.19% 0.53%
===== ===== =====
</TABLE>
- -----------------
/(1)/These loans are not currently delinquent 90 days or more with respect to
principal, but are delinquent with respect to late fees or interest.
For the nine months ended March 31, 1996 and the fiscal year ended
June 30, 1995, gross interest income which would have been recorded had the non-
accruing loans been current in accordance with their original terms amounted to
$6,000 and $11,000, respectively. The amount that was included in interest
income on such loans was $6,000 and $7,000 for the nine months ended March 31,
1996 and the fiscal year ended June 30, 1995, respectively.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
64
<PAGE>
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank reviews loans
in its portfolio monthly to determine whether such assets require classification
in accordance with applicable regulations. On the basis of management's review
of its assets, at March 31, 1996, the Bank had classified a total of $60,000 of
its assets as substandard. At March 31, 1996 the Bank had no assets classified
as doubtful or as loss. At March 31, 1996, total classified assets comprised
$60,000, or 0.76% of the Bank's capital and 0.07% of the Bank's total assets.
Other Loans of Concern. In addition to the non-performing loans set
forth in the tables above, as of March 31, 1996, there were no loans classified
by the Bank with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the security properties have
caused management to have some doubts as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and changes in the nature and volume
of its loan activity, including those loans which are being specifically
monitored by management. Such evaluation, which includes a review of loans for
which full collectibility may not be reasonably assured, considers among other
matters, the loan classifications discussed above, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience,
the amount of loans outstanding and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at
the lower of cost or fair value minus estimated cost to sell. If fair value at
the date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At March 31, 1996, the Bank had no properties which were
acquired through foreclosure.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At March 31, 1996, the Bank had a total allowance for loan losses
of $347,000, representing 109.46% of total non-performing loans and 0.45% of the
Bank's loans receivable, net. See Note 1 of the Notes to Consolidated Financial
Statements.
65
<PAGE>
The following table sets forth the allocation for loan losses by
category for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
At --------------------------------------------------------------
March 31, 1996 1995 1994
------------------------------------- ------------------------------ -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
-------------- ----------- --------- --------- -------- --------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... $ 30 $52,471 61.00% $ 34 $55,257 64.46% $ 28 $39,001 67.32%
Multi-family................. 1 321 0.37 1 134 0.16 1 163 0.28
Commercial real estate....... 6 1,025 1.19 4 818 0.95 2 317 0.55
Land......................... 21 3,641 4.23 8 1,992 2.32 3 545 0.94
Construction or development.. 149 17,888 20.80 58 16,221 18.93 29 7,857 13.56
Consumer..................... 140 10,676 12.41 121 11,296 13.18 100 10,052 17.35
---- ------- ------ ---- ------- ------ ---- ------- ------
Total................... $347 $86,022 100.00% $226 $85,718 100.00% $163 $57,935 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
</TABLE>
66
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Years Ended June 30,
--------------------- -------------------
1996 1995 1995 1994
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 226 $ 163 $ 163 $ 150
------- ------ ------
Charge-offs:
One- to four-family............................... -- 10 10 8
Consumer.......................................... 91 147 161 40
------- ------ ------- ------
91 157 171 48
Recoveries:
Consumer.......................................... 24 56 63 28
------- ------ ------- ------
24 56 63 28
------- ------ ------- ------
Net charge-offs.................................... 67 101 108 20
Provision for loan losses.......................... 188 143 171 33
------- ------ ------- ------
Balance at end of period........................... $ 347 $ 205 $ 226 $ 163
======= ====== ======= ======
Ratio of net charge-offs during the period
to average loans outstanding during the period... 0.11% 0.21% 0.16% 0.04%
======= ====== ======= ======
Ratio of allowance for loan loss to ending
loans receivable, net............................. 0.45% 0.28% 0.29% 0.30%
======= ====== ======= ======
Ratio of allowance for loan loss to non-
performing assets at end of period................ 105.79% 67.88% 139.51% 43.01%
======= ====== ======= ======
</TABLE>
67
<PAGE>
Investment Activities
General. Community Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flows projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At March 31, 1996, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 5.96%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Mortgage-backed Securities. The Bank purchases mortgage-backed
securities to supplement residential loan production and as part of its
asset/liability strategy. The type of securities purchased is based upon the
Bank's asset/liability management strategy and balance sheet objectives. The
Bank has invested primarily in federal agency securities, principally FHLMC and
Government National Mortgage Association ("GNMA") obligations. At March 31,
1996, the Bank's investment in mortgage-backed securities totaled $549,000, or
0.6% of its total assets. At March 31, 1996 and at June 30, 1995 and 1994, all
of the Bank's mortgage-backed securities were classified as held-to-maturity.
See Note 3 of the Notes to Consolidated Financial Statements.
The FHLMC and GNMA certificates are modified pass-through mortgage-
backed securities that represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable-rate, single-family residential
mortgages issued by these government-sponsored entities. As a result, the
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed rate or adjustable rate, as well as prepayment risk, are passed on to the
certificate holder. FHLMC provides the certificate holder a guarantee of timely
payments of interest and ultimate collection of principal, whether or not they
have been collected. GNMA's guarantee to the holder of timely payments of
principal and interest is backed by the full faith and credit of the U.S.
Government.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities.
Set forth below is a table showing the Bank's purchases, sales and
repayments of mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Year Ended June 30,
--------------------- -------------------
1996 1995 1995 1994
--------- -------- ------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Purchases.................. $ -- $ -- $ -- $ --
Sales...................... (2,914) -- -- --
Repayments................. (407) (753) (965) (1,572)
-------- -------- ------- --------
Net increase (decrease).... $ (3,321) $ (753) $ (965) $ (1,572)
======== ======== ======= ========
</TABLE>
68
<PAGE>
Other Investments. At March 31, 1996, the Bank's investment
securities other than mortgage-backed securities consisted of federal agency
obligations, FHLB stock and other FHLB interest-earning assets. In addition, in
recent years, the Bank has also invested in certain mutual funds whose assets
conform to the investments that a federally-chartered saving institution is
otherwise authorized to make directly.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At March 31, 1996, the Bank was in compliance
with this regulation. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Bank's
investment activities.
The following table sets forth the composition of the Bank's
investment securities, net of premiums and discounts, at the dates indicated.
The Bank adopted SFAS No. 115 on July 1, 1993. Investment securities with an
original maturity of less than five years are classified as available-for-sale
and are valued at fair value at March 31, 1996 and at June 30, 1995 and 1994.
<TABLE>
<CAPTION>
At At
March 31, June 30,
----------------- --------------------------------------
1996 1995 1994
------------------ ----------------- -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------- ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available-for-sale:
Federal agency obligations............. $ 1,981 48.22% $ 1,962 31.12% $ 1,994 25.74%
Mutual funds........................... -- -- 1,079 17.11 1,038 13.40
------- ------- ------- ------- ------- -------
Subtotal................................ 1,981 48.22 3,041 48.23 3,032 39.14
FHLB stock.............................. 811 19.74 795 12.61 521 6.72
------- ------- ------- ------- ------- -------
Total investment securities and
FHLB stock............................. 2,792 67.96 3,836 60.84 3,553 45.86
------- ------- ------- ------- ------- -------
Other interest-earning assets:
FHLB certificates of deposit.......... -- -- -- -- 1,600 20.65
FHLB checking......................... 1,316 32.04 2,417 38.34 1,078 13.91
FHLB daily time....................... -- -- 52 0.82 1,517 19.58
------- ------- ------- ------- ------- -------
Total other interest-earnings assets.... 1,316 32.04 2,469 39.16 4,195 54.14
------- ------- ------- ------- ------- -------
Total investment portfolio.............. $ 4,108 100.00% $ 6,305 100.00% $ 7,748 100.00%
======= ======= ======= ======= ======= =======
Average remaining life of investment
securities available for sale......... 1.17 years 1.92 years 2.92 years
</TABLE>
69
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities excluding FHLB stock at March 31, 1996.
<TABLE>
<CAPTION>
March 31, 1996
---------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------- -------- -------- -------- ---------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
---------- -------- -------- -------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations................... $ 991 $ 990 $ -- $ -- $ 1,981 $ 1,981
-------- ------- ------- ------- ------- -------
Total investment securities.................. $ 991 $ 990 $ -- $ -- $ 1,981 $ 1,981
======== ======= ======= ======= ======= =======
Weighted average yield....................... 4.73% 4.23% --% --% 4.48% 4.48%
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, FHLB advances, and other funds
provided from operations.
FHLB advances are used to support lending activities and to assist in
the Bank's asset/liability management strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Asset\Liability
Management." Typically, the Bank does not use other forms of borrowings. At
March 31, 1996, the Bank had $9.0 million in FHLB advances.
Deposits. Community Bank offers a variety of deposit accounts having
a wide range of interest rates and terms. The Bank's deposits consist of
passbook, demand, NOW, money market deposit and certificate accounts. The
certificate accounts currently range in terms from 91 days to seven years.
The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. Currently, Community
Bank solicits deposits from its market area only, and does not use brokers to
obtain deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates and
competition.
The Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest-rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability management.
Notwithstanding the foregoing, a significant percentage of the Bank's deposits
are for terms of less than one year. At March 31, 1996, $39.4 million, or 80.3%
of the Bank's certificates of deposit were in certificates of deposit with terms
of 12 months or less. The Bank believes that upon maturity most of these
deposits will remain at the Bank. The ability of the Bank to attract and
maintain savings accounts and certificates of deposit, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
70
<PAGE>
Savings Portfolio
The following table sets forth the dollar amount of savings deposits
with various types of deposit programs offered by the Bank at the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
At March 31, ------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Balance Percent Balance Percent Balance Percent
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings
Deposits:
Passbook savings..................... $ 3,656 5.38% $ 3,740 5.48% $ 3,952 6.57%
NOW accounts......................... 7,919 11.66 7,601 11.13 7,619 12.66
Money market accounts................ 5,778 8.51 5,874 8.61 8,178 13.59
Noninterest-bearing demand accounts.. 1,521 2.24 1,320 1.93 936 1.55
------- ------- ------- ------- -------- -------
Total non-certificates.............. 18,874 27.79 18,535 27.15 20,685 34.37
------- ------- ------- ------- -------- -------
Certificates:
2.00 - 3.99%......................... 13 0.02 876 1.28 16,894 28.07
4.00 - 5.99%......................... 37,675 55.47 19,118 28.00 19,812 32.92
6.00 - 7.99%......................... 10,869 16.01 29,114 42.64 1,598 2.66
8.00 - 9.99%......................... 485 0.71 631 0.93 868 1.44
10.00% & over........................ -- -- -- -- 323 0.54
------- ------- ------- ------- -------- -------
Total certificates.................. 49,042 72.21 49,739 72.85 39,495 65.63
------- ------- ------- ------- -------- -------
Total........................... $67,916 100.00% $68,274 100.00% $ 60,180 100.00%
======= ======= ======= ======= ======== =======
</TABLE>
Deposit Activity
The following table sets forth the deposit activities of the Bank for
the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Years Ended June 30,
-------------------- ----------------------
1996 1995 1995 1994
------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance.................... $ 68,274 $ 60,180 $ 60,180 $ 58,750
Deposits(1)........................ 117,991 117,519 161,534 134,976
Withdrawals........................ 120,345 112,572 155,498 135,252
Interest credited.................. 1,996 1,386 2,058 1,706
-------- -------- -------- --------
Ending balance..................... $ 67,916 $ 66,513 $ 68,274 $ 60,180
======== ======== ======== ========
Net (decrease) increase............ $ (358) $ 6,333 $ 8,094 $ 1,430
======== ======== ======== ========
Percent (decrease) increase.. (0.52)% 10.52% 13.45% 2.43%
======== ======== ======== ========
</TABLE>
- ------------------
(1) Does not reflect the rollover of certificates of deposit.
71
<PAGE>
Time Deposit Maturity Schedule
The following table shows weighted average rate and maturity
information for the Bank's certificates of deposit as of March 31, 1996.
<TABLE>
<CAPTION>
Certificate accounts maturing in Total Weighted
- -------------------------------- Balance Average Percent of
quarter ending: Balance Rate Total
- --------------- --------- --------- -----------
<S> <C> <C> <C>
June 30, 1996......................... $15,026 5.91% 30.64%
September 30, 1996.................... 8,241 5.39% 16.80%
December 31, 1996..................... 4,152 5.11% 8.47%
March 31, 1997........................ 11,952 5.54% 24.37%
June 30, 1997......................... 1,041 5.23% 2.12%
September 30, 1997.................... 1,871 5.29% 3.82%
December 31, 1997..................... 880 5.31% 1.79%
March 31, 1998........................ 661 5.59% 1.35%
June 30, 1998......................... 889 5.51% 1.81%
September 30, 1998.................... 524 5.72% 1.07%
December 31, 1998..................... 254 5.70% 0.52%
March 31, 1999........................ 64 5.00% 0.13%
Thereafter............................ 3,487 6.19% 7.11%
------- ---- ------
Total............................. $49,042 100.00%
======= ======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of
March 31, 1996.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over
or Less Months Months 12 Months Total
-------- ----------- ------------ ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000................... $ 13,880 $ 7,935 $ 15,162 $ 9,063 $ 46,040
Certificates of deposit of
$100,000 or more................ 1,146 306 942 608 3,002
-------- ------- -------- ------- --------
Total certificates of deposit.. $ 15,026 $ 8,241 $ 16,104 $ 9,671 $ 49,042
======== ======= ======== ======= ========
</TABLE>
72
<PAGE>
Borrowings. Community Bank's borrowings historically have consisted
of advances from the FHLB of Des Moines. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At March 31, 1996, the Bank had $9.0 million in
advances from the FHLB. The Bank has the ability to purchase additional capital
stock from the FHLB. For additional information regarding the term to maturity
on FHLB advances, see Note 7 of the Notes to Consolidated Financial Statements
and "Business - Lending Activities."
The following tables set forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated, as well as the
amount of such advances and the weighted average interest rate at the dates
indicated.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Years Ended June 30,
---------------------- ----------------------
1996 1995 1995 1994
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Maximum Balance:
- ---------------
FHLB advances............................ $ 14,360 $ 10,926 $ 15,877 $ --
Average Balance:
- ---------------
FHLB advances............................ $ 12,451 $ 5,927 $ 7,919 $ 57
</TABLE>
<TABLE>
<CAPTION>
At June 30,
March 31, ----------------------
1996 1995 1994
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
FHLB advances........................... $ 9,000 $ 15,877 $ --
========= ======== ========
Weighted average interest rate.......... 5.91% 6.91% --%
</TABLE>
Employees
At March 31, 1996, the Bank had a total of 42 full-time and eight
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Properties
The Bank conducts its business through its main office, located in
Excelsior Springs, Missouri and one branch office located in Kearney, Missouri.
The Bank's Kearney branch office space is leased. The following table sets
forth information relating to the Bank's offices as of March 31, 1996. The
total net book value of the Bank's premises and equipment (including land,
buildings and leasehold improvements and furniture, fixtures and equipment) at
March 31, 1996 was approximately $1.3 million.
73
<PAGE>
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage March 31, 1996
- ------------------------------ --------- --------- ------------------
(In thousands)
<S> <C> <C> <C>
Main Office: 1983 10,000 $1,159
1001 North Jesse James Road
Excelsior Springs, Missouri 64020
Branch Office: Leased 2,725 127
178 West 6th Street (Expires
Kearney, Missouri 64020 January 2000)
</TABLE>
Community Bank believes that its current facilities are adequate to meet the
present and forseeable needs of the Bank and the Holding Company.
Legal Proceedings
Community Bank is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Community Bank in the proceedings, that the resolution of these
proceedings should not have a material effect on the Holding Company's financial
position or results of operations on a consolidated basis.
Service Corporation Activities
As a federally chartered savings association, Community Bank is
permitted by OTS regulations to invest up to 2% of its assets, or approximately
$1.7 million at March 31, 1996, in the stock of, or loans to, service
corporation subsidiaries. Community may invest an additional 1% of its assets in
service corporations where such additional funds are used for inner-city or
community development purposes and up to 50% of its total capital in conforming
loans to service corporations in which it owns more than 10% of the capital
stock. In addition to investments in service corporations, federal associations
are permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities in which a federal association may engage. At
March 31, 1996, Community Bank had one subsidiary, CBES Service Corporation
("CBES"). CBES was established in March 1993 for the purpose of offering credit
life, health and accident insurance to its customers. At March 31, 1996, the
Bank's investment in CBES was $1,000. Also, for the fiscal year ended
June 30, 1995, CBES had pre-tax income of approximately $2.
REGULATION
General
Community Bank is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Des Moines and is subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Bank, the Holding Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings and loan associations. The Bank is a member of the SAIF.
The deposits of the Bank are insured by the SAIF of the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
74
<PAGE>
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings and
loan associations. As part of this authority, the Bank is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of the Bank were as of
May 1995 and April 1991, respectively. Such examinations did not result in any
material changes to the operations, personnel or finances of the Bank. When
these examinations are conducted by the OTS and the FDIC, the examiners may
require the Bank to provide for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment,
based upon the savings and loan association's total assets. The Bank's OTS
assessment for the fiscal year ended June 30, 1995, was approximately $24,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Holding
Company. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders and
to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
example, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings and
loan associations are also generally authorized to branch nationwide. The Bank
is in compliance with the noted restrictions.
OTS regulations limit a thrift institution's loans to one borrower to
the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At
March 31, 1996, the Bank's lending limit under this restriction was
approximately $1.2 million. Assuming the sale of the minimum number of shares in
the Conversion at March 31, 1996, that limit would be increased to approximately
$1.7 million. The Bank is in compliance with the loans-to-one borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a capital
compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action. The OTS and the
other federal banking agencies have also proposed additional guidelines on asset
quality and earnings standards. No assurance can be given as to whether or in
what form the proposed regulations will be adopted. The guidelines are not
expected to materially effect the Bank.
Insurance of Accounts and Regulation by the FDIC
Community Bank is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
and loan associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-
based system under which all insured depository institutions are placed into one
of nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6%
75
<PAGE>
and a risk-based capital ratio of at least 10%) and considered healthy would pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., a core capital or core capital to risk-based capital ratios of less than
4% or a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern would pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. See "Risk Factors -Recapitalization of SAIF, Disparity
Between BIF and SAIF Premiums" for information regarding the FDIC's proposed
regulations which would revise BIF premiums.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
The FDIC has reported that the BIF attained the 1.25% reserve ratio in May 1995
but that the SAIF is not likely to reach the 1.25% reserve ratio until 2002. In
August 1995, the FDIC issued final regulations to reduce the assessment rates
for the BIF. Under the revised assessment schedule, which became effective on
June 1, 1995, BIF-insured institutions paid an average of 0.045% of deposits,
with new assessment rates ranging from 0.04% of deposits to 0.31% of deposits.
The FDIC refunded any assessments collected in excess of those due under the
revised schedule. On November 14, 1995, the FDIC voted to reduce annual BIF
assessments to the legal minimum of $2,000, effective January 1, 1996 for all
BIF-insured institutions except for those that were not well capitalized or were
assigned to the higher supervisory risk categories. It is estimated that 92% of
the BIF-insured institutions will pay only the minimum annual assessment. SAIF-
insured institutions will continue to pay assessments at the current assessment
rates until the SAIF attains the 1.25% reserve ratio. The resulting disparity
in deposit insurance assessments between SAIF members and BIF members is likely
to provide BIF-insured institutions with certain competitive advantages in the
pricing of loans and deposits, and in lowered operating costs, pending any
legislative action to remedy the disparity.
The proposed Budget Act, which was vetoed by the President, included
provisions that focused on a resolution of the financial problems of the SAIF.
Under the provisions of the Budget Act, all SAIF member institutions would pay a
special assessment to recapitalize the SAIF, and the assessment base for the
payments on the FICO bonds would be expanded to include the deposits of both
BIF- and SAIF-insured institutions. The amount of the special assessment
required to recapitalize the SAIF has been estimated to be approximately 80
basis points of the SAIF-assessable deposits. This estimate of the special SAIF
assessment is less than the assessment of 85 to 90 basis points that had been
previously estimated. The special assessment would have been imposed on the
first business day of January 1996, or on such other date prescribed by the FDIC
not later than 60 days after enactment of the Budget Act, based on the amount of
SAIF deposits on March 31, 1995. The Budget Act would have also permitted BIF-
insured institutions with deposits subject to SAIF assessments to reduce such
SAIF-deposits by 20% in computing the institution's special assessment. If an
85 or a 90 basis point assessment were assessed against the Bank's deposits as
of March 31, 1996, the Bank's aggregate special SAIF assessment would be
approximately $577,000 or $611,000, respectively, and an assessment of 80 basis
points would be $543,000. The Budget Act also would have provided that the BIF
could not assess regular insurance assessments when it has a reserve ratio of
1.25% or more except on those of its member institutions that have been found to
have "moderately severe" or "unsatisfactory" financial, operational, or
compliance weaknesses.
The Budget Act also provided for the merger of the BIF and SAIF on
January 1, 1998, with such merger being conditioned upon the prior elimination
of the thrift charter. Congressional leaders had also agreed that Congress
should consider and act upon separate legislation to eliminate the thrift
charter as early as possible in 1996. If adopted, such legislation would
require that the Bank, as a federal savings and loan association, convert to a
bank charter. Such a requirement to convert to a bank charter could cause the
Bank to lose the favorable tax treatment for its bad debt reserves that it
currently enjoys under Section 593 of the Code and to have all or part of its
existing bad debt reserves recaptured into income. At March 31, 1996, the Bank
had a balance of approximately $1.7 million in bad debt reserves.
The above described provisions of the Budget Act were not the basis
for the President's veto, and Congressional leaders have indicated that these
provisions will be the basis for future legislation to recapitalize the SAIF.
If enacted by Congress, such legislation would have the effect of reducing the
capital of SAIF member institutions by the after-tax
76
<PAGE>
cost of the special SAIF assessment, plus any related additional tax
liabilities. The legislation would also have the effect of reducing any
differential that may otherwise be required in the assessment rates for the BIF
and SAIF.
Regulatory Capital Requirements
Federally insured savings and loan associations, such as the Bank, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings and loan associations. Generally, these
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a case-
by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the regulatory capital calculation. At March 31, 1996, the Bank
had no intangible assets and a valuation allowance, net of tax under SFAS No.
115 of $13,000.
The OTS regulations establish special capitalization requirements for
savings and loan associations that own subsidiaries. In determining compliance
with the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are consolidated for
capital purposes in proportion to the Bank's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank has one service corporation subsidiary.
At March 31, 1996, the Bank had tangible capital of $7.9 million, or
9.15% of adjusted total assets, which is approximately $6.6 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date. On
a pro forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of the net proceeds in assets not excluded for tangible capital
purposes, the Bank would have had tangible capital equal to 12.23%, 12.79% and
13.34%, respectively, of adjusted total assets at March 31, 1996, which is $9.7
million, $10.3 million and $10.9 million, respectively, above the requirement.
The capital standards also require core capital equal to at least 3%
of adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) and a limited
amount of purchased credit card relationships and purchased mortgage servicing
rights. As a result of the prompt corrective action provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") discussed
below, however, a savings and loan association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At
March 31, 1996, the Bank had no intangibles which were subject to these tests.
At March 31, 1996, the Bank had core capital equal to $7.9 million, or
9.15% of adjusted total assets, which is $5.3 million above the minimum leverage
ratio requirement of 3% as in effect on that date. On a pro forma basis, after
giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion and investment of the net proceeds in
assets not excluded from core capital, the Bank would have had core capital
equal to 12.23%, 12.79% and 13.34%, respectively, of adjusted total assets at
March 31, 1996, which is $8.3 million, $8.9 million and $9.5 million,
respectively, above the requirement.
The OTS risk-based requirement requires savings and loan associations
to have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. At March 31, 1996, the Bank had $347,000 of general
loan valuation allowances, which was less than 1.25% of risk-weighted assets.
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Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio (these
items are excluded on a sliding scale through March 31, 1995, after which they
must be excluded in their entirety) and reciprocal holdings of qualifying
capital instruments. Community Bank had $518,000 of such exclusions from capital
and assets at March 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless the loan amount in excess of such ratio is insured by an insurer approved
by the Federal National Mortgage Association ("FNMA") or FHLMC.
On March 31, 1996, the Bank had total capital of $7.9 million
(including approximately $7.9 million in core capital, $347,000 in qualifying
supplementary capital and reduced by $518,000 for exclusions from capital) and
risk-weighted assets of $64.2 million (with no converted off-balance sheet
assets); or total capital of 12.0% of risk-weighted assets. This amount was
$2.6 million above the 8% requirement in effect on that date. On a pro forma
basis, after giving effect to the sale of the minimum, midpoint and maximum
number of shares of Common Stock offered in the Conversion, the infusion to the
Bank of 50% of the net Conversion proceeds and the investment of those proceeds
in 20% risk-weighted government securities, the Bank would have had total
capital of 16.71%, 17.60% and 18.48%, respectively, of risk-weighted assets,
which is above the current 8% requirement by $5.7 million, $6.2 million and $6.8
million, respectively.
The OTS has adopted a final rule that requires every savings and loan
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two
quarter lag between calculating interest rate risk and recognizing any deduction
from capital. The rule will not become effective until the OTS adopts the
process by which savings and loan associations may appeal an interest rate risk
deduction determination. Any savings and loan association with less than $300
million in assets and a total risk-based capital ratio in excess of 12% is
exempt from this requirement unless the OTS determines otherwise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" for information regarding the effect of
this rule on the Bank.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings and loan associations that
fail to meet their capital requirements. Effective December 19, 1992, the
federal banking agencies, including the OTS, were given additional enforcement
authority over undercapitalized depository institutions. The OTS is generally
required to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4% core
capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such association must submit a capital restoration plan and
until such plan is approved by the OTS may not increase its assets, acquire
another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
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Any savings and loan association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be made subject to one or more of additional specified actions and
operating restrictions, which may cover all aspects of its operations and
include a forced merger or acquisition of the Bank. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement activity of the OTS and the FDIC, including the appointment of a
receiver or conservator.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose restrictions applicable to such category if
the institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Community Bank may have a substantial adverse effect on the Bank's operations
and profitability and the value of the Common Stock purchased in the Conversion.
Holding Company shareholders do not have preemptive rights and, therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the Bank would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual-to-stock conversion. See "The Conversion - Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank" and
"- Restrictions on Repurchase of Stock."
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "- Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the Bank's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Holding Company, the Bank will also
be required to give the OTS 30 days' notice prior to declaring any dividend on
its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. See "- Regulatory Capital
Requirements."
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The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings and
loan association may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company) provided that it has a CAMEL 1
or 2 rating, is not in troubled condition and would remain adequately
capitalized (as defined by regulation) following the proposed distribution.
Savings and loan associations that would remain adequately capitalized following
the proposed distribution but do not meet the other noted requirements must
notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings and loan
association may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. A savings and loan association will be considered in troubled
condition if it has a CAMEL rating of 4 or 5, is subject to an enforcement
action relating to its safety and soundness or financial viability or has been
informed in writing by the OTS that it is in troubled condition. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings and loan associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings and loan associations. At the present time, the minimum liquid asset
ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term U.S. Treasury obligations)
currently must constitute at least 1% of the Bank's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of either liquid assets ratio requirement. At
March 31, 1996, the Bank was in compliance with both requirements, with an
overall liquid assets ratio of 5.96% and a short-term liquid assets ratio of
4.06%.
Accounting
An OTS policy statement applicable to all savings and loan
associations clarifies and re-emphasizes that the investment activities of a
savings and loan association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
generally accepted accounting principles. Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with appropriate
documentation.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than generally accepted accounting principles by the
OTS, to require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS. The Bank is in compliance with these amended rules.
Qualified Thrift Lender Test
All savings and loan associations, including the Bank, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings and loan association to have at
least 65% of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At March 31, 1996, the Bank met the test and has always met the
test since its effectiveness.
Any savings and loan association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a QTL and
thereafter remains a QTL. If an association does not requalify and converts to
a national bank charter, it must remain SAIF-insured until the FDIC permits it
to transfer to the BIF. If such an association has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both
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a savings and loan association and a national bank, and it is limited to
national bank branching rights in its home state. In addition, the Bank is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in January 1996 and received a rating of "satisfactory record of
meeting community credit needs."
Transactions with Affiliates
Generally, transactions between a savings and loan association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Bank as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the Bank's capital. Affiliates of the Bank include the Holding Company and any
company which is under common control with the Bank. In addition, a savings and
loan association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings and loan association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings and loan association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings and loan association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Holding Company and any of its subsidiaries (other than the
Bank or any other SAIF-insured savings and loan association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
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If the Bank fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings and loan associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings and loan association.
Federal Securities Law
The stock of the Holding Company will be registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Holding Company will be subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any three-
month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At March 31, 1996, the Bank was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "- Liquidity."
Savings and loan associations are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board regulations
require associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Des Moines, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
and loan associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and
procedures are subject to the regulation and oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in
the FHLB of Des Moines. At March 31, 1996, the Bank had $810,700 (at cost) of
FHLB stock, which was in compliance with this requirement. In past years, the
Bank has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 8.10% and were 7.63% for fiscal 1995.
For the fiscal year ended June 30, 1995, dividends paid by the FHLB of Des
Moines to the Bank totaled approximately $44,000, which constitutes a $1,000
increase over the amount of dividends received in fiscal year 1994. No
assurance can be given that such dividends will continue in the future at such
levels.
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Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings and loan associations and to contribute to low-
and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-
income housing projects. These contributions have affected adversely the level
of FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
Federal and State Taxation
Federal Taxation. Savings and loan associations such as the Bank that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code are permitted to establish reserves for bad
debts and to make annual additions thereto which may, within specified formula
limits, be taken as a deduction in computing taxable income for federal income
tax purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" is computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) may be computed under either the experience method or
the percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings and loan association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings and loan association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") is 8%.
The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permits qualifying
savings and loan associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the Bank
may not deduct any addition to a bad debt reserve and generally must include
existing reserves in income over a four-year period. No representation can be
made as to whether the Bank will meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
March 31, 1996, the 6% and 12% limitations did not restrict the percentage bad
debt deduction available to the Bank. It is possible that these limitations
will be a limiting factor in the future.
In addition to the regular federal income tax, corporations, including
savings and loan associations such as the Bank, generally are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent
it exceeds the corporation's regular income tax and net operating losses can
offset no more than 90% of alternative minimum taxable income. For taxable
years beginning after 1986 and before 1996, corporations, including savings and
loan associations such as the Bank, are also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings and loan
association's bad debt reserves for "qualifying real property loans" and
deducted for federal income tax purposes exceed the allowable amount of such
reserves computed under the experience method and to the extent of the Bank's
supplemental reserves for losses on loans ("Excess"), such Excess may not,
without adverse tax consequences, be utilized for the payment of cash dividends
or other distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1996, the Bank's Excess for tax purposes totaled
approximately $1.7 million.
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The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Holding Company intends to file consolidated federal income tax returns with the
Bank. Savings and loan associations, such as the Bank, that file federal income
tax returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the non-
savings and loan association members of the consolidated group that are
functionally related to the activities of the savings and loan association
member.
The Bank has not been audited by the IRS recently with respect to
federal income tax returns. In the opinion of management, any examination of
still open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
State Taxation. The Missouri Corporation Income Tax Act provides for
an exemption from the Missouri Corporation Income Tax for mutual savings banks
and for banking corporations, which includes stock associations (e.g., the
Bank). However, this exemption does not extend to non-banking entities such as
the Company. The non-banking subsidiaries of the Bank (as well as the Company)
are subject to the Missouri Corporate Income Tax based on their Missouri taxable
income, as well as franchise taxes. The Missouri Corporation Income Tax applies
at graduated rates from 4% upon the first $25,000 of Missouri taxable income to
8% on all Missouri taxable income in excess of $200,000. For these purposes,
"Missouri taxable income" means net income which is earned within or derived
from sources within the State of Missouri, after adjustments permitted under
Missouri law including a federal income tax deduction and an allowance for net
operating losses, if any. In addition, the Bank will become subject to the
Missouri Shares Tax after the Conversion, which will be imposed on the assessed
value of the Bank's stock. The formula for deriving the assessed value is to
calculate 15% of the sum of (i) 20% of a corporation's capitalized earnings,
plus (ii) 80% of a corporation's taxable stockholders' equity, and to subtract
from that amount 50% of a corporation's real and personal property assessment.
Other various items may also be subtracted in calculating a corporation's
capitalized earnings.
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT
Directors and Executive Officers of the Holding Company
The Board of Directors of the Holding Company currently consists of
six members, each of whom is also a director of the Bank. See "Directors of the
Bank." Each Director of the Holding Company has served as such since the
Holding Company's incorporation in June 1996. Directors of the Holding Company
will serve three-year staggered terms so that approximately one-third of the
directors will be elected at each annual meeting of stockholders. The terms of
the current directors of the Holding Company are the same as their terms as
directors of the Bank. The Holding Company intends to pay directors a fee of
$2,000 per annum, payable on a quarterly basis. See "- Directors of the Bank."
The executive officers of the Holding Company, each of whom held his
present position since June 1996, are elected annually and hold office until his
respective successor has been elected and qualified or until death, resignation
or removal by the Board of Directors. The executive officers of the Holding
Company, are set forth below. See "- Executive Officers Who are Not Directors."
<TABLE>
<CAPTION>
Name Title
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<S> <C>
Larry E. Hermreck Chief Executive Officer and Secretary
Dennis D. Hartman Controller and Chief Financial Officer
</TABLE>
It is not anticipated that the executive officers of the Holding
Company will receive any remuneration in their capacity as Holding Company
executive officers. For information regarding compensation of directors and
executive
84
<PAGE>
officers of the Bank, see "- Meetings of the Board of Directors of the Bank,"
"- Compensation of the Board of Directors of the Bank" and "- Executive
Compensation."
Committees of the Holding Company
The Holding Company formed standing Audit, Nominating and Compensation
Committees in connection with its organization in June 1996. The Holding
Company was not incorporated in fiscal 1995 and therefore the committees did not
meet during that fiscal year.
The Audit Committee will review audit reports and related matters to
ensure effective compliance with regulations and internal policies and
procedures. This committee also will act on the recommendation by management of
an accounting firm to perform the Holding Company's annual audit and acts as a
liaison between the auditors and the Board. The current members of this
committee are Directors Cox, Lalumondier, Lamb, Radley and Rounkles.
The Nominating Committee will meet annually in order to nominate
candidates for membership on the Board of Directors. This committee is
comprised of the Board members who are not up for election.
The Compensation Committee will establish the Holding Company's
compensation policies and review compensation matters. The current members of
this Committee are Directors Cox, Lalumondier, Lamb, Radley and Rounkles.
Indemnification
The Certificate of Incorporation of the Holding Company provides that
a director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the Delaware General Corporation Law
("DGCL") against all expenses, liability and loss reasonably incurred or
suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company and, with respect
to any criminal action or proceeding, either had reasonable cause to believe
such conduct was lawful or did not have reasonable cause to believe his conduct
was unlawful.
The Certificate of Incorporation and Delaware law also provide that
the indemnification provisions of such Certificate and the statute are not
exclusive of any other right which a person seeking indemnification may have or
later acquire under any statute, provision of the Certificate of Incorporation,
Bylaws of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action. A similar effect would not be expected
for third-party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Holding
Company has the power to indemnify such person against such expense, liability
or loss under the DGCL. The Holding Company intends to obtain such insurance.
Directors of the Bank
Prior to the Conversion, the direction and control of the Bank, as a
mutual savings institution, had been vested in its Board of Directors. Upon
conversion of the Bank to stock form, each of the directors of the Bank will
continue to serve as a director of the converted Bank. The Board of Directors of
the Bank currently consists of six directors. The directors are divided into
three classes. Approximately one-third of the directors are elected at each
annual meeting of stockholders. Because the Holding Company will own all of the
issued and outstanding shares of capital stock of the converted Bank after the
Conversion, directors of the Holding Company will elect the directors of the
Bank.
85
<PAGE>
The following table sets forth certain information regarding the
directors of the Bank and the Holding Company:
<TABLE>
<CAPTION>
Position(s) Held with Director Term
Name the Bank Age/(1)/ Since Expires
- ---- ------------------------- -------- -------- -------
<S> <C> <C> <C> <C>
Robert E. McCrorey Chairman of the Board and President 55 1973 1996
Edgar L. Radley Vice Chairman of the Board 68 1979 1997
Richard N. Cox Director 49 1992 1996
Robert L. Lalumondier Director 56 1992 1998
Cecil E. Lamb Director 67 1985 1998
Rodney G. Rounkles Director 58 1984 1997
</TABLE>
- ---------------------------
/(1)/ At March 31, 1996.
The business experience of each director is set forth below. All
directors have held their present position for at least the past five years,
except as otherwise indicated.
Robert E. McCrorey. Mr. McCrorey has served as a loan originator for
the Bank since 1993. Prior to that time, he served as a branch manager for a
beer distributor.
Edgar L. Radley. Mr. Radley is the retired owner and operator of a
Coast to Coast hardware store, which he operated until 1990.
Richard N. Cox. Mr. Cox is the owner and operator of Cox Tool Co.,
Inc., a designer/builder of plastic molds, located in Excelsior Springs,
Missouri.
Robert L. Lalumondier. Mr. Lalumondier is the owner of Lalumondier
Insurance Agency, located in Kearney, Missouri.
Cecil E. Lamb. Mr. Lamb is a retired postmaster.
Rodney G. Rounkles. Mr. Rounkles was the plant manager of a molding
products plant in Excelsior Springs, Missouri until his retirement in 1995.
Executive Officers Who Are Not Directors
The Bank's executive officers who are not also directors will retain
their offices in the converted Bank. Officers of the Bank are elected annually
by the Board of Directors of the Bank. The business experience of the executive
officers of the Bank and the Holding Company who are not also directors are set
forth below.
Larry E. Hermreck. Mr. Hermreck, age 56, has been with the Bank for
the past 23 years and has served as Chief Executive Officer for 18 years. In
that capacity, he is responsible for overseeing the day to day operations of the
Bank.
Deryl R. Goettling. Mr. Goettling, age 49, is the Manager of the
Bank's Mortgage Loan Department and is responsible for the supervision of all
mortgage lending operations of the Bank. Mr. Goettling joined the Bank in 1986
and served in various capacities prior to being promoted to his current position
in 1992.
Margaret E. Teegarden. Ms. Teegarden, age 47, is the Manager of the
Bank's Savings Department, responsible for managing the Bank's savings
department. Ms. Teegarden joined the Bank in 1978.
Dennis D. Hartman. Mr. Hartman, age 41, is the Controller and Manager
of the Bank's Accounting Department. He is responsible for the supervision of
the Accounting Department and reporting to the regulatory authorities. He is
also responsible for overseeing the Bank's asset/liability management program.
Mr. Hartman joined the Bank in 1978.
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<PAGE>
James V. Alderson. Mr. Alderson, age 50, has served as the Manager of
the Consumer Loan Department since June 1994, responsible for supervision of the
Bank's consumer lending operations. Mr. Alderson has been with the Bank since
1990 and served as a loan officer until June 1994.
Meetings of the Board of Directors and Committees of the Bank
The Board of Directors met 28 times during the year ended
June 30, 1995. During fiscal 1995, no director of the Bank attended fewer than
75% of the aggregate of the total number of Board meetings and the total number
of meetings held by the committees of the Board of Directors on which he served.
The Board of Directors of the Bank has established various committees,
including Executive, Audit and Salary Review Committees. The Board of Directors
does not have a separate Nominating Committee. The full Board of Directors acts
as the Nominating Committee, except for directors who are up for election at the
upcoming meeting.
The Executive Committee generally has the power and authority to act
on behalf of the Board of Directors on important matters between scheduled Board
meetings, unless specific Board of Directors action is required. The members of
the Executive Committee consist of Messrs. McCrorey, Radley and Rounkles. The
Executive Committee did not meet during the year ended June 30, 1995.
The Audit Committee reviews (i) the independent auditors' reports and
results of their examination, subject to review by and with the entire Board of
Directors, (ii) the internal audit function, which is under the control of and
reports directly to the Audit Committee, and (iii) the examination reports of
the OTS and the FDIC and other regulatory reports, subject to review by and with
the entire Board of Directors. The Bank's full Board of Directors acts as the
Audit Committee. The Audit Committee met 12 times during the year ended
June 30, 1995.
The Salary Review Committee reviews the compensation of the Bank's
officers and employees, and it is expected that the members of the Committee
will serve as trustees of the ESOP and as administrators of the Stock Option
Plan and the Recognition and Retention Plan. The members of the committee are
Messrs. Lamb, Rounkles, Lalumondier, Radley, Cox and Hermreck, and the committee
met one time during the year ended June 30, 1995.
Compensation of the Board of Directors of the Bank
During fiscal 1995, all directors received a fee of $650 per month
from July to December 1994, plus an additional $650 fee for a year-end special
meeting of the board held in December 1994, and a fee of $700 per month from
January to June 1995. During fiscal 1995, directors also received fees of $200
per month for participation on board committees. Each director received
aggregate board and committee fees of $11,150 during fiscal 1995. During fiscal
1996, the Bank paid directors board fees of $700 per month from July to December
1995, plus an additional $700 fee for a special meeting of the board held in
December 1995. Effective January 1996, board fees were increased to $800 per
month. Each director except for Mr. Lalumondier also receives group
hospitalization, dental, prescription and life insurance coverage. Mr. McCrorey
also is paid a salary for services performed as a loan originator for the Bank.
In order to encourage directors to remain members of the Bank's board,
in February 1995 the Bank entered into Director Emeritus Agreements (the
"Emeritus Agreements") with each of the directors of the Bank. Pursuant to the
Emeritus Agreements, upon reaching age 75, directors Radley, Lamb, Lalumondier,
McCrorey, Rounkles and Cox will receive a benefit of $671, $525, $642, $1,225,
$817, and $846, respectively, per month paid monthly for ten years following
retirement. Upon termination of service for disability or retirement prior to
age 75, the director will receive a reduced amount pursuant to a schedule as set
forth in the Emeritus Agreements, paid monthly for ten years following
termination, or if earlier, until the director's recovery from disability. Upon
termination following a change in control of the Bank, each director would be
entitled to a lump sum payment of a reduced amount pursuant to a schedule as set
forth in the Emeritus Agreement. Upon the death or termination for cause of a
director, no benefits will be paid to such director. The Bank purchased life
insurance to finance the benefits that would be payable to five of the six
directors. The Bank accrued expenses during fiscal 1995 in the aggregate amount
of $4,440 for the Emeritus Agreements.
Upon completion of the Conversion, and subject to the approval of the
Holding Company's stockholders, each director of the Bank who is not a full-time
employee (5 persons) will receive an option to purchase shares of Common Stock
and an award of restricted stock under the RRP equal to 0.5% and 0.2%,
respectively, of the Common Stock issued
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<PAGE>
in the Conversion. See "Benefit Plans - Stock Option and Incentive Plan" and
"Benefit Plans Recognition and Retention Plan." In addition, Mr. McCrorey, who
serves as both a director of the Bank and as the Bank's loan originator will
receive an option to purchase shares of Common Stock and an award of restricted
stock under the RRP equal to 1.0% and 0.4%, respectively, of the Common Stock
issued in the Conversion. One-half of Mr. McCrorey's awards are being granted to
him as a director, and the other half as the Bank's loan originator.
Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to the Bank's Chief Executive Officer. No other executive
officer of the Bank had aggregate compensation (salary plus bonus) in excess of
$100,000 in fiscal 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
=======================================================================================================================
Long-Term
Compensation
Annual Compensation/(1)/ Awards
- -----------------------------------------------------------------------------------------------------------------------
Other Restricted
Annual Stock Options/ All Other
Name and Principal Fiscal Compensation Award SARs Compensation
Position Year/(a)/ Salary($) Bonus($) ($) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry E. Hermreck, Chief
Executive Officer 1995 $59,500 $16,000 $ --- ---/(2)/ ---/(2)/ $ ---
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------
</TABLE>
/(1)/ In accordance with the revised rules on executive officer and
director compensation disclosure adopted by the SEC, Summary
Compensation information is excluded for the fiscal years ended
June 30, 1993 and 1994, as the Bank was not a public company
during such periods.
/(2)/ Pursuant to the proposed Stock Option Plan, the Holding Company
intends to grant to Mr. Hermreck options to purchase a number of
shares equal to 2.2% (19,635 shares at the minimum and 26,565
shares at the maximum of the Estimated Valuation Range) of the
total number of shares of Common Stock sold in the Conversion at
an exercise price equal to the market value per share of the
Common Stock on the date of the grant. See "- Benefit Plans -Stock
Option and Incentive Plan." In addition, pursuant to the proposed
RRP, the Holding Company intends to grant to Mr. Hermreck a number
of shares of restricted stock equal to 0.88% (7,854 shares at the
minimum and 10,626 shares at the maximum of the Estimated
Valuation Range), of the total number of shares of Common Stock
sold in the Conversion. See " - Benefit Plans - Recognition and
Retention Plan."
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<PAGE>
Employment Agreements
The Bank has determined to enter into an employment agreement
effective upon consummation of the Conversion, with Larry E. Hermreck, the
Bank's Chief Executive Officer, providing for a term of three years. The
contract provides for payment to the employee for the remaining term of the
contract unless the employee is terminated "for cause."
The employment agreement for Mr. Hermreck provides for an annual base
salary as determined by the Board of Directors, but not less than the employee's
current salary. Mr. Hermreck's base salary (exclusive of director fees and
bonuses) will be $65,300, assuming the employment contract is entered into in
fiscal 1997. So long as the contract remains in force, salary increases will be
reviewed not less often than annually thereafter, and are subject to the sole
discretion of the Board of Directors. The employment contract provides for
annual extensions for one additional year, but only upon express authorization
by the Board of Directors at the end of each year. The contract provides for
termination upon the employee's death, for cause or in certain events specified
by OTS regulations. The employment contract is terminable by the employee upon
90 days' notice to the Bank.
In the event there is a change in control of the Holding Company or
the Bank, as defined in the agreement, if employment terminates involuntarily,
as defined in the Agreement, in connection with such change in control or within
12 months thereafter, the employment contract provides for a payment equal to
299% of Mr. Hermreck's base amount of compensation as defined in the Code.
Assuming a change in control were to take place as of March 31, 1996, the
aggregate amounts payable to Mr. Hermreck pursuant to this change in control
provision would be approximately $210,000.
The contract provides, among other things, for participation in an
equitable manner in employee benefits applicable to executive personnel. The
employment contract may have an "anti-takeover" effect that could affect a
proposed future acquisition of control of the Bank after its Conversion. See
"Restrictions on Acquisitions of Stock and Related Takeover Defensive
Provisions."
The Bank also intends to enter into an employment agreement with
Messrs. Goettling and Hartman and Ms. Teegarden. These agreements will each
provide for a term of eighteen months and a change of control payment equal to
150% of the employee's prior years' compensation plus certain additional
benefits such as health insurance. These agreements are otherwise expected to be
similar to the employment agreement with Mr. Hermreck.
Salary Continuation Agreements
In order to encourage the Bank's Chief Executive Officer to remain an
employee of the Bank, the Bank entered into Salary Continuation Agreement (the
"Agreement") in February 1995 with Mr. Hermreck. Pursuant to the Agreement,
upon retirement on or after reaching age 65, Mr. Hermreck would receive a
monthly benefit of $2,917 paid monthly for 15 years following retirement. Upon
termination of service for disability or retirement prior to age 65, Mr.
Hermreck would receive a reduced amount pursuant to a schedule set forth in the
Agreement, paid monthly for 15 years following termination or, if earlier, until
Mr. Hermreck's recovery from disability. Upon termination following a change in
control of the Bank, Mr. Hermreck would be entitled to a lump sum payment of a
reduced amount pursuant to a schedule set forth in the Agreement. The Agreement
provides for a death benefit if Mr. Hermreck dies while in active service of the
Bank equal to the amount that would be paid to Mr. Hermreck upon serving until
age 65. If Mr. Hermreck dies after benefit payments commence but before
receiving all payments, the Bank will pay the remaining benefits at the same
time and in the same amounts they would have been paid had Mr. Hermreck
survived. The Bank purchased life insurance on Mr. Hermreck whereby the Bank is
the beneficiary in order to offset the expected payments to Mr. Hermreck. The
Bank has also entered into Salary Continuation Agreements with Messrs. Alderson,
Goettling and Hartman and Ms. Teegarden. These agreements are similar to the
Agreement with Mr. Hermreck, although providing for lower payments.
89
<PAGE>
Benefit Plans
General. The Bank currently provides health care benefits, including
medical, prescription and dental, subject to certain deductibles and copayments
by employees, and group life insurance to its full time employees.
Stock Option and Incentive Plan. Among the benefits to the Bank
anticipated from the Conversion is the ability to attract and retain personnel
through prudent use of stock option and other stock-related incentive programs.
It is anticipated that a Stock Option Plan will be adopted by the Board of
Directors of the Holding Company, subject to approval by stockholders of the
Holding Company following Conversion. Stock options, stock appreciation rights
and limited stock appreciation rights covering shares representing an aggregate
of up to 10% of the shares of Common Stock sold in the Conversion may be granted
to directors, officers and employees of the Holding Company or its subsidiaries
under the Stock Option Plan.
Options granted under the Stock Option Plan may be either options that
qualify as "incentive stock options" (options that afford tax treatment to
recipients upon compliance with certain restrictions and that do not normally
result in tax deductions to the employer) or options that do not so qualify. In
the event of a change in control of the Holding Company, outstanding options may
become immediately exercisable to the extent such options have vested. The
exercise price of stock options granted under the Stock Option Plan is required
to be at least equal to the fair market value per share of the stock on the date
of grant.
The proposed Stock Option Plan provides for the grant of Stock
Appreciation Rights ("SARs") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SARs on the date exercised over the
exercise price. SARs generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options. There is no present
intention to grant any SARs.
The Stock Option Plan will be administered by the Holding Company's
Compensation Committee each of the members of which is a "disinterested person"
under applicable regulations. The Compensation Committee will select the
recipients and terms of awards pursuant to the Stock Option Plan. See " -
Committees of the Holding Company."
The Compensation Committee currently intends to grant options to
employees to purchase shares of Common Stock in amounts expressed as a
percentage of the shares offered in the Conversion, as follows: Mr. Hermreck -
2.2%; and all executive officers of the Bank and Holding Company as a group (5
persons) -5.5%. Under the terms of the Stock Option Plan, a ten-year, non-
qualified stock option is intended to be granted to each current director of the
Bank or the Company in an amount equal to 0.5% of the shares issued in the
Conversion. It is further expected that Mr. McCrorey will be granted an
incentive option to purchase an additional 0.5% of the shares issued in the
Conversion. In addition, the Bank intends to grant each director elected
subsequent to the Conversion a ten-year, non-qualified stock option in an amount
equal to 0.5% of the shares issued in the Conversion, subject to availability.
The options granted under the Stock Option Plan will have an exercise price
equal to the market value per share of the Common Stock on the date of the
grant, which under OTS regulations may not be any sooner than six months after
completion of the Conversion. All of these grants are made upon consideration of
past services rendered to the Bank and in an amount deemed necessary (after a
review of grants made by other converting institutions) to encourage the
continued retention of the officers and directors who are considered necessary
for the continued success of the Bank. In this regard, all options granted as
described above will vest in five equal annual installments commencing one year
from the date of grant, subject to the continued service of the holder of such
option. All options will expire ten years after the date such option was
granted, which is the date of shareholder approval of the Stock Option Plan.
In granting awards under the proposed Stock Option Plan, the
Compensation Committee will consider, among other things, position and years of
service, value of the participant's service to the Bank and the Holding Company
and the added responsibilities of such individuals as executive officers and
directors of a public company. As a stock-related incentive plan, the proposed
Stock Option Plan is designed to recognize the past contributions of the
officers, directors and employees to the Bank and to encourage them to remain
with the Bank. The Bank also believes that the equity stake of such persons in
the Holding Company will give them an incentive to perform to the best of their
abilities in the interest of the Bank and its affiliates. All proposed grants to
officers are subject to modification by the Compensation Committee based upon
its performance evaluation of the option recipients prior to ratification of the
Stock Option Plan by stockholders following completion of the Conversion and
subject to OTS regulations.
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<PAGE>
Employee Stock Ownership Plan. The Boards of Directors of Community and
the Holding Company have approved the adoption of an ESOP for the benefit of
employees of Community. The ESOP is designed to meet the requirements of an
employee stock ownership plan as described at Section 4975(e)(7) of the Code and
Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and, as such, the ESOP is empowered to borrow in order to
finance purchases of the Holding Company's Common Stock.
It is anticipated that the ESOP will be capitalized with a loan from the
Holding Company. The proceeds from this loan are expected to be used by the
ESOP to purchase up to 8.0% of the Common Stock issued in the Conversion. After
the Conversion, as a qualified employee pension plan under Section 401(a) of the
Code, the ESOP will be in the form of a stock bonus plan and will provide for
contributions, predominantly in the form of either the Holding Company's Common
Stock or cash, which will be used within a reasonable period after the date of
contributions primarily to purchase Holding Company Common Stock. The Bank will
receive a tax deduction equal to the amount it contributes to the ESOP, subject
to the limitations set forth in the Code. The maximum tax-deductible
contribution by the Bank in any year is an amount equal to the maximum amount
that may be deducted by the Bank under Section 404 of the Code, subject to
reduction based on contributions to other Tax-Qualified Employee Plans.
Additionally, the Bank will not make contributions if such contributions would
cause the Bank to violate its regulatory capital requirements. The assets of
the ESOP will be invested primarily in Holding Company Common Stock.
From time to time, the ESOP may purchase additional shares of Common Stock
for the benefit of plan participants through purchases of outstanding shares in
the market, upon the original issuance of additional shares by the Holding
Company or upon the sale of shares held in treasury by the Holding Company.
Such purchases, which are not currently contemplated, would be subject to then-
applicable laws, regulations and market conditions.
Generally accepted accounting principles require that any borrowing by the
ESOP be reflected as a liability in the Holding Company's consolidated financial
statements, whether or not such borrowing is guaranteed by, or constitutes a
legally binding contribution commitment of the Holding Company or the Bank. In
addition, shares purchased with borrowed funds will, to the extent of the
borrowings, be excluded from stockholders' equity, representing unearned
compensation to employees for future services not yet performed. Consequently,
if the ESOP purchases already-issued shares in the open market, the Holding
Company's consolidated liabilities will increase to the extent of the ESOP's
borrowings, and total and per share stockholders' equity will be reduced to
reflect such borrowings. If the ESOP purchases newly issued shares from the
Holding Company, total stockholders' equity would neither increase nor decrease,
but per share stockholders' equity and per share net income would decrease
because of the increase in the number of outstanding shares. In either case, as
the borrowings used to fund ESOP purchases are repaid, total stockholders'
equity will correspondingly increase.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service during which they work at
least 1,000 hours. Employees will be credited for years of service to the Bank
prior to the adoption of the ESOP for participation and vesting purposes. The
Bank's contribution to the ESOP is allocated among participants on the basis of
compensation. Each participant's account will be credited with cash and shares
of Holding Company Common Stock based upon compensation earned during the year
with respect to which the contribution is made. After completing five years of
service, a participant will be 100% vested in his ESOP account. ESOP
participants are entitled to receive distributions from their ESOP accounts only
upon termination of service. Distribution will be made in cash and in whole
shares of Holding Company Common Stock. Fractional shares will be paid in cash.
Participants will not incur a tax liability until a distribution is made.
Participating employees are entitled to instruct the trustee of the ESOP as
to how to vote the shares held in their account. The trustee, who has
dispositive power over the shares in the Plan, will not be affiliated with the
Holding Company or Community. The ESOP may be amended by the Board of Directors
of the Holding Company, except that no amendment may be made which would reduce
the interest of any participant in the ESOP trust fund or divert any of the
assets of the ESOP trust fund to purposes other than the benefit of participants
or their beneficiaries.
Recognition and Retention Plan. It is anticipated that the Holding Company
will establish an RRP as a method of providing directors, officers and employees
with a proprietary interest in the Holding Company in a manner designed to
encourage such individuals to remain with the Bank. In this respect, it is
anticipated that Restricted Stock Awards ("Awards") covering up to 4% of the
shares of Common Stock that will be outstanding upon completion of the
91
<PAGE>
Conversion may be awarded to the Bank's directors, officers and key employees
under the RRP. The RRP will be subject to stockholder approval at the Holding
Company's meeting of stockholders following the Conversion.
The RRP will be administered by the Compensation Committee. Under the
terms of the proposed RRP, Awards may be granted to directors and key employees
in the form of shares of Common Stock held by the RRP. Awards are non-
transferable and non-assignable. Recipients will earn (i.e., become vested in),
over a period of time, the shares of Common Stock covered by the Awards. The
Compensation Committee will determine the period of time over which the Awards
are to be earned. Awards will be 100% vested upon termination of employment due
to death or disability.
The Compensation Committee currently intends to grant to Mr. Hermreck, and
all executive officers of the Bank and Holding Company as a group (5 persons)
RRP awards of 0.88% and 2.2%, respectively, of the shares issued in the
Conversion, respectively. It is intended that the Awards to officers and
employees will vest in five equal annual installments commencing one year from
the date of grant, subject in each case to the continued service of the holder
as an employee, officer, director or advisory director of the Bank and to the
Bank meeting its fully phased-in regulatory capital requirements. In addition,
it is intended that each director of the Bank (6 persons) at the date of
completion of the Conversion receive an Award of 0.2% of the Common Stock sold
in the Conversion. It is further expected that Mr. McCrorey will receive an
additional award of 0.2% of the shares issued in the Conversion. Each director
elected subsequent to approval of the RRP by stockholders who is not an employee
is intended to receive an Award equal to 0.2% of the dollar value of the Award
to each non-employee director at the date of the approval of the RRP, subject to
availability. Awards are intended to vest in five equal annual installments
commencing one year from the date of grant, subject to the continued service of
the director and to the Bank's meeting its fully phased-in capital requirements.
The Award recipient may receive any dividends paid on the restricted shares
upon vesting of such shares. In addition, upon the vesting of such shares,
recipients of Awards may direct the voting of the shares allocated to them. The
cost of the RRP will be reflected as compensation expense in the Statements of
Income as vesting occurs.
In granting awards under the RRP, the Compensation Committee will consider,
among other things, position and years of service, value of the participant's
service to the Bank and the Holding Company and the added responsibilities of
such individuals as executive officers and directors of a public company. In
addition, as a stock-based retention plan, the RRP is designed to recognize the
past contributions of the officers, directors and employees to the Bank and to
encourage them to remain with the Bank. The Bank also believes that the equity
stake of such persons will give them incentive to perform in the best interests
of the Bank and the Holding Company. All proposed grants to officers are
subject to modification by the Compensation Committee based upon its performance
evaluation of the award recipients prior to ratification of the RRP by
stockholders following completion of the Conversion.
It is currently anticipated that the RRP will be funded by shares
subsequently reacquired and held as treasury shares or through the issuance of
authorized but unissued shares. To the extent the RRP is funded from authorized
but unissued shares, the funding of the RRP will have the effect of diluting
existing stockholders. See "Prospectus Summary-Benefits of Conversion to
Directors and Executive Officers" and "Capitalization."
Indebtedness of Management
The Bank has followed a policy of granting consumer loans and loans secured
by one- to four-family real estate to officers, directors and employees. Loans
to directors and executive officers are made in the ordinary course of business
and on the same terms and conditions as those of comparable transactions with
the general public prevailing at the time, in accordance with the Bank's
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans by the Bank to its directors and executive officers are subject
to OTS regulations restricting loan and other transactions with affiliated
persons of the Bank. Federal law currently requires that all loans to directors
and executive officers be made on terms and conditions comparable to those for
similar transactions with non-affiliates. Loans to all directors, executive
officers, employees and their associates totaled $1,795,000 at March 31, 1996,
which was 15.5% of the Bank's equity capital at that date and 10.8% of the
Holding Company's stockholders' equity at that date, assuming completion of the
Conversion at the midpoint of the Estimated Valuation Range. There were no
loans outstanding to any director, executive officer or their affiliates at
preferential rates or terms which in the aggregate
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exceeded $60,000 during the three years ended June 30, 1995 and the nine months
ended March 31, 1996. All loans to directors and officers were performing in
accordance with their terms at March 31, 1996.
THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan of
Conversion, subject to approval by the members of the Bank and the satisfaction
of certain other conditions. OTS approval does not constitute a recommendation
or endorsement by the OTS of the Plan of Conversion. Certain terms used in the
following summary are defined in the Plan of Conversion, a copy of which may be
obtained by contacting the Bank.
General
On May 14, 1996, the Board of Directors of the Bank adopted the Plan,
subject to approval by the OTS and the members of the Bank. Pursuant to the
Plan, the Bank is to be converted from a federal mutual savings bank to a
federal stock savings bank, with the concurrent formation of a holding company.
The OTS has approved the Plan, subject to its approval by the affirmative vote
of the members of the Bank holding not less than a majority of the total number
of votes eligible to be cast at a Special Meeting called for that purpose to be
held on September ___, 1996.
The Conversion will be accomplished through amendment of the Bank's federal
mutual charter to authorize the issuance of capital stock, at which time the
Bank will become a wholly owned subsidiary of the Holding Company. The
Conversion will be accounted for as a pooling of interests.
Subscription Rights are being given to Eligible Account Holders as of March
31, 1995, the Tax-Qualified Employee Plans of the Bank and the Holding Company,
Supplemental Eligible Account Holders, Other Members, and officers, directors
and employees of the Bank. Concurrently with, during, or following the
Subscription Offering, and subject to the prior rights of holders of
Subscription Rights, members of the general public to whom a prospectus is
delivered are being afforded the opportunity to subscribe for Holding Company
Common Stock in the Community Offering with a preference to natural persons
residing in the Local Community. The residence of such individuals shall be
determined by the Bank in its sole discretion based upon the books and records
of the Bank. See "- Offering of Holding Company Common Stock." Depending upon
market conditions, any shares not initially subscribed for in the Subscription
Offering may be offered for sale by the Holding Company to the general public in
a Syndicated Community Offering. See "-Syndicated Community Offering."
Subscriptions for shares will be subject to the maximum and minimum purchase
limitations set forth in the Plan of Conversion.
Business Purposes
The Bank has several business purposes for the Conversion. The sale of
Holding Company Common Stock will have the immediate result of providing the
Bank with additional equity capital. This increased capital will support
expansion of its financial services, subject to applicable regulatory
restrictions. The sale of the Common Stock is the most effective means of
increasing the Bank's permanent capital and does not involve the high interest
cost and repayment obligation of subordinated debt. In addition, investment of
the net Conversion proceeds is expected to provide additional operating income
to further increase the Bank's capital on a continuing basis.
The Board of Directors of the Bank believes that a holding company
structure could facilitate the acquisition of other financial institutions as
well as other companies. If a multiple holding company structure is utilized in
a future acquisition, the acquired savings institution would be able to operate
on a more autonomous basis as a wholly owned subsidiary of the Holding Company
rather than as a division of the Bank. For example, the acquired savings
institution could retain its own directors, officers and corporate name as well
and have representation on the Board of Directors of the Holding Company. As of
the date hereof, there are no plans or understandings by the Bank or the Holding
Company regarding the acquisition of any other institutions.
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The Board of Directors of the Bank also believes that a holding company
structure will facilitate the diversification of the Bank's business activities.
While diversification will be maximized if a unitary holding company structure
is utilized because the types of business activities permitted to a unitary
holding company are broader than those of a multiple holding company, either
type of holding company may engage in a broader range of activities than may a
thrift institution directly. Currently, there are no plans that the Holding
Company engage, immediately after Conversion, in any material activities apart
from holding the shares of the Bank, although the Board may determine to expand
the Holding Company's activities after Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions
(although the Holding Company has no current negotiations, understandings or
plans with respect to any acquisition) and for issuance and sale to raise
additional equity capital, subject to market conditions and generally without
stockholder approval.
The Conversion will structure the Bank in the stock form used in the United
States by all commercial banks, most major business corporations and an
increasing number of savings institutions. The Conversion will permit the
Bank's members to become stockholders of the Holding Company, thereby allowing
them to own stock in the parent corporation of the Bank in which they maintain
deposit accounts or with which they have a borrowing relationship. Such
ownership may encourage customers who become stockholders to promote the Bank to
others, thereby further contributing to the Bank's growth. The more flexible
operating structure provided by the Holding Company and the stock form of
ownership is expected to assist the Bank in competing aggressively with other
financial institutions in its principal market area.
The Bank is also expected to benefit from its management and employees
owning stock, because stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Upon Conversion, neither deposit account holders nor
borrowers will have voting rights in the Bank or the Holding Company and will
therefore not be able to elect directors of either entity or to control their
affairs. These rights are currently accorded to deposit account holders with
regard to the Bank. Subsequent to Conversion, voting rights will be vested
exclusively in the Holding Company as the sole stockholder of the Bank. Voting
rights as to the Holding Company will be held exclusively by its stockholders.
Each purchaser of Holding Company Common Stock shall be entitled to vote on any
matters to be considered by the Holding Company stockholders. A stockholder
will be entitled to one vote for each share of Common Stock owned, subject to
certain limitations applicable to holders of 10% or more of the shares of the
Common Stock. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." The Holding Company intends to supply each stockholder
with quarterly and annual reports and proxy statements.
Deposit Accounts and Loans. The terms of the Bank's deposit accounts, the
balances of the individual accounts and the existing FDIC insurance coverage
will not be affected by the Conversion. Furthermore, the Conversion will not
affect the loan accounts, the balances of these accounts, or the obligations of
the borrowers under their individual contractual arrangements with the Bank.
Tax Effects. The Bank has received an opinion from Luse Lehman Gorman
Pomerenk & Schick, P.C. with regard to federal income taxation, and an opinion
of KPMG Peat Marwick LLP with regard to Missouri taxation, to the effect that
the adoption and implementation of the Plan of Conversion set forth herein will
not be taxable for federal or Missouri tax purposes to the Bank or the Holding
Company. See "- Income Tax Consequences."
Liquidation Rights. The Bank has no plan to liquidate either before or
after the Conversion. However, if there should ever be a complete liquidation,
either before or after Conversion, deposit account holders would receive the
protection of insurance by the FDIC up to applicable limits. Subject thereto,
liquidation rights before and after Conversion would be as follows:
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Liquidation Rights in Present Mutual Bank. In addition to the protection of
FDIC insurance up to applicable limits, in the event of a complete liquidation
each holder of a deposit account in the Bank in its present mutual form would
receive his pro rata share of any assets of the Bank remaining after payment of
claims of all creditors (including the claims of all depositors in the amount of
the withdrawal value of their accounts). Such holder's pro rata share of such
remaining assets, if any, would be in the same proportion of such assets as the
balance in his deposit account was to the aggregate balance in all deposit
accounts in the Bank at the time of liquidation.
Liquidation Rights in Proposed Converted Bank. After Conversion each
deposit account holder, in the event of a complete liquidation, would have a
claim of the same general priority as the claims of all other general creditors
of the Bank in addition to the protection of FDIC insurance up to applicable
limits. Therefore, except as described below, the deposit account holder's claim
would be solely in the amount of the balance in his deposit account plus accrued
interest and the holder would have no interest in the value of the Bank above
that amount.
The Plan of Conversion provides that there shall be established, upon the
completion of the Conversion, a special "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders (i.e.,
depositors with an account balance of $50 or more at March 31, 1995 and June
30, 1996, respectively) in an amount equal to the net worth of the Bank as of
the date of its latest consolidated statement of financial condition contained
in the final Prospectus relating to the sales of shares of Holding Company
Common Stock in the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each qualifying deposit account held in the Bank on the qualifying
date. An Eligible Account Holder's or Supplemental Eligible Account Holder's
interest as to each deposit account would be in the same proportion of the total
liquidation account as the balance in his account on March 31, 1995 and June 30,
1996, respectively, was to the aggregate balance in all qualifying deposit
accounts of Eligible Account Holders and Supplemental Eligible Account Holders
on such date. For accounts in existence on both dates, separate subaccounts
shall be determined on the basis of the qualifying deposits in such accounts on
the record dates. However, if an Eligible Account Holder or Supplemental
Eligible Account Holder should reduce the amount in the qualifying deposit
account on any annual closing date of the Bank to a level less than the lowest
amount in such account on March 31, 1995 or June 30, 1996, respectively, and on
any subsequent closing date, then the account holder's interest in this special
liquidation account would be reduced by an amount proportionate to any such
reduction, and the account holder's interest would cease to exist if such
qualifying deposit account were closed.
In addition, the interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders' related
accounts after Conversion, and would only decrease.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the Holding Company as the sole stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Bank, as converted, or another SAIF-insured institution if the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the liquidation account and, in any such transaction, the liquidation account
would be assumed to the full extent authorized by regulations of the OTS as then
in effect. The OTS has stated that the consummation of a transaction of the type
described in the preceding sentence in which the surviving entity is not an
SAIF-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then remaining balance in the liquidation account. While the
Bank believes that such a transaction should not constitute a complete
liquidation, there can be no assurance that the OTS will not adopt a contrary
position and, in such event, that the Bank's position will be determined to be
correct.
Common Stock. For information as to the characteristics of the Common Stock
to be issued under the Plan of Conversion, see "Dividends" and "Description of
Capital Stock." Common Stock issued under the Plan of Conversion cannot, and
will not, be insured by the FDIC or any other government agency.
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The Bank will continue, immediately after completion of the Conversion, to
provide its services to depositors and borrowers pursuant to its existing
policies and will maintain the existing management and employees of the Bank.
Other than for payment of expenses incident to the Conversion, no assets of the
Bank will be distributed in the Conversion. The Bank will continue to be a
member of the FHLB System, and its deposit accounts will continue to be insured
by the FDIC. The affairs of the Bank will continue to be directed by the
existing Board of Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, up to 1,207,500 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below through a Subscription and Community Offering.
Subscription Offering. The Subscription Offering will expire at noon,
Excelsior Springs, Missouri Time, on September ____, 1996 (the "Subscription
Expiration Date") unless extended by the Bank and the Holding Company.
Regulations of the OTS require that all shares to be offered in the Conversion
be sold within a period ending not more than 45 days after the Subscription
Expiration Date (or such longer period as may be approved by the OTS) or,
despite approval of the Plan of Conversion by members, the Conversion will not
be effected and the Bank will remain in mutual form. This period expires on
________, 1996, unless extended with the approval of the OTS. If the Conversion
is not completed by __________, 1996, all subscribers will have the right to
modify or rescind their subscriptions and to have their subscription funds
returned promptly with interest. In the event of such an extension, all
subscribers will be notified in writing of the time period within which
subscribers must notify the Bank of their intention to maintain, modify or
rescind their subscriptions. If the subscriber rescinds or does not respond in
any manner to the Bank's notice, the funds submitted will be refunded to the
subscriber with interest at 2.25%, the Bank's current passbook rate per annum,
and/or the subscriber's withdrawal authorizations will be terminated. In the
event that the Conversion is not effected, all funds submitted and not
previously refunded pursuant to the Subscription and Community Offering will be
promptly refunded to subscribers with interest at 2.25%, the Bank's current
passbook rate per annum, and all withdrawal authorizations will be terminated.
Subscription Rights. In accordance with OTS regulations, non-transferable
Subscription Rights have been granted under the Plan of Conversion to the
following persons in the following order of priority: (1) Eligible Account
Holders (deposit account holders of the Bank maintaining an account balance of
$50 or more as of March 31, 1995), (2) Tax-Qualified Employee Plans, (3)
Supplemental Eligible Account Holders (deposit account holders of the Bank
maintaining an account balance of $50 or more as of June 30, 1996); (4) Other
Members of the Bank (deposit account holders of the Bank as of July 31, 1996 and
certain borrowers as of both June 1, 1995 and July 31, 1996, who continue to be
borrowers as of the date of the Special Meeting, other than Eligible Account
Holders and Supplemental Eligible Account Holders), and (5) officers, directors
and employees of the Bank. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering, and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion. Subscription
Rights are non-transferable. Persons found to be selling or otherwise
transferring their right to purchase stock in the Subscription Offering or
purchasing Common Stock on behalf of another person will be subject to
forfeiture of such rights and possible further sanctions and penalties imposed
by the OTS, an agency of the U.S. Government. The preference categories are
more fully described below.
Category No. 1 is reserved for the Bank's Eligible Account Holders.
Subscription Rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in an amount equal to the greater of $100,000 of Common Stock, one-tenth of one
percent (.10%) of the total shares of Common Stock offered in the Conversion, or
15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the converting Bank in
each case on March 31, 1995 (the "Eligibility Record Date"); if sufficient
shares are not available, shares shall be allocated first to permit each
subscribing Eligible Account Holder to purchase to the extent possible 100
shares, and thereafter among each subscribing Eligible Account Holder pro rata
in the same proportion that his qualifying deposit bears to the total qualifying
deposits of all subscribing Eligible Account Holders whose subscriptions remain
unsatisfied.
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Category No. 2 provides for the issuance of Subscription Rights to Tax-
Qualified Employee Plans to purchase up to 10% of the total shares issued in the
Subscription Offering, provided that singly or in the aggregate such plans
(other than that portion of such plans which is self-directed) shall not
purchase more than 10% of the shares of the Holding Company Conversion Stock.
Subscription Rights received pursuant to this Category shall be subordinated to
all rights received by Eligible Account Holders to purchase shares pursuant to
Category No. 1; provided, however, that notwithstanding any other provision in
the Plan of Conversion to the contrary, the Tax-Qualified Employee Plans shall
have a first priority Subscription Right to the extent that the total number of
shares of Holding Company Conversion Stock sold in the Subscription and
Community Offering exceeds the maximum of the Estimated Valuation Range.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Holding Company Common Stock issued. It is currently intended that the ESOP
will purchase 8% of the shares of Common Stock issued in the Conversion.
Category No. 3 provides that each Supplemental Eligible Account Holder
shall receive non-transferable Subscription Rights to subscribe for shares of
Holding Company Conversion Stock in an amount equal to the greater of $100,000
of Common Stock, one-tenth of one percent (.10%) of the total offering of
shares, or 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders in the
converting association in each case on June 30, 1996 (the "Supplemental
Eligibility Record Date"). Subscription Rights received pursuant to this
category shall be subordinated to all Subscription Rights received by Eligible
Account Holders and Tax-Qualified Employee Plans. Any non-transferable
Subscription Rights to purchase shares received by an Eligible Account Holder in
accordance with Category No. 1 shall reduce to the extent thereof the
Subscription Rights to be distributed to such person pursuant to this Category.
In the event of an oversubscription for shares under the provisions of this
subparagraph, the shares available shall be allocated first to permit each
subscribing Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation (including
the number of shares, if any, allocated in accordance with Category No. 1) equal
to 100 shares, and thereafter among each subscribing Supplemental Eligible
Account Holder pro rata in the same proportion that his qualifying deposit bears
to the total qualifying deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available after
satisfying the subscriptions of Eligible Account Holders, Tax-Qualified Employee
Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to each such Other Member to purchase shares in an amount
equal to the greater $100,000 of Common Stock or one-tenth of one percent (.10%)
of the total offering of shares offered in the Conversion based on the Estimated
Valuation Range subject to the overall purchase limitation and to the extent
Common Stock is available. In the event of an oversubscription for shares, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of approval by members of
this Plan of Conversion.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Bank, to purchase up to a maximum of
$100,000 individually of Common Stock to the extent that shares are available
after satisfying the subscriptions of eligible subscribers in preference
Categories 1, 2, 3 and 4. In the event of an oversubscription, the available
shares will be allocated pro rata among all subscribers in this Category.
The Bank and the Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for shares pursuant to the Plan of Conversion reside.
However, no shares will be offered or sold under the Plan of Conversion to any
such person who (1) resides in a foreign country or (2) resides in a state of
the United States in which a small number of persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to which the Bank
and the Holding Company determine that compliance with the securities laws of
such state would be impracticable for reasons of cost or otherwise, including,
but not limited to, a requirement that the Bank or the Holding Company or any of
their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesman or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
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Community Offering. To the extent that shares are available for purchase,
the Holding Company and the Bank have determined to offer shares pursuant to the
Plan to certain members of the general public to whom the Holding Company
delivers a copy of this Prospectus and a stock order form in the Community
Offering, with preference given to natural persons residing in Clay and Ray
Counties, Missouri (the "Local Community"). Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to $100,000 of Common Stock. The Community Offering, if any, may terminate at
any time without notice, but may not terminate later than _________, 1996,
unless extended with the approval of the OTS. The opportunity to subscribe for
shares of Common Stock in the Community Offering category is subject to the
right of the Company and the Bank, in their sole discretion, to accept or reject
any such orders in whole or in part either at the time of receipt of an order or
as soon as practicable thereafter.
If there are not sufficient shares available to fill orders in the
Community Offering, such stock will be allocated first to each natural person
residing in the Local Community whose order is accepted by the Company, in an
amount equal to the lesser of 1,000 shares or the number of shares subscribed
for by each such subscriber in the Local Community, if possible. Thereafter,
unallocated shares will be allocated among the subscribers in the Local
Community whose orders remain unsatisfied in the same proportion that the
unfilled subscription of each bears to the total unfilled subscriptions of all
subscribers in the Local Community whose subscription remains unsatisfied. If
there are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for subscribers in the Local Community.
Syndicated Community Offering. As part of the Community Offering, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be formed
and managed by Trident Securities. The Holding Company and the Bank expect to
market any shares which remain unsubscribed after the Subscription and Community
Offerings through a Syndicated Community Offering. The Holding Company and the
Bank have the right to reject orders in whole or part in their sole discretion
in the Syndicated Community Offering. Neither Trident Securities nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of Common Stock in the Syndicated Community Offering; however, Trident
Securities has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be the same price as in the Subscription and Community Offerings.
Subject to overall purchase limitations, no person will be permitted to
subscribe in the Syndicated Community Offering for more than $100,000 or 10,000
shares of Common Stock.
Trident Securities may enter into agreements with broker-dealers ("Selected
Dealers") to assist in the sale of the shares in the Syndicated Community
Offering. No orders may be placed or filled by or for a Selected Dealer during
the Subscription Offering. After the close of the Subscription Offering, Trident
Securities will instruct Selected Dealers as to the number of shares to be
allocated to each Selected Dealer. Only after the close of the Subscription
Offering and upon allocation of shares to Selected Dealers may Selected Dealers
take orders from their customers. During the Subscription and Community
Offerings, Selected Dealers may only solicit indications of interest from their
customers to place orders with the Holding Company as of a certain date ("Order
Date") for the purchase of shares of Common Stock. When and if Trident
Securities and the Holding Company believe that enough indications of interest
and orders have not been received in the Subscription and Community Offerings to
consummate the Conversion, Trident Securities will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. Selected
Dealers will send confirmations of the orders to such customers on the next
business day after the Order Date. Selected Dealers will debit the accounts of
their customers on the "Settlement Date" which date will be three business days
from the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Settlement Date. On the Settlement Date, Selected Dealers
will remit funds to the account established by the Bank for each Selected
Dealer. Each customer's funds so forwarded to the Bank, along with all other
accounts held in the same title, will be insured by the FDIC up to $100,000 in
accordance with applicable FDIC regulations. After payment has been received by
the Bank from Selected Dealers, funds will earn interest at the Bank's passbook
rate until the consummation or
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termination of the Conversion. Funds will be promptly returned, with interest,
in the event the Conversion is not consummated as described above.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Holding
Company and the Bank with the approval of the OTS.
Limitations on Purchase of Shares. The Plan also provides for certain
additional limitations to be placed upon the purchase of shares in the
Conversion. Specifically, no person (other than a Tax-Qualified Employee Plan)
by himself or herself or with an associate, and no group of persons acting in
concert, may subscribe for or purchase more than $200,000 of Common Stock
offered in the Conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 34% of the shares to be sold in the
Conversion. For purposes of the Plan, the members of the Board of Directors are
not deemed to be acting in concert solely by reason of their Board membership.
For purposes of this limitation, an associate of a person does not include a
Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan. Also, for
purposes of this limitation, an associate of an officer or director does not
include a Tax-Qualified Employee Plan or a recognition and retention plan, such
as the RRP. Moreover, any shares attributable to the officers and directors and
their associates, but held by a Tax-Qualified Employee Plan (other than that
portion of a plan which is self-directed) shall not be included in calculating
the number of shares which may be purchased under the limitations in this
paragraph. Shares purchased by employees who are not officers or directors of
the Bank, or their associates, are not subject to this limitation. The term
"associate" is used above to indicate any of the following relationships with a
person: (i) any corporation or organization (other than the Holding Company or
the Bank or a majority-owned subsidiary of the Holding Company or the Bank) of
which a person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity security; (ii) any trust
or other estate in which such person has a substantial beneficial interest or as
to which such person serves as trustee or in a similar fiduciary capacity; and
(iii) any relative or spouse of such person or any relative of such spouse who
has the same home as such person or who is a director or officer of the Holding
Company or the Bank or any subsidiary of the Holding Company or the Bank.
The Boards of Directors of the Holding Company and the Bank may, in their
sole discretion, decrease the maximum purchase limitation referred to above or
increase the maximum purchase limitation up to 9.99% of the shares being offered
in the Conversion, provided that orders for shares exceeding 5.0% of the shares
being offered in the Conversion shall not exceed, in the aggregate, 10% of the
shares being offered in the Conversion. Requests to purchase additional shares
of Holding Company Common Stock under this provision will be allocated by the
Boards of Directors on a pro rata basis giving priority in accordance with the
priority rights set forth above. Depending upon market and financial conditions,
and subject to certain regulatory limitations, the Boards of Directors of the
Holding Company and the Bank, with the approval of the OTS and without further
approval of the members, may increase or decrease any of the above purchase
limitations at any time. To the extent that shares are available, each
subscriber must subscribe for a minimum of 25 shares. In computing the number of
shares to be allocated, all numbers will be rounded down to the next whole
number.
Common Stock purchased in the Conversion will be freely transferable except
for shares purchased by executive officers and directors of the Bank or the
Holding Company and except as described below. See "- Restrictions on
Transferability." In addition, under National Association of Securities
Dealers, Inc. ("NASD") guidelines, members of the NASD and their associates are
subject to certain restrictions on transfer of securities purchased in
accordance with Subscription Rights and to certain reporting requirements upon
purchase of such securities.
Marketing Arrangements
The Holding Company and the Bank have engaged Trident Securities as a
financial advisor and marketing agent in connection with the offering of the
Common Stock, and Trident Securities has agreed to use its best efforts to
solicit subscriptions and purchase orders for shares of Common Stock in the
Offerings. Trident Securities is a member of the NASD and an SEC-registered
broker-dealer. Trident Securities is headquartered in Raleigh, North Carolina,
and its telephone number is (919) 781-8900. Trident Securities will provide
various services including, but not limited to, (i) training and educating the
Bank's directors, officers and employees regarding the mechanics
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and regulatory requirements of the stock sales process; (2) providing its
employees to staff the Stock Information Center to assist the Bank's customers
and internal stock purchasers and to keep records of orders for shares of Common
Stock; and (3) targeting the Holding Company's sales efforts, including
preparation of marketing materials. Based upon negotiations between the Holding
Company and the Bank concerning fee structure, Trident Securities will receive a
fee of $150,000. In the event that a selected dealers agreement is entered into
in connection with a Syndicated Community Offering, the Bank will pay a fee to
be determined to such selected dealers, for shares sold by an NASD member firm
pursuant to a selected dealers agreement. Fees to Trident Securities and to any
other broker-dealer may be deemed to be underwriting fees, and Trident
Securities and such broker-dealers may be deemed to be underwriters. Trident
Securities will also be reimbursed for its reasonable out of pocket expenses in
an amount not to exceed $10,000 and reasonable legal fees and expenses not to
exceed $25,000 without the prior approval of the Bank. Trident Securities has
been paid $10,000 as an advance against these expenses. The Holding Company and
the Bank have agreed to indemnify Trident Securities for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act.
In addition, directors and executive officers of the Holding Company and
the Bank, may to a limited extent and subject to applicable state law,
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Bank may participate in the Subscription and Community Offering
in administrative capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering document. Other questions of prospective purchasers
will be directed to registered representatives of Trident Securities. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. Sales of Common Stock by
directors, executive officers and registered representatives will be made from
the Stock Information Center. The Holding Company will rely on Rule 3a4-1 under
the Exchange Act, and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and employees to
participate in the sale of Common Stock except in some states where only
registered broker-dealers may sell. No officer, director or employee of the
Holding Company or the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
Participation by Management
The following table sets forth information regarding intended Common Stock
purchases by each of the directors of the Bank and the Holding Company, by Mr.
Hermreck, and by all directors and officers as a group. This table excludes
shares to be purchased by the ESOP or proposed Restricted Stock Awards under the
proposed RRP or proposed option grants pursuant to the proposed Stock Option
Plan. See "Management - Benefit Plans." The directors and officers of the Bank
have indicated their intention to purchase in the Conversion an aggregate of
$1,050,000 of Common Stock, equal to 11.8%, 10.0%, 8.7%, and 7.6% of the number
of shares to be issued in the Subscription and Community Offering, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively. For information regarding options and restricted stock
intended to be awarded to management pursuant to the proposed Stock Option Plan
and the proposed RRP, see "Management -Benefit Plans."
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<TABLE>
<CAPTION>
Aggregate Number Percent
Purchase of at
Name Title Price Shares Midpoint
- --------------------------- ----------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Robert E. McCrorey Chairman of the
Board and
President $ 200,000 20,000 1.9%
Edgar L. Radley Director 70,000 7,000 0.6%
Rodney G. Rounkles Director 60,000 6,000 0.6%
Cecil E. Lamb Director 60,000 6,000 0.6%
Richard N. Cox Director 200,000 20,000 1.9%
Robert L. Lalumondier Director 10,000 1,000 0.1%
Larry E. Hermreck Chief Executive
Officer 150,000 15,000 1.4%
Other officers (8 persons) 300,000 30,000 2.9%
-------- ------
All directors and officers as a group (15
persons) $1,050,000 105,000 10.0%
</TABLE>
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate Purchase Price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation. RP
Financial, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal of the estimated pro forma market
value of the Common Stock.
RP Financial will receive a fee of $25,000 for its appraisal and assistance
in preparation of the Bank's business plan plus reasonable out-of-pocket
expenses not to exceed $5,000. The Holding Company has agreed to indemnify RP
Financial, under certain circumstances against liabilities and expenses
(including legal fees) arising out of, related to, or based upon the Conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Common Stock taking into account market conditions for initial
public offerings of thrift stocks and the formation of Holding Company as the
holding company for the Bank. RP Financial's appraisal concluded that at June
14, 1996, an appropriate range for the estimated pro forma market value of the
Holding Company and the Bank, as converted, ranges from a minimum of $8,925,000
to a maximum of $12,075,000, with a midpoint of $10,500,000. Assuming that the
shares are sold at $10.00 per share in the Conversion, the estimated number of
shares to be issued in the Conversion is expected to be between 892,500 and
1,207,500. The appraisal involved a comparative evaluation of the operating and
financial statistics of the Bank with those of other thrift institutions. The
appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in Missouri, which affect the operations of thrift institutions, the
competitive environment within which the Bank operates and the effect of the
Bank becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the Bank's
assets and liabilities was performed in connection with the evaluation. The
Plan of Conversion requires that all of the shares subscribed for in the
Subscription and Community Offering be sold at the same price per share. The
Board of Directors of the Holding Company and the Bank have reviewed the
appraisal of RP Financial and in determining the reasonableness and adequacy of
such appraisal consistent with OTS regulations and policies, have reviewed the
methodology and reasonableness of the assumptions utilized by RP Financial in
the preparation of such appraisal.
No sale of the shares will take place unless, prior thereto, RP Financial
confirms to the Bank, the Holding Company and the OTS that, to the best of RP
Financial's knowledge and judgment, nothing of a material nature has occurred
which would cause RP Financial to conclude that the actual aggregate Purchase
Price was incompatible with its estimate of the total pro forma market value of
the Common Stock at the time of the sale. If, however, the facts do not justify
such a statement, a new Estimated Valuation Range and price per share may be
set. Under such circumstances, the Holding Company will be required to
resolicit, and subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced; provided that if the pro
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forma market value of the Bank upon Convrsion has not decreased below $8,925,000
or increased to an amount which does not exceed $13,886,250 (15% above the
maximum of the Estimated Valuation Range), the Holding Company and the Bank do
not intend to resolicit subscriptions unless it is determined after consultation
with the OTS that a resolicitation is required.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. A decrease
in the number of shares to be issued in the Conversion would increase a
purchaser's ownership interest and both pro forma net income and net worth on a
per share basis while decreasing these amounts on an aggregate basis. In the
event of a resolicitation, subscribers will be afforded the opportunity to
increase, decrease or maintain their previously submitted order. In the event a
new valuation range is established by RP Financial, such new range will be
subject to approval by the OTS and the Holding Company will be required to
resolicit. The Holding Company will also be required to resolicit if the
aggregate Purchase Price of Common Stock sold in the Conversion is less than the
minimum of the Estimated Valuation Range or above 15% above the maximum of the
Estimated Valuation Range.
If purchasers can not be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Bank and the Holding Company, if possible. Such
other purchase arrangements will be subject to the approval of the OTS and may
provide for purchases by directors, officers, their associates and other persons
in excess of the limitations discussed herein. If such other purchase
arrangements cannot be made, the Subscription and Community Offering will
terminate.
In preparing its valuation of the pro forma market value of the Holding
Company and the Bank, as converted, RP Financial relied upon and assumed the
accuracy and completeness of all financial and statistical information provided
by the Bank and the Holding Company. RP Financial also considered information
based upon other publicly available sources which it believes are reliable.
However, RP Financial does not guarantee the accuracy and completeness of such
information and did not independently verify the financial statements and other
data provided by the Bank and the Holding Company or independently value the
assets or liabilities of the Bank and the Holding Company. The valuation by RP
Financial is not intended and must not be construed as a recommendation of any
kind as to the advisability of voting to approve the Conversion or of purchasing
shares of Common Stock. Moreover, because the valuation is necessarily based
upon estimates of and projections as to a number of matters (including certain
assumptions as to expense factors affecting the net proceeds from the sale of
Common Stock in the Conversion and as to the net earnings on such net proceeds),
all of which are subject to change from time to time, no assurance can be given
that persons who purchase such shares in the Conversion will be able to sell
such shares thereafter at or above the Purchase Price.
Method of Payment for Subscriptions
Subscribers must, before the Subscription Expiration Date, or such date to
which the Subscription Expiration Date may be extended, return an original stock
order form and certification to the Bank, properly completed, together with
cash, checks or money orders in an amount equal to the Purchase Price ($10.00
per share) multiplied by the number of shares for which subscription is made.
Subscriptions which are returned by mail must be received by the Bank by the
Expiration Date. Payment for stock purchases can also be accomplished through
authorization on the order form of withdrawals from accounts with the Bank.
Until completion or termination of the Conversion, subscribers who elect to make
payment through authorization of withdrawal from accounts with the Bank will not
be permitted to reduce the deposit balance in any such accounts below the amount
required to purchase the shares for which they subscribed. In such cases
interest will continue to be credited on deposits authorized for withdrawal
until the completion of the Conversion. Interest at the Bank's current passbook
rate per annum will be paid on amounts submitted in cash, check, bank draft or
money order. Authorized withdrawals from certificate accounts for the purchase
of Common Stock will be permitted without the imposition of early withdrawal
penalties or loss of interest. However, withdrawals from certificate accounts
that reduce the balance of said accounts below the required minimum for specific
interest rate qualification will cause the cancellation of the certificate
accounts, and the remaining balance will earn interest at the Bank's current
passbook rate per annum.
The beneficiaries of Individual Retirement Accounts ("IRAs") are deemed to
have the same subscription rights as other depositors. However, the IRA
accounts maintained at the Bank do not permit investment in Common
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Stock. A depositor interested in using his IRA funds to purchase Common Stock
must do so through a self-directed IRA account. Since the Bank does not offer
such accounts, it will allow such a depositor to make a trustee to trustee
transfer or other form of transfer of the IRA on deposit at the Bank. There will
be no early withdrawal or IRS penalties for such transfers. The new trustee
would hold the Common Stock in a self-directed account in the same manner as the
Bank now holds the depositor's IRA funds. An annual administrative fee might be
payable to the new trustee. The Bank assumes no responsibility as to the
selection of, or services performed by, a new trustee.
Depositors interested in transferring IRA funds on deposit at the Bank to
purchase Common Stock should contact the Stock Information Center at (816)-
____________ as soon as possible so that the necessary forms may be completed
prior to the Expiration Date of the Subscription Offering. This process cannot
be done through the mail and sufficient time should be allowed for the
completion of the transfer.
Stock subscriptions received by the Bank may not be modified, withdrawn or
canceled by the subscriber without the consent of the Bank and, if accepted by
the Bank, are final. Subscriptions which are not received by the Subscription
Expiration Date or are not in compliance with the Plan of Conversion or the
stock order form instructions may be deemed void by the Bank. The Bank and the
Holding Company have the right to extend the Subscription Expiration Date,
unless objected to by the OTS, or to waive or permit correction of incomplete or
improperly executed stock order forms, but does not represent that they will do
so.
If Tax-Qualified Employee Plans subscribe for shares during the
Subscription Offering, such plans will not be required to pay for the shares
subscribed for at the time they subscribe, but may pay for such shares of Common
Stock subscribed for by such plans at the actual Purchase Price upon
consummation of the Conversion, provided that, in the case of the ESOP, there is
a loan commitment to lend to the ESOP the aggregate Purchase Price of the shares
for which it subscribes.
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Subscription Expiration Date in accordance with Rule 15c2-8 under the
Exchange Act, no Prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the order form will confirm receipt or delivery in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus. The Bank
will accept for processing only orders submitted on original order forms.
Payment by check, money order, bank draft or debit authorization to an existing
account at the Bank must accompany the order form.
Risk of Delayed Offering
In the event that all shares of the Common Stock are not sold in the
Subscription Offering and concurrent Community Offering, the Bank and the
Holding Company may extend the Community Offering for a period of up to 45 days
from the date of the termination of the Subscription Offering. Further
extensions are subject to OTS approval and may be granted for successive
periods, but not beyond 24 months from the date of the Special Meeting.
A material delay in the completion of the sale of all unsubscribed shares
in the Community Offering may result in a significant increase in the costs in
completing the Conversion. Significant changes in the Bank's operations and
financial condition, the aggregate market value of the shares to be issued in
the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting, the Bank would charge accrued Conversion costs to
then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the completeness
and validity of order forms, will be made by the Bank and the Holding Company
and will be final, subject to the authority of the OTS and the requirements of
applicable law. The Plan of Conversion provides that, if deemed necessary or
desirable by the Boards of Directors of the Bank and the Holding Company, the
Plan of Conversion may be substantively amended (including an amendment to
eliminate the formation of the Holding Company as part of the Conversion) by the
Boards of Directors of the Bank and the Holding Company, as a result of comments
from regulatory authorities or
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otherwise, at any time but only with the concurrence of the OTS. Moreover, if
the Plan of Conversion is amended, subscriptions which have been received prior
to such amendment will not be refunded if such amendment is not material to the
transaction or otherwise required by the OTS.
In the event that a decision is made to eliminate the Holding Company as
part of the Conversion, the Holding Company will withdraw its registration
statement from the SEC and the Bank will take all steps necessary to complete
the Conversion without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the OTS the Bank will issue and
sell the common stock of the Bank and subscribers will be notified of the
elimination of the Holding Company and resolicited (i.e., permitted to affirm
their orders, in which case they will need affirmatively to reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest at the Bank's current passbook
rate per annum; or be permitted to modify or rescind their subscriptions) and
notified of the time period within which they must affirmatively notify the Bank
of their intention to affirm, modify or rescind their subscription. In the
event that a holding company form of organization is not used, all other
pertinent terms of the Plan as described in "- Offering of Holding Company
Common Stock" will apply to the conversion of the Bank from the mutual to stock
form of organization and the sale of the Bank's common stock.
The Plan of Conversion will terminate if the sale of all shares is not
completed within 24 months after the date of the Special Meeting. The Plan of
Conversion may be terminated by the Board of Directors of the Bank with the
concurrence of the OTS at any time. A specific resolution approved by a two-
thirds vote of the Board of Directors would be required to terminate the Plan of
Conversion prior to the end of such 24-month period. See "Risk Factors -
Possible Consequences of Amendment to Plan of Conversion."
Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company may
not repurchase any shares of its capital stock, except in the case of an offer
to repurchase on a pro rata basis made to all holders of capital stock of the
Holding Company. Any such offer shall be subject to the prior approval of the
OTS. Furthermore, the Holding Company may not repurchase any of its stock (i)
if the result thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to OTS regulations and (ii) except in compliance with the requirements of the
OTS' capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(except with OTS approval), (ii) repurchases during the second and third year
after conversion are part of an open market stock repurchase program that does
not allow for a repurchase of more than 5% of the Holding Company's outstanding
capital stock during a 12-month period, (iii) the repurchases do not cause the
Bank to become undercapitalized, and (iv) the Holding Company provides notice or
an application to the OTS at least ten days prior to the commencement of a
repurchase program and the OTS does not object. In addition, the above
limitations do not preclude repurchases of capital stock by the Holding Company
as otherwise permitted by the OTS or in the event applicable federal regulatory
limitations are subsequently liberalized.
Restrictions on Transferability
The Subscription Rights described in this Prospectus are non-transferable
and shall be awarded to eligible persons without payment. Prior to the
completion of the Conversion, federal regulations prohibit any person from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the Subscription Rights issued under the Plan
or the shares of Common Stock to be issued upon their exercise. Persons
violating such prohibition may lose their right to purchase stock in the
Conversion and may be subject to sanctions by the OTS. Each person exercising
Subscription Rights will be required to certify that a purchase of Common Stock
is solely for the purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. The Bank and the
Holding Company will pursue any and all legal and equitable remedies in the
event they become aware of the transfer of Subscription Rights and will not
honor orders known by them to involve the transfer of such rights.
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Shares purchased by directors, executive officers or their associates in the
Conversion shall be subject to the restrictions that said shares shall not be
sold during the period of one year following the date of purchase, except in the
event of the death of the stockholder or resulting from an exchange of
securities in a merger or acquisition approved by applicable regulatory
authorities, in which event such restriction shall be released. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and associates shall bear a legend giving appropriate notice of such
restriction and, in addition, the Bank and the Holding Company will give
appropriate instructions to the transfer agent for the Holding Company's Common
Stock with respect to the applicable restriction upon transfer of any restricted
shares. Any shares issued at a later date as a stock dividend, stock split or
otherwise, to holders of restricted stock, shall be subject to the same
restrictions that may apply to such restricted stock. Holding Company stock
(like the stock of most companies) is subject to the requirements of the
Securities Act. Accordingly, Holding Company stock may be offered and sold only
in compliance with such registration requirements or pursuant to an applicable
exemption from registration.
OTS regulations provide that for a period of three years following the
Conversion, without prior approval of the OTS, neither directors and officers of
the Holding Company, the Bank nor their associates may purchase shares of the
Holding Company, except from a broker registered with the SEC. This restriction
does not, however, apply to negotiated transactions involving more than one
percent of the Holding Company's outstanding Common Stock or the purchase of
stock made by or held by any one or more employee stock benefit plans which may
be attributable to individual directors or officers.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain information
concerning the Holding Company, and that sales thereunder be made in routine
brokerage transactions or through a market maker. If the conditions of Rule 144
are satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of shares which does not exceed the greater
of (i) 1% of the number of outstanding shares of Holding Company stock, or (ii)
if the stock is admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities
association the average weekly reported volume of trading during the four weeks
preceding the sale.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior receipt
by the Bank of either a ruling from the Internal Revenue Service or an opinion
of Luse Lehman Gorman Pomerenk & Schick, P.C. with respect to federal taxation,
and a ruling of the Missouri taxation authorities or an opinion of KPMG Peat
Marwick LLP with respect to Missouri taxation, to the effect that consummation
of the Conversion will not be taxable to the converted Association or the
Holding Company.
An opinion has been received from Luse Lehman Gorman Pomerenk & Schick, P.C.
with respect to the proposed Conversion of the Bank to the stock form, to the
effect that (i) the Conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized to the Bank in
either its mutual form or its stock form by reason of the proposed Conversion,
(ii) no gain or loss will be recognized to the Bank upon the receipt of money
from the Holding Company for stock of the Bank; and no gain or loss will be
recognized to the Holding Company upon the receipt of money for Common Stock of
the Holding Company; (iii) the assets of the Bank in either its mutual or its
stock form will have the same basis before and after the Conversion; (iv) the
holding period of the assets of the Bank will include the period during which
the assets were held by the Bank in its mutual form prior to conversion; (v) no
gain or loss will be recognized by the deopsitors of the Bank upon the issuance
to them of withdrawable deposit accounts in the Bank after the Conversion in the
same dollar amount as their deposit accounts in the Bank plus an interest in the
Liquidation Account of the Bank, as described above, in exchange for their
deposit account in the Bank; (vi) the basis of the account holder's deposit
accounts in the Bank after the Conversion will be the same as the basis of his
deposit accounts in the Bank prior to the Conversion; (vii) the basis of each
account holder's interest in the Liquidation Account will be zero; (viii) the
basis of the Holding Company Common Stock to its shareholders will be the
Purchase Price thereof plus, in the case
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of stock acquired by account holders, the basis, if any in the Subscription
Rights and a shareholder's holding period for Holding Company Common Stock
acquired through the exercise of Subscription Rights shall begin on the date on
which the Subscription Rights are exercised; (ix) for purposes of Section 381 of
the Code, the Bank will be treated as if there had been no reorganization,
accordingly, the taxable year of the Bank will not end on the effective date of
the Conversion and the tax attributes of the Bank will be taken into account by
the Bank in stock form as if there had been no reorganization; (x) the part of
the taxable year of the Bank before the reorganization and the part of the
taxable year of the Bank after the reorganization will constitute a single
taxable year of the Bank; (xi) the Bank, immediately after Conversion, will
succeed to the bad debt reserve accounts of the Bank, in mutual form, and the
bad debt reserves will have the same character in the hands of the Bank after
Conversion as if no distribution or transfer had occurred; and (xii) the
creation of the liquidation account will have no effect on the Bank's taxable
income, deductions or addition to reserve for bad debts either in its mutual or
stock form.
The opinion from Luse Lehman Gorman Pomerenk & Schick, P.C. is based, among
other things, on certain assumptions, including the assumptions that the
exercise price of the Subscription Rights to purchase Holding Company Common
Stock will be approximately equal to the fair market value of that stock at the
time of the completion of the proposed Conversion. The Holding Company and the
Bank have received a letter issued by RP Financial stating that pursuant to RP
Financial's valuation, RP Financial is of the belief that Subscription Rights
issued in connection with the Conversion will have no value. The letter of RP
Financial and the federal and state tax opinions, respectively, referred to
herein are filed as exhibits to the Registration Statement. See "Additional
Information."
The Bank has also received an opinion of Luse Lehman Gorman Pomerenk &
Schick, P.C. to the effect that, based in part on the RP Financial Letter: (i)
no taxable income will be realized by depositors as a result of the receipt or
exercise of non-transferable Subscription Rights to purchase shares of Holding
Company Common Stock at fair market value; and (ii) no taxable income will be
realized by the Bank or Holding Company on the issuance of Subscription Rights
to eligible subscribers to purchase shares of Holding Company Common Stock at
fair market value.
If it is subsequently established that the Subscription Rights received by
such persons have an ascertainable fair market value, then, in such event, the
Subscription Rights will be taxable to the recipient in the amount of their fair
market value. In this regard, the Subscription Rights may be taxed partially or
entirely at ordinary income tax rates.
With respect to Missouri taxation, the Bank has received an opinion from
KPMG Peat Marwick LLP to the effect that, assuming the Conversion does not
result in any federal taxable income, gain or loss to the Bank in its mutual or
stock form, the Holding Company, the account holders, borrowers, officers,
directors and employees and Tax-Qualified Employee Plans of the Bank, the
Conversion should not result in any Missouri income tax liability to such
entities or persons.
Unlike a private letter ruling, the opinions of Luse Lehman Gorman Pomerenk
& Schick, P.C. and KPMG Peat Marwick LLP, as well as the RP Financial Letter,
have no binding effect or official status, and no assurance can be given that
the conclusions reached in any of those opinions would be sustained by a court
if contested by the IRS or the Missouri tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Bank and the Holding Company are not
aware of any effort that might be made to obtain control of the Holding Company
after Conversion, the Boards of Directors, as discussed below, believe that it
is appropriate to include certain provisions as part of the Holding Company's
certificate of incorporation to protect the interests of the Holding Company and
its stockholders from takeovers which the Board
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of Directors of the Holding Company might conclude are not in the best interests
of the Bank, the Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of the material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect.
The following description of certain of these provisions is necessarily general
and, with respect to provisions contained in the Holding Company's certificate
of incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the OTS and the Holding Company's
Registration Statement filed with the SEC. See "Additional Information."
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, it would take two annual elections to replace a
majority of the Holding Company's Board. The Holding Company's certificate of
incorporation provides that the size of the Board of Directors may be increased
or decreased only by a majority vote of the Board. The certificate of
incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the certificate and bylaws
impose certain notice and information requirements in connection with the
nomination by stockholders of candidates for election to the Board of Directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Removal for "cause" is limited to the grounds for termination in the federal
regulations that applies to employment contracts of federally insured savings
institutions.
Restrictions on Call of Special Meetings. The certificate of incorporation
of the Holding Company provides that a special meeting of stockholders may be
called by the Chairman of the Board of the Holding Company or pursuant to a
resolution adopted by a majority of the Board of Directors. Stockholders are
not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation provides that there shall be no cumulative voting rights in the
election of directors.
Authorization of Preferred Stock. The certificate of incorporation of the
Holding Company authorizes 500,000 shares of serial preferred stock, without par
value. The Holding Company is authorized to issue preferred stock from time to
time in one or more series subject to applicable provisions of law; and the
Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
conversion rights of such shares (which could be multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to
gain control of the Holding Company that the Board of Directors does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. An effect of the possible issuance
of preferred stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans or understandings for the issuance of
any preferred stock but it may issue any preferred stock on terms which the
Board deems to be in the best interests of the Holding Company and its
stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that (I) no person shall directly or indirectly offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Holding Company (provided that such limitation shall not
apply to the acquisition of equity securities by any one or more tax-qualified
employee stock benefit plans maintained by the Holding Company, if the plan or
plans beneficially own no more than 25% of any class of such equity security of
the
107
<PAGE>
Holding Company); and that (ii) shares beneficially owned in violation of the
stock ownership restriction described above shall not be entitled to vote and
shall not be voted by any person or counted as voting stock in connection with
any matter submitted to a vote of stockholders. For these purposes, a person
(including management) who has obtained the right to vote shares of the Common
Stock pursuant to revocable proxies shall not be deemed to be the "beneficial
owner" of those shares if that person is not otherwise deemed to be a beneficial
owner of those shares.
The certificate of incorporation of the Holding Company further provides
that the Board of Directors of the Holding Company, when determining to take or
refrain from taking corporate action on any matter, including making or
declining to make any recommendation to the Holding Company's stockholders, may,
in connection with the exercise of its judgment in determining what is in the
best interest of the Holding Company, the Bank and the stockholders of the
Holding Company, give due consideration to all relevant factors, including,
without limitation, the social and economic effects of acceptance of such offer
on the Holding Company's customers and the Bank's present and future account
holders, borrowers and employees; the effect on the communities in which the
Holding Company and the Bank operate or are located; and the effect on the
ability of the Holding Company to fulfill the objectives of a savings and loan
holding company and of the Bank or future subsidiaries to fulfill the objectives
of a stock savings and loan association under applicable statutes and
regulations. The certificate of incorporation of the Holding Company also
authorize the Board of Directors to take certain actions to encourage a person
to negotiate for a change of control of the Holding Company or to oppose such a
transaction deemed undesirable by the Board of Directors including the adoption
of so-called shareholder rights plans. By having these standards and provisions
in the certificate of incorporation of the Holding Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Holding Company, even if the price offered is significantly greater than the
then market price of any equity security of the Holding Company.
Procedures for Certain Business Combinations. The certificate of
incorporation of the Holding Company requires that certain business combinations
between the Holding Company (or any majority-owned subsidiary thereof) and a 10%
or greater stockholder either (I) be approved by at least 80% of the total
number of outstanding voting shares of the Holding Company or (ii) be approved
by a majority of certain directors unaffiliated with such 10% or greater
stockholder or (iii) involve consideration per share generally equal to the
higher of (A) the highest amount paid by such 10% stockholder or its affiliates
in acquiring any shares of the Common Stock or (B) the "Fair Market Value"
(generally, the highest closing bid paid on the Common Stock during the 30 days
preceding the date of the announcement of the proposed business combination or
on the date the 10% or greater stockholder became such, whichever is higher).
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock; provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain
provisions (i.e., provisions relating to number, classification, election and
removal of directors, amendment of bylaws, call of special stockholder meetings,
criteria for evaluating certain offers, offers to acquire and acquisitions of
control, director liability, certain business combinations, power of
indemnification, and amendments to provisions relating to the foregoing in the
certificate of incorporation).
The bylaws may be amended by the affirmative vote of the total number of
directors of the Holding Company or the affirmative vote of at least 80% of the
total votes eligible to be voted at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's Certificate
of Incorporation and Bylaws. The Board of Directors of the Bank believes that
the provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Bank in the orderly deployment of the Conversion proceeds
into productive assets during the initial period after the Conversion. The
Board of Directors believes these provisions are in the best interest of the
Bank and of the Holding Company and its stockholders. In the judgment of the
Board of Directors, the Holding Company's Board will be in the best
108
<PAGE>
position to determine the true value of the Holding Company and to negotiate
more effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interests of
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at prices reflective of the true value of the Holding Company and
which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding companies
have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Holding Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then-
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Potential Anti-Takeover Effects. Despite the belief of the Bank and the
Holding Company as to the benefits to stockholders of these provisions of the
Holding Company's certificate of incorporation and bylaws, these provisions may
also have the effect of discouraging a future takeover attempt which would not
be approved by the Holding Company's Board, but pursuant to which stockholders
may receive a substantial premium for their shares over then-current market
prices. As a result, stockholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Holding Company's Board of Directors and of management
more difficult. The Boards of Directors of the Bank and the Holding Company,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
provisions to its certificate of incorporation regarding the acquisition of its
equity securities that would be permitted to a Delaware corporation. The
Holding Company and the Bank do not presently intend to propose the adoption of
further restrictions on the acquisition of the Holding Company's equity
securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The State of Delaware has enacted
legislation which provides that subject to certain exceptions a publicly held
Delaware corporation may not engage in any business combination with an
"interested stockholder" for three years after such stockholder became an
interested stockholder, unless, among other things, the interested stockholder
acquired at least 85% of the corporation's voting stock in the transaction that
resulted in the stockholder becoming an interested stockholder. This
legislation generally defines "interested stockholder" as any person or entity
that owns 15% or more of the corporation's voting stock. The term "business
combination" is defined broadly to cover a wide range of corporate transactions,
including mergers, sales of assets, issuances of stock, transactions with
subsidiaries and the receipt of disproportionate financial benefits. Under
certain circumstances, either the board of directors or both the board and two-
thirds of the stockholders other than the acquiror may approve a given business
combination and thereby exempt the corporation from the operation of the
statute.
109
<PAGE>
However, these statutory provisions do not apply to Delaware corporations
with fewer than 2,000 stockholders or which do not have voting stock listed on a
national exchange or listed for quotation with a registered national securities
association. The Holding Company has applied to have the Common Stock listed on
the Nasdaq SmallCap Market.
Federal Regulation. A federal regulation prohibits any person prior to the
completion of a conversion from transferring, or entering into any agreement or
understanding to transfer, the legal or beneficial ownership of the Subscription
Rights issued under a plan of conversion or the stock to be issued upon their
exercise. This regulation also prohibits any person prior to the completion of
a conversion from offering, or making an announcement of an offer or intent to
make an offer, to purchase such Subscription Rights or stock. For three years
following conversion, this regulation prohibits any person, without the prior
approval of the OTS, from acquiring or making an offer (if opposed by the
institution) to acquire more than 10% of the stock of any converted savings
institution if such person is, or after consummation of such acquisition would
be, the beneficial owner of more than 10% of such stock. In the event that any
person, directly or indirectly, violates this regulation, the securities
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to a vote of stockholders.
Federal law provides that no company "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings and loan
association at any time without the prior approval of the OTS. "Acting in
concert" is defined very broadly. In addition, federal regulations require that,
prior to obtaining control of a savings and loan association, a person, other
than a company, must give 60 days' prior notice to the OTS and have received no
OTS objection to such acquisition of control. Any company that acquires such
control becomes a "savings and loan holding company" subject to registration,
examination and regulation as a savings and loan holding company. Under federal
law (as well as the regulations referred to below) the term "savings and loan
association" includes state and federally chartered SAIF-insured institutions
and federally chartered savings banks whose accounts are insured by the FDIC's
BIF and holding companies thereof.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings and
loan association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings and loan association's voting stock, if
the acquiror also is subject to any one of eight "control factors," constitutes
a rebuttable determination of control under the regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The regulations provide that persons or companies which
acquire beneficial ownership exceeding 10% or more of any class of a savings and
loan association's stock must file with the OTS a certification that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 4,000,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
3,500,000 shares of Common Stock ($.01 par value) and 500,000 shares of serial
preferred stock ($.01 par value). The Holding Company currently expects to
issue between 892,500 and 1,207,500 shares of Common Stock in the Conversion.
The aggregate stated value of the issued shares will constitute the capital
account of the Holding Company on a consolidated basis. The balance of the
Purchase Price of Common Stock, less expenses of Conversion, will be reflected
as paid-in capital on a consolidated basis. See
110
<PAGE>
"Capitalization." Upon payment of the Purchase Price for the Common Stock, in
accordance with the Plan, all such stock will be duly authorized, fully paid,
validly issued and nonassessable.
Each share of the Common Stock will have the same relative rights and will
be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess exclusive
voting power in the Holding Company. Each stockholder will be entitled to one
vote for each share held on all matters voted upon by stockholders, subject to
the limitation discussed under "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Holding Company, the holders of the Common Stock will be
entitled to receive--after payment or provision for payment of all debts and
liabilities of the Holding Company (including all deposits in the Bank and
accrued interest thereon) and after distribution of the liquidation account
established upon Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who continue their deposit accounts at the
Bank--all assets of the Holding Company available for distribution, in cash or
in kind. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Bank." If preferred stock is issued subsequent
to the Conversion, the holders thereof may have a priority over the holders of
Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the Common
Stock will be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the Holding
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred
stock will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except as discussed herein, the Holding Company has no present plans for the
issuance of the additional authorized shares of Common Stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued
and unreserved shares of Common Stock will be available for general corporate
purposes including but not limited to possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment and stock purchase plan, in a future underwritten or other public
offering or under an employee stock ownership plan, stock option or restricted
stock plan. The authorized but unissued shares of preferred stock will
similarly be available for issuance in future mergers or acquisitions, in a
future underwritten public offering or private placement or for other general
corporate purposes. Except as described above or as otherwise required to
approve the transaction in which the additional authorized shares of Common
Stock or authorized shares of preferred stock would be issued, no stockholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the Holding Company, without stockholder approval, can
issue preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
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<PAGE>
Dividends. Upon consummation of the formation of the Holding Company, the
Holding Company's only asset will be the Bank's Common Stock. Although it is
anticipated that the Holding Company will retain approximately 50% of the net
proceeds in the Conversion, dividends from the Bank will be an important source
of income for the Holding Company. Should the Bank elect to retain its income,
the ability of the Holding Company to pay dividends to its own shareholders may
be adversely affected. Furthermore, if at any time in the future the Holding
Company owns less than 80% of the outstanding stock of the Bank, certain tax
benefits under the Code as to inter-company distributions will not be fully
available to the Holding Company and it will be required to pay federal income
tax on a portion of the dividends received from the Bank, thereby reducing the
amount of income available for distribution to the shareholders of the Holding
Company. For further information concerning the ability of the Bank to pay
dividends to the Holding Company, see "Dividends."
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Holding Company by the
firm of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C. 20015.
The Missouri state income tax consequences of the Conversion will be passed upon
for the Bank and the Holding Company by KPMG Peat Marwick LLP, Kansas City,
Missouri. Luse Lehman Gorman Pomerenk & Schick, P.C. and KPMG Peat Marwick LLP
have consented to the references herein to their opinions. Certain legal
matters regarding the Conversion will be passed upon for Trident Securities by
Breyer & Aguggia, Washington, D.C.
EXPERTS
The Consolidated Financial Statements of the Bank as of June 30, 1995 and
1994, and for the fiscal years ended June 30, 1995 and 1994 have been included
in this Prospectus in reliance on the report of KPMG Peat Marwick LLP, certified
public accountants, appearing elsewhere herein, and upon the authority of that
firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and the Holding Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
valuation with respect to Subscription Rights.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement under
the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the registration statement. Such
information can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549, and copies of
such material can be obtained from the SEC at prescribed rates. The statements
contained herein as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete but do contain all material information
regarding such documents; each such statement is qualified by reference to such
contract or document.
The Bank has filed an Application for Conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that Application. The
Application may be examined at the principal offices of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Midwest Regional Office of the OTS
located at 122 W. John Carpenter Freeway, Suite 600, Irving, Texas 75039.
112
<PAGE>
In connection with the Conversion, the Holding Company will register the
Common Stock with the SEC under Section 12(g) of the Exchange Act; and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Holding Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion.
A copy of the certificate of incorporation and bylaws of the Holding Company
are available without charge from the Bank.
113
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
Excelsior Springs, Missouri
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets as of March 31, 1996 (unaudited)
and June 30, 1995 and 1994............................................... F-3
Consolidated Statements of Earnings for the nine months ended March 31,
1996 and 1995 (unaudited) and the years ended June 30, 1995 and
1994..................................................................... 37
Consolidated Statements of Equity for the nine months
ended March 31, 1996 (unaudited) and for the years ended June 30, 1995
and 1994................................................................ F-5
Consolidated Statements of Cash Flows for the nine months ended March 31,
1996 and 1995 (unaudited) and for the years ended June 30, 1995 and
1994..................................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
######
All financial statements of CBES Bancorp, Inc. have been omitted because CBES
Bancorp, Inc. has not yet issued any stock, has no assets and liabilities and
has not conducted any business other than of an organizational nature.
All schedules are omitted as the required information is not applicable or
because the required information is included in the consolidated financial
statements or related notes.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Community Bank of Excelsior Springs,
a Savings Bank:
We have audited the accompanying consolidated balance sheets of Community Bank
of Excelsior Springs, a Savings Bank, and subsidiary as of June 30, 1995 and
1994 and the related consolidated statements of earnings, equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of Community Bank's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bank of
Excelsior Springs, and subsidiary as of June 30, 1995 and 1994 and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
August 25, 1995, except for
footnote 13, which is as of May 14, 1996
Kansas City, Missouri
F-2
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1996 June 30,
-------------- -------------------------
Assets (unaudited) 1995 1994
------ ---- ----
<S> <C> <C> <C>
Cash $ 768,211 604,665 692,685
Interest-bearing deposits in other financial institutions 1,316,396 2,469,045 4,194,393
Investment securities available-for-sale (note 2):
U.S. government and agency obligations (amortized cost of
$2,002,625 (unaudited), $2,003,750 and $2,005,250 in 1996,
1995 and 1994, respectively) 1,980,820 1,962,320 1,993,610
Mutual fund (amortized cost of $1,078,676 and $1,392,823 in
1995 and 1994, respectively) - 1,078,676 1,038,585
Mortgage-backed securities held-to-maturity (estimated fair value
of $545,869 (unaudited), $3,911,886 and $4,796,508 in
1996, 1995 and 1994, respectively) (note 3) 548,742 3,869,572 4,834,152
Loans held for sale, net 979,260 1,518,908 105,268
Loans receivable, net (note 4) 76,294,107 77,361,061 53,348,212
Accrued interest receivable:
Loans receivable 562,077 504,442 305,369
Investment securities 13,842 34,386 41,486
Mortgage-backed securities 4,173 33,223 41,438
Real estate owned - - 81,053
Stock in Federal Home Loan Bank (FHLB), at cost 810,700 794,700 521,200
Office property and equipment, net (note 5) 1,286,445 1,288,352 1,193,561
Cash surrender value of life insurance and other assets (note 9) 1,602,741 1,581,076 151,761
---------- ---------- ----------
Total assets $ 86,167,514 93,100,426 68,542,773
========== ========== ==========
Liabilities and Equity
----------------------
Liabilities:
Deposits (note 6) $ 67,916,486 68,274,476 60,180,445
FHLB advances (note 7) 9,000,000 15,876,915 -
Accrued expenses and other liabilities 517,027 477,188 449,059
Accrued interest payable on deposits 137,899 104,769 61,836
Advance payments by borrowers for property taxes and
insurance 461,996 864,780 801,869
Income taxes payable (receivable) (note 8):
Current 221,442 (5,560) 51,177
Deferred 30,000 27,000 17,451
---------- ---------- ----------
Total liabilities 78,284,850 85,619,568 61,561,837
Equity:
Retained earnings, substantially restricted (notes 10, 11 and 12) 7,895,747 7,505,716 7,342,158
Unrealized (losses) on available-for-sale securities,
net of tax (13,083 (24,858) (361,222)
---------- ---------- ----------
Total equity 7,882,664 7,480,858 6,980,936
Commitments (note 4) ---------- ---------- ----------
Total liabilities and equity $ 86,167,514 93,100,426 68,542,773
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Equity
<TABLE>
<CAPTION>
Retained Net loss on
earnings, available-for-
substantially sale securities,
restricted net of tax Total
---------- ---------- -----
<S> <C> <C> <C>
Balance at June 30, 1993 $ 6,641,448 (332,165) 6,309,283
Initial adoption of Financial Accounting Standards
Board Statement No. 115, on July 1, 1993, net of
taxes - 10,951 10,951
Net earnings 700,710 - 700,710
Increase in unrealized loss on available-for-sale
securities, net of taxes - (40,008) (40,008)
---------- -------- ---------
Balance at June 30, 1994 7,342,158 (361,222) 6,980,936
Net earnings 163,558 - 163,558
Writedown of investment in mutual fund - 314,148 314,148
Decrease in unrealized loss on available-for-sale
securities, net of tax - 22,216 22,216
---------- -------- ---------
Balance at June 30, 1995 7,505,716 (24,858) 7,480,858
Net earnings (unaudited) 390,031 - 390,031
Decrease in unrealized loss on available-for-sale
securities, net of tax (unaudited) - 11,775 11,775
---------- -------- ---------
Balance at March 31, 1996 (unaudited) $ 7,895,747 (13,083) 7,882,664
========== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
March 31, Years ended June 30,
----------------- --------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 390,031 27,684 163,558 700,710
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 188,341 143,056 171,277 33,590
Depreciation 95,862 84,719 118,250 108,125
Net realized (gain) loss on sale of
securities available-for-sale (54,205) - - 135,933
Writedown of investment in mutual fund - 314,148 314,148 -
Gain on disposition of real estate owned, net - (2,376) (5,822) (14,611)
Proceeds from sale of loans held for sale 12,700,276 1,160,948 4,763,106 15,949,331
Origination of loans held for sale (12,021,352) (1,363,937) (6,134,640) (15,914,268)
Gain on sale of loans, net (139,277) (4,948) (42,106) (140,331)
Premium amortization and accretion of
discounts and deferred loan fees (191,488) (212,910) (301,901) (115,783)
Deferred income taxes (benefit) (4,850) 14,000 21,464 (7,055)
FHLB stock dividends (16,000) - - -
Changes in assets and liabilities:
Accrued interest receivable (8,041) (66,169) (183,758) (9,798)
Other assets (21,663) 7,873 (28,821) 24,540
Accrued expenses and other liabilities 39,839 65,416 180,940 92,240
Accrued interest payable on deposits 33,130 70,832 42,933 (11,234)
Current income taxes payable 227,002 (89,860) (56,737) 20,051
------------ ----------- ---------- -----------
Net cash provided by (used in)
operating activities 1,217,605 148,476 (978,109) 851,440
------------ ----------- ---------- -----------
Cash flows from investing activities:
Net change in loans receivable 1,072,414 (18,731,012) (23,956,731) (6,546,599)
Purchase of FHLB stock - (51,700) (273,500) -
Proceeds from sales of securities available-for-sale 4,046,846 - - 1,430,309
Mortgage-backed securities principal repayments 405,676 753,316 964,384 1,572,064
Change in FHLB time deposits - 1,600,000 1,600,000 (1,600,000)
Purchase of office property and equipment (93,955) (143,604) (213,041) (70,330)
Proceeds from sale of real estate owned - 29,772 29,772 30,000
Purchase of life insurance policies - (1,420,000) (1,420,000) -
------------ ----------- ----------- -----------
Net cash provided by (used in)
investing activities 5,430,981 (17,963,228) (23,269,116) (5,184,556)
------------ ----------- ----------- -----------
</TABLE>
(Continued)
F-5
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Nine months ended
March 31, Years ended June 30,
----------------- --------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net change in deposits $ (357,990) 6,332,707 8,094,031 1,430,668
Proceeds from FHLB advances 16,650,000 22,100,000 32,000,000 -
Repayments of FHLB advances (23,526,915) (11,174,143) (16,123,085) -
Increase in advance payments by borrowers for
property taxes and insurance (402,784) (99,586) 62,911 155,265
------------ ----------- ----------- ----------
Net cash (used in) provided by
financing activities (7,637,689) 17,158,978 24,033,857 1,585,933
------------ ----------- ----------- ----------
Net decrease in cash and
cash equivalents (989,103) (655,774) (213,368) (2,747,183)
Cash and cash equivalents at the beginning of the period 3,073,710 3,287,078 3,287,078 6,034,261
------------ ----------- ----------- ----------
Cash and cash equivalents at the end of the period $ 2,084,607 2,631,304 3,073,710 3,287,078
============ =========== =========== ==========
Supplemental disclosure of cash flow information:
(Refunds received) cash paid during the period
for income taxes $ (15,054) 286,510 336,510 339,080
============ =========== =========== ==========
Cash paid during the period for interest $ 3,056,090 2,030,998 3,102,999 2,101,514
============ =========== =========== ==========
Supplemental schedule of noncash investing and
financing activities:
Conversion of loans to real estate owned $ - 10,897 10,897 250,993
============ =========== =========== ==========
Loans made to finance sales of real
estate owned $ - - 68,000 194,500
============ =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
Nine months ended March 31, 1996 and 1995 (unaudited)
and the years ended June 30, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Organization
------------
The consolidated financial statements include the accounts of Community
Bank of Excelsior Springs, a Savings Bank, and its wholly-owned
subsidiary, CBES Service Corporation, collectively referred to as
Community Bank. Community Bank of Excelsior Springs is chartered as a
federal mutual savings bank. CBES Service Corporation was formed in
March 1993 to provide insurance services. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Unaudited Interim Financial Statements
--------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements for a presentation of
interim financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, that are
necessary for a fair presentation of the interim periods have been
reflected.
(c) Cash and Cash Equivalents
-------------------------
For purposes of the cash flows, all short-term investments with a maturity
of three months or less at date of purchase are considered cash
equivalents.
(d) Mortgage-backed and Investment Securities
-----------------------------------------
Community Bank classifies securities as either available-for-sale or held-
to-maturity. Held-to-maturity securities are those which Community
Bank has the positive intent and ability to hold to maturity. All
other securities are classified as available-for-sale.
Securities classified as held-to-maturity are recorded at amortized cost.
Securities classified as available-for-sale are recorded at fair value
with unrealized net holding gains and losses, net of the related tax
effect, excluded from earnings and reported as a separate component of
equity until realized. A decline in the market value of any security
below cost that is deemed other than temporary is charged to income,
resulting in the establishment of a new cost basis for the security.
Pursuant to Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and implementation
guidance issued in November 1995 by the Financial Accounting Standards
Board, Community Bank reclassified certain held-to-maturity mortgage-
backed securities with aggregate cost and fair value of $2,913,965 and
$2,963,159, respectively, to available-for-sale in December 5, 1995.
These securities were disposed of on December 11, 1995.
(Continued)
F-7
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
Premiums and discounts on mortgage-backed and investment securities are
amortized using the interest method over the life of the
securities.
Realized gains or losses on sales are recognized using the specific
identification method.
(e) Loans Held for Sale
-------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value. Fees received on
such loans are deferred and recognized in income as part of the gain or
loss on sale. At March 31, 1996 and June 30, 1995, all loans held for
sale are committed to be sold to a third party. The valuation
allowance at June 30, 1994 was $4,732. There was no valuation
allowance at March 31, 1996 or June 30, 1995.
(f) Deferred Loan Fees and Costs
----------------------------
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized as interest income using the interest
method over the contractual life of the loan for loans generated for
Community Bank's portfolio.
(g) Allowance for Losses
--------------------
The allowance for loan losses is established through provision for loan
losses charged against income. Loans deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
A general valuation allowance for losses on loans is established by
management based on its estimate of the amount required to maintain an
adequate allowance for loan losses reflective of the risks in the loan
portfolio. This estimate is based on reviews of the loan portfolio,
including assessment of the estimated net realizable value of the
related underlying collateral of and consideration of past loan loss
experience, current economic conditions and such other factors which,
in the opinion of management, deserve current recognition. Loans are
also subject to periodic examination by regulatory agencies. Such
agencies may require charge-off or additions to the allowance based
upon their judgments about information available at the time of their
examination.
Additionally, it is Community Bank's policy to place loans delinquent, as
to principal, over ninety days on nonaccrual status and exclude
interest on such loans from income. Interest ultimately collected is
credited to income in the period received.
(Continued)
F-8
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(h) Real Estate Owned
-----------------
Real estate properties acquired through foreclosure are initially recorded
at the lower of cost or the fair value, less estimated costs to sell,
of the underlying collateral at the time of foreclosure. Subsequent to
foreclosure, further declines in the fair value of such properties are
recorded as a reduction to the carrying value of those assets through
the establishment of an allowance for losses. No loss allowance was
provided by management as of June 30, 1994 because it believed the
recorded values of such properties were less than their respective
fair values.
(i) Stock in Federal Home Loan Bank (FHLB)
--------------------------------------
Community Bank is a member of the FHLB system. As a member, it is required
to purchase and hold stock in the FHLB of Des Moines in an amount
equal to the greater of (a) 1% of unpaid residential loans at the
beginning of each year, (b) 5% of FHLB advances, or (c) .3% of total
assets. Community Bank's investment in such stock is recorded at cost.
(j) Office Property and Equipment
-----------------------------
Office property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives (three to thirty years) of the
respective assets.
Maintenance and repairs are charged to expense and betterments are
capitalized. Gains and losses on disposition are reflected in current
operations.
(k) Income Taxes
------------
Community Bank accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective income tax bases. The effect on
deferred tax assets and liabilities for a change in tax rate is
recognized in income in the period that includes the enactment dates.
(Continued)
F-9
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(l) Effect of New Financial Accounting Standards
--------------------------------------------
The Financial Accounting Standards Board has issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." SFAS No. 114, as amended by SFAS No. 118, defines
the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans for which terms have been
modified in troubled-debt restructurings (a restructured loan).
Specifically, a loan is considered impaired when it is probable a
creditor will be unable to collect all amounts due - both principal and
interest - according to the contractual terms of the loan agreement.
When measuring impairment, the expected future cash flows of an
impaired loan are required to be discounted at the loan's effective
interest rate. Alternatively, impairment can be measured by reference
to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Regardless of the
historical measurement method used, SFAS No. 114 requires a creditor to
measure impairment based on the fair value of the collateral when the
creditor determines foreclosure is probable. Additionally, impairment
of a restructured loan is measured by discounting the total expected
future cash flows at the loan's effective rate of interest as stated in
the original loan agreement.
Community Bank applies the recognition criteria of SFAS No. 114 to
multifamily real estate loans, commercial real estate loans and
restructured loans. Smaller balance, homogeneous loans, including one-
to-four-family residential and contraction loans and consumer loans,
are collectively evaluated for impairment. SFAS No. 118 amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans. Community Bank has elected to
continue to use its existing nonaccrual methods for recognizing
interest on impaired loans. The adoption of SFAS No. 114 and No. 118
resulted in no prospective adjustment to the allowance for loan losses
and did not affect Community Bank's policies regarding charge-offs or
recoveries. Adoption of these statements was effective for the fiscal
year beginning July 1, 1995.
SFAS No. 107 and SFAS No. 119, "Disclosures About Fair Value of Financial
Instruments," was effective for Community Bank for the year beginning
July 1, 1995 and requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized
in the balance sheets.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," will be effective
for Community Bank for the year beginning July 1, 1996 and generally
requires entities that sell or securitize loans and retain the mortgage
servicing rights to allocate total cost of the mortgage loans to the
mortgage servicing right and the loan based on their relative fair
value. Costs allocated to mortgage servicing rights should be
recognized as a separate asset and amortized over the period of
estimated net servicing income and evaluated for impairment based on
fair value. The adoption of this statement is not expected to have a
material effect on the consolidated financial statements.
(Continued)
F-10
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," supersedes SFAS No. 122 and will be
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets
and liabilities that exist after the transfer. Many of these assets and
liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of
collateral. The adoption of this statement is not expected to have a
material effect on the consolidated financial statements.
(2) Investment Securities
---------------------
A summary of investment securities available-for-sale at March 31, 1996 and
June 30, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
March 31, 1996 (unaudited):
U.S. government and
agency obligations
maturing within one
year $1,000,000 - (9,200) 990,800
U.S. government and
agency obligations
maturing after one
year but within
five years 1,002,625 - (12,605) 990,020
---------- ---------- ------- ---------
$2,002,625 - (21,805) 1,980,820
========== ========== ======= =========
June 30, 1995:
U.S. government and
agency obligations
maturing after one year
but within five years $2,003,750 - (41,430) 1,962,320
Mutual fund 1,078,676 - - 1,078,676
---------- ---------- ------- ---------
$3,082,426 - (41,430) 3,040,996
========== ========== ======= =========
</TABLE>
(Continued)
F-11
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
June 30, 1994:
U.S. government and
agency obligations
maturing after one year
but within five years $2,005,250 12,700 (24,340) 1,993,610
Mutual fund 1,392,823 - (354,238) 1,038,585
---------- ------ ---------
$3,398,073 12,700 (378,578) 3,032,195
========== ====== =========
</TABLE>
During the year ended June 30, 1995, management determined that the decline
in market value of its mutual fund investment below cost was not
temporary and, accordingly, adjusted the cost basis of the investment
downward by $314,148 through a charge to earnings.
During the nine months ended March 31, 1996, Community Bank recognized
gross gains of $5,011 and no gross losses on proceeds of $1,083,687 from
the sale of the mutual fund (unaudited). During the year ended June 30,
1994, Community Bank recognized gross losses of $135,933 and no gross
gains from mutual fund proceeds of $1,430,309. No investment securities
were sold during the year ended June 30, 1995.
(3) Mortgage-backed Securities
--------------------------
Mortgage-backed securities held-to-maturity consisted of the following at
March 31, 1996, June 30, 1995 and 1994:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
cost gains losses fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
March 31, 1996 (unaudited):
Federal Home Loan
Mortgage Corporation
(FHLMC) participation
certificates $545,787 2,776 (5,687) 542,876
Pass-through certificate
guaranteed by Government
National Mortgage
Association (GNMA) 2,955 38 - 2,993
----- ------ ------- --------
$548,742 2,814 (5,687) 545,869
======== ===== ======= =======
</TABLE>
(Continued)
F-12
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
cost gains losses fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
June 30, 1995:
FHLMC participation
certificates $3,507,847 21,606 (15,923) 3,513,530
Pass-through certificate
guaranteed by GNMA 361,725 36,631 - 398,356
---------- ------ ------- ---------
$3,869,572 58,237 (15,923) 3,911,886
========== ====== ====== =========
June 30, 1994:
FHLMC participation
certificates $4,357,921 7,368 (88,102) 4,277,187
Pass-through certificate
guaranteed by GNMA 476,231 43,212 (122) 519,321
---------- ------ ------- -------
$4,834,152 50,580 (88,224) 4,796,508
========== ====== ====== =========
</TABLE>
During the nine months ended March 31, 1996, Community Bank recognized
gross gains of $52,722 and gross losses of $3,528 on proceeds of
$2,989,177 from the sale of mortgage-backed securities available for
sale. There were no other sales of mortgage-backed securities.
(4) Loans Receivable
----------------
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
March 31, June 30,
----------------------
1996 1995 1994
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Real estate:
One-to-four family residential $51,491,727 53,737,889 38,895,957
Construction 17,887,526 16,221,145 7,857,377
Land 3,641,482 1,991,631 545,384
Commercial 1,025,441 818,371 316,757
Multifamily 321,018 134,412 162,528
Consumer loans 10,675,912 11,296,068 10,052,394
----------- ---------- ----------
85,043,106 84,199,516 57,830,397
Less:
Loans in process 8,142,999 6,390,936 4,068,155
Deferred loan origination fees
and discounts on loans, net 259,000 221,519 251,030
Allowance for loan losses 347,000 226,000 163,000
----------- ---------- ----------
$76,294,107 77,361,061 53,348,212
=========== ========== ==========
</TABLE>
(Continued)
F-13
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
At March 31, 1996 and June 30, 1995, Community Bank was committed to make
first mortgage loans approximating $1,418,000 (unaudited) and $739,000
with $231,000 (unaudited) and $267,000 of these loans committed to be
sold to a third party. Fixed rate loan commitments approximated
$1,153,000 (unaudited) and $363,000 at March 31, 1996 and June 30,
1995, respectively, with rates ranging from 7.25% to 9.38%. Community
Bank services mortgage loans for others amounting to approximately
$30,967,000 and $24,339,000 (unaudited) and $25,743,000 and $25,581,000
at March 31, 1996 and 1995 and June 30, 1995 and 1994, respectively.
At March 31, 1996 and June 30, 1995, Community Bank had loans of
approximately $970,800 (unaudited) and $971,700 to directors, officers
and management employees. During the nine months ended March 31, 1996
and year ended June 30, 1995, approximately $198,300 and $328,100 new
loans were made and repayments totaled approximately $199,200
(unaudited) and $143,200, respectively. Such loans were made in
accordance with Community Bank's normal lending practices.
A summary of activity in the allowance for loan losses for the periods
ended March 31, 1996 and June 30, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
March 31, June 30,
---------------------- -------------------
1996 1995 1995 1994
----------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period $226,000 163,000 163,000 150,000
Provision for loan losses 188,341 143,056 171,277 33,590
Charge-offs (91,679) (157,980) (171,386) (48,399)
Recoveries 24,338 56,924 63,109 27,809
-------- -------- -------- -------
Balance at end of period $347,000 205,000 226,000 163,000
======== ======== ======== =======
</TABLE>
Community Bank evaluates each customer's creditworthiness on a case-by-case
basis. Residential loans with a loan-to-value ratio exceeding 80% are
required to have private mortgage insurance. Community Bank's
principal lending areas are the economically-diverse communities
northeast of Kansas City, Missouri.
(5) Office Property and Equipment
-----------------------------
Office property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
--------------------
1996 1995 1994
------------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Land and land improvements $ 171,130 171,130 171,130
Office buildings 1,310,206 1,281,997 1,270,697
Furniture and equipment 758,756 691,621 492,743
---------- --------- ---------
2,240,092 2,144,748 1,934,570
Less accumulated depreciation 953,647 856,396 741,009
---------- --------- ---------
$1,286,445 1,288,352 1,193,561
========== ========= =========
</TABLE>
(Continued)
F-14
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(6) Deposits
--------
Deposit balances are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996 June 30,
------------------------ ------------------------------------------------
(unaudited) 1995 1994
----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Noninterest bearing
demand accounts - $ 1,521,496 2% $ 1,319,904 2% $ 935,738 1%
NOW accounts 2.25 - 2.00 7,919,039 12 7,601,014 11 7,618,888 13
Money market 2.50 - 2.75 5,777,598 9 5,874,186 9 8,178,549 14
Passbook accounts 2.25 - 2.75 3,656,235 5 3,740,235 5 3,951,662 6
----------- --- ----------- --- ----------- ---
18,874,368 28 18,535,339 27 20,684,837 34
----------- --- ----------- --- ----------- ---
Certificate accounts: 2.00 - 2.99 13,385 - 22,732 - 420,829 1
3.00 - 3.99 - - 853,408 1 16,473,626 27
4.00 - 4.99 2,215,415 3 7,548,143 11 11,093,535 18
5.00 - 5.99 35,459,555 52 11,569,757 17 8,718,946 15
6.00 - 6.99 10,709,347 16 22,091,710 33 953,574 2
7.00 - 7.99 159,659 1 7,022,435 10 643,919 1
8.00 - 8.99 484,757 - 628,466 1 865,752 1
9.00 - 9.99 - - 2,486 - 2,258 -
10.00 - 10.99 - - - - 1,411 -
12.00 - 12.99 - - - - 321,758 1
----------- --- ----------- --- ----------- ---
49,042,118 72 49,739,137 73 39,495,608 66
----------- --- ----------- --- ----------- ---
$67,916,486 100% $68,274,476 100% $60,180,445 100%
=========== === =========== === =========== ===
Weighted average interest
rate on savings deposits
at period end 4.66% 4.84% 3.56%
===== ===== =====
Contractual maturity of
certificate accounts:
Under 12 months $39,370,835 60% $39,609,558 80% $23,789,567 60%
12 to 24 months 4,453,113 24 5,573,835 10 9,513,214 24
24 to 36 months 1,730,577 7 2,363,905 5 2,780,989 7
36 to 48 months 693,810 6 474,964 1 2,256,752 6
48 to 60 months 683,314 2 435,806 1 606,353 2
Over 60 months 2,110,469 1 1,281,069 3 548,733 1
----------- --- ----------- --- ----------- ---
$49,042,118 100% $49,739,137 100% $39,495,608 100%
=========== === =========== === =========== ===
</TABLE>
Deposits of $100,000 or more totaled $3,002,275 (unaudited), $3,132,000 and
$1,991,000 at March 31, 1996 and June 30, 1995 and 1994, respectively.
(Continued)
F-15
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
The components of interest expense on savings deposits for the periods
ended March 31, 1996 and 1995 and June 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
March 31, June 30,
----------------------- ---------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
NOW, passbook and money
market $ 265,279 276,219 397,213 437,993
Certificates of deposit 2,219,700 1,506,297 2,179,936 1,652,287
---------- --------- --------- ---------
$2,484,979 1,782,516 2,577,149 2,090,280
========== ========= ========= =========
</TABLE>
(7) FHLB Advances
-------------
Community Bank had the following debt outstanding from the Federal Home
Loan Bank of Des Moines at March 31, 1996 and June 30, 1995:
<TABLE>
<CAPTION>
March 31, June 30,
-------------
1996 1995
------------- ----------
(unaudited)
<S> <C> <C>
$3,000,000 advances,
interest at 6.14% due
September 2000 $3,000,000 -
$3,000,000 advance,
interest at 8.00% due
September 2009 - 2,919,860
$2,500,000 advance,
interest at 8.03% due
December 2009 - 2,457,055
$2,000,000 advance,
interest at 6.78% due
November 1995 - 2,000,000
$1,000,000 advance,
interest at 6.65%
due October 1995 - 1,000,000
$2,000,000 advance,
interest at 5.81% due
October 1996 2,000,000 -
$1,000,000 advance,
interest at 5.78%
due June 1996 2,000,000 2,000,000
$1,000,000 advance,
interest at 5.77%
due June 1997 1,000,000 1,000,000
$1,000,000 advance,
interest at 5.86%
due June 1998 1,000,000 1,000,000
$10,000,000 line of
credit, interest at
approximately 50 basis
points above the
U.S. Treasury Bill
rate (6.46% at June 30,
1995) maturing May 1996 - 3,500,000
---------- ----------
$9,000,000 15,876,915
========== ==========
</TABLE>
The advances and lines of credit to the FHLB are collateralized by first
mortgage loans.
(Continued)
F-16
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
Scheduled maturities of FHLB advances are as follows:
<TABLE>
<CAPTION>
Year ending
March 31,
---------
(unaudited)
<S> <C>
1997 $ 4,000,000
1998 1,000,000
1999 1,000,000
2000 -
2001 3,000,000
---------
$ 9,000,000
=========
(8) Income Taxes
------------
Components of income tax expense are
as follows:
Federal State Total
------- ----- -----
Nine months ended March 31, 1996
(unaudited):
Current $ 191,082 13,016 204,098
Deferred (11,000) 14,000 3,000
---------- ------ -------
$ 180,082 27,016 207,098
========== ====== =======
Nine months ended March 31, 1995
(unaudited):
Current $ 185,700 24,200 209,920
Deferred 730 - 730
---------- ------ -------
$ 186,430 24,220 210,650
========== ====== =======
Year ended June 30, 1995:
Current $ 257,355 34,334 291,689
Deferred 8,883 666 9,549
---------- ------ -------
$ 266,238 35,000 301,238
========== ====== =======
Year ended June 30, 1994:
Current $ 303,736 46,000 349,736
Deferred 2,264 - 2,264
---------- ------ -------
$ 306,000 46,000 352,000
========== ====== =======
</TABLE>
(Continued)
F-17
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
Income tax expense has been provided at effective rates of 34.7% and 88.4%
(unaudited), and 64.8% and 33.4% (applied to earnings before taxes) for
the nine months ended March 31, 1996 and 1995, and the years ended June
30, 1995 and 1994, respectively. The reasons for the differences
between the effective tax rates and the corporate federal income tax
rate of 34% are as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
March 31, June 30,
------------------ -----------
1996 1995 1995 1994
--------- ------- ---- -----
(unaudited)
<S> <C> <C> <C> <C>
Federal income tax rate 34.0% 34.0 34.0 34.0
Items affecting federal income tax rate:
Writedown of investment in
mutual fund - 44.8 23.0 -
Capital loss carryforward utilization - - - (.5)
State income tax net of federal benefit 3.0 6.7 5.0 2.9
Other (2.3) 2.9 2.8 (3.0)
---- ---- ---- ----
Effective income tax rate 34.7% 88.4 64.8 33.4
==== ==== ==== ====
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Temporary differences which give
rise to deferred tax assets and liabilities at March 31, 1996 and June
30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Year ended
--------------------
March 31, June 30,
--------------------
1996 1995 1994
----------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Loan origination fees $ - - 20,000
Allowance for loan losses 106,000 56,000 39,000
Unrealized losses on assets 9,000 17,000 -
available-for-sale
Writedown of investment in mutual fund - 129,000 150,000
Other 30,000 17,000 22,549
--------- -------- --------
Deferred income tax asset
before valuation allowance 145,000 219,000 231,549
Valuation allowance for capital losses
on investments - 107,000 120,000
--------- -------- --------
Deferred income tax asset 145,000 112,000 111,549
--------- -------- --------
Loan origination fees (77,000) (49,000) -
Fixed assets (63,000) (51,000) (105,000)
Other (35,000) (39,000) (24,000)
--------- -------- --------
Deferred income tax liability (175,000) (139,000) (129,000)
Net deferred income tax liability $ (30,000) (27,000) (17,451)
========= ======== ========
</TABLE>
(Continued)
F-18
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(9) Compensation Agreements
-----------------------
Effective March 1995, Community Bank entered into deferred compensation
agreements with members of the Board of Directors and Officers. The
agreements provide for monthly payments to the individuals or their
beneficiary for between ten and fifteen years following retirement.
The agreements are accounted for on an individual basis with the cost
accrued over the individual's period of service. Expense under the
agreements for the nine months ended March 31, 1996 and for the year
ended June 30, 1995 was approximately $31,000 (unaudited) and $14,000,
respectively.
The Directors/Officers and their beneficiaries are general unsecured
creditors of Community Bank for all amounts due under these
agreements.
(10) Retained Earnings
-----------------
Retained earnings at March 31, 1996 and June 30, 1995 and 1994 include
approximately $1,700,000 for which no provision for federal income tax
has been made. This amount represents an allocation of income to bad
debt deductions for income tax purposes only. Reduction of amounts
allocated for purposes other than income tax bad debt losses will create
income for tax purposes only, which will be subject to the then current
corporate income tax rate.
(11) Regulatory Capital Requirements
-------------------------------
Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA)
and the capital regulations of the Office of Thrift Supervision (OTS)
promulgated thereunder require institutions to have a minimum regulatory
tangible capital equal to 1.5% of total assets, a minimum 3% leverage
capital ration and a minimum 8% risk-based capital ratio. These capital
standards set forth in the capital regulations must generally be no less
stringent than the capital standards applicable to banks. FIRREA also
specifies the required ratio of housing-related assets in order to
qualify as a savings institution. Community Bank met the regulatory
capital requirements at March 31, 1996 and June 30, 1995 and 1994.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital requirements which require regulatory
action against depository institutions in one of the undercapitalized
categories defined in implementing regulations. Institutions such as
Community Bank, which are defined as well capitalized, must generally
have a leverage capital (core) ratio of at least 5%, a tier risk-based
capital ratio of at least 6% and a total risk-based capital ratio of at
least 10%. In November 1994, the OTS revised its regulations whereby
unrealized gains or losses on available-for-sale securities accounted
for under SFAS No. 115 are not considered in the determination of
regulatory capital. FDICIA also provides for increased supervision by
federal regulatory agencies, increased reporting requirements for
insured depository institutions and other changes in the legal and
regulatory environment for institutions.
(Continued)
F-19
<PAGE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(12) Plan of Conversion
------------------
On May 14, Community Bank's Board of Directors approved a plan ("Plan") to
convert from a federally chartered mutual savings bank to a federally
chartered stock savings bank, subject to approval by Community Bank's
members. The Plan, which includes formation of a holding company to own
all of the outstanding stock of Community Bank, is subject to approval
by the OTS and includes the filing of a registration statement with the
Securities and Exchange Commission. As of March 31, 1996, Community
Bank had incurred $10,000 of costs related to this conversion which is
included in other assets. If the conversion is ultimately successful,
actual conversion costs will be accounted for as a reduction in gross
proceeds. If the conversion is unsuccessful, the conversion costs will
be expensed.
The Plan calls for the common stock of the holding company to be offered to
various parties in a subscription offering at a price based on an
independent appraisal of Community Bank. It is anticipated that any
shares not purchased in the subscription offering will be offered in a
community offering.
Community Bank may not declare or pay a cash dividend if the effect thereof
would cause its net worth to be reduced below either the amount required
for the liquidation account discussed below or the regulatory capital
requirements imposed by the OTS.
At the time of conversion, Community Bank will establish a liquidation
account in an amount equal to its retained earnings as reflected in the
latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their deposit
accounts in Community Bank after conversion. In the event of a complete
liquidation of Community Bank, and only in such an event, eligible
depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account before any
liquidation may be made with respect to common stock.
F-20
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Holding
Company or Community Bank. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any of the securities of fered hereby to
any person in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction. Neither the delivery of this Prospectus
nor any sale hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Holding Company or Community Bank
since any of the dates as of which information is furnished herein or since the
date hereof.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ...................................................
Selected Consolidated Financial Information ..........................
and Other Data ......................................................
Recent Financial Data ................................................
Risk Factors..........................................................
Community Bank of Excelsior Springs, A Savings Bank ..................
CBES Bancorp, Inc.....................................................
Capitalization .......................................................
Pro Forma Data .......................................................
Pro Forma Regulatory Capital .........................................
Use of Proceeds ......................................................
Dividends ............................................................
Market for Common Stock ..............................................
Community Bank of Excelsior Springs,
A Savings Bank, Consolidated Statement of Earnings ..................
Management's Discussion and Analysis of Financial Condition
and Results of Operations ...........................................
Business .............................................................
Regulation ...........................................................
Management ...........................................................
The Conversion .......................................................
Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions ................................................
Description of Capital Stock .........................................
Legal and Tax Matters ................................................
Experts ..............................................................
Additional Information ...............................................
Index to Consolidated Financial Statements ...........................
Until the later of September __, 1996, or 25 days after commencement
of the offering of Common Stock, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
1,207,500 Shares
CBES
BANCORP, INC.
(Holding Company for Community Bank
of Excelsior Springs)
Common Stock
----------
PROSPECTUS
----------
TRIDENT SECURITIES, INC.
August __, 1996
================================================================================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers of Community Bank of
Excelsior Springs, A Savings Bank
Generally, federal regulations define areas for indemnity coverage for federal
savings associations, as follows:
(a) Any person against whom any action is brought by reason of the
fact that such person is or was a director or officer of the savings association
shall be indemnified by the savings association for:
(i) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred by such person in
connection with proceedings related to the defense or settlement of
such action;
(ii) Any amount for which such person becomes liable by
reason of any judgment in such action;
(iii) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred in any action to enforce
his rights under this section, if the person attains a final judgment
in favor of such person in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made
to such officer or director only if the requirements of this subsection are met:
(i) The savings association shall make the indemnification
provided by subparagraph (a) in connection with any such action which
results in a final judgment on the merits in favor of such officer or
director.
(ii) The savings association shall make the indemnification
provided by subparagraph (a) in case of settlement of such action,
final judgment against such director or officer or final judgment in
favor of such director or officer other than on the merits except in
relation to matters as to which he shall be adjudged to be liable for
negligence or misconduct in the performance of duty, only if a
majority of the directors of the savings association determines that
such a director or officer was acting in good faith within what he was
reasonably entitled to believe under the circumstances was the scope
of his employment or authority and for a purpose which he was
reasonably entitled to believe under the circumstances was in the best
interest of the savings association or its members.
(c) As used in this paragraph:
(i) "Action" means any action, suit or other judicial or
administrative proceeding, or threatened proceeding, whether civil,
criminal, or otherwise, including any appeal or other proceeding for
review;
(ii) "Court" includes, without limitation, any court to which
or in which any appeal or any proceeding for review is brought;
(iii) "Final Judgment" means a judgment, decree, or order which
is appealable and as to which the period for appeal has expired and no
appeal has been taken;
(iv) "Settlement" includes the entry of a judgment by consent
or by confession or upon a plea of guilty or of nolo contendere.
<PAGE>
Indemnification of Directors and Officers of CBES Bancorp, Inc.
Article ELEVENTH of CBES Bancorp, Inc.'s (the "Corporation")
Certificate of Incorporation sets forth circumstances under which directors,
officers, employees and agents of the Corporation may be insured or indemnified
against liability which they may incur in their capacities as such.
ELEVENTH:
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or an
officer of the Corporation or is or was serving at the request of the
Corporation as a director or officer of another corporation, including, without
limitation, any Subsidiary (as defined in Article EIGHTH of the Certificate of
Incorporation of the Corporation), partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director or officer or in any other capacity
while serving as a director or officer, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article ELEVENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however, that,
if the Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication"), that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this Article
ELEVENTH shall be contract rights and such rights shall continue as to an
indemnitee who has ceased to be a director or officer and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article ELEVENTH is not
paid in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall also be
entitled to be paid the expense of prosecuting or defending such suit. In (i)
any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper
<PAGE>
in the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article ELEVENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article ELEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time
by a majority vote of the Disinterested Directors, grant rights to
indemnification and to the advancement of expenses to any employee or agent of
the Corporation to the fullest extent of the provisions of this Article with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
Item 25. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
Amount
------
<S> <C> <C>
* Legal Fees and Expenses......................... $ 110,000
* Printing, Postage and Mailing................... 50,000
* Appraisal and Business Plan Fees and Expenses... 32,000
* Accounting Fees and Expenses.................... 75,000
* Blue Sky Filing Fees and Expenses
(including counsel fees)........................ 15,000
Conversion Agent and Proxy Solicitation Fees.... 6,500
** Marketing Agent Fees and Expenses............... 160,000
* Marketing Agent Counsel Fees.................... 25,000
* Filing Fees (NASD, OTS and SEC)................. 19,894
* Other Expenses.................................. 31,606
----------
* Total........................................... $ 525,000
==========
</TABLE>
- --------------
* Estimated
** CBES Bancorp, Inc. has retained Trident Securities, Inc. ("Trident
Securities") to assist in the sale of common stock on a best efforts basis
in the Offerings. Trident Securities will receive fees of $150,000,
exclusive of estimated expenses of $10,000.
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Not Applicable.
Item 27. Exhibits:
The exhibits filed as part of this registration statement are as
follows:
(a) List of Exhibits
<TABLE>
<S> <C>
1.1 Engagement Letter between Community Bank of Excelsior Springs, A Savings Bank and Trident Securities,
Inc.*
1.2 Form of Agency Agreement among CBES Bancorp, Inc., Community Bank of Excelsior Springs, A
Savings Bank and Trident Securities, Inc.
2 Plan of Conversion*
3.1 Certificate of Incorporation of CBES Bancorp, Inc.*
3.2 Bylaws of CBES Bancorp, Inc.*
3.3 Charter of Community Bank of Excelsior Springs, A Savings Bank*
3.4 Bylaws of Community Bank of Excelsior Springs, A Savings Bank*
4 Form of Common Stock Certificate of CBES Bancorp, Inc.*
5 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding legality of securities being registered*
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick
8.2 State Tax Opinion of KPMG Peat Marwick LLP
8.3 Opinion of RP Financial LC. with respect to Subscription Rights*
10.1 Proposed Stock Option and Incentive Plan*
10.2 Proposed Recognition and Retention Plan*
10.3 Form of Employment Agreement for Larry E. Hermreck*, Deryl R. Goettling, Margaret E. Teegarden
and Dennis D. Hartman
10.4 Employee Stock Ownership Plan*
10.5 Director Emeritus Agreements*
10.6 Salary Continuation Agreement with Officer*
21 Subsidiaries*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick (contained in Opinions included on Exhibits 5
and 8.1)*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, LC*
24 Power of Attorney (set forth on signature page)*
27.1 EDGAR Financial Data Schedule*
99.1 Appraisal Agreement between Community Bank of Excelsior Springs, A Savings Bank and RP Financial,
LC*
99.2 Appraisal Report of RP Financial, LC*
99.3 Proxy Statement*
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form* and Certification Form
</TABLE>
______________________________
* Previously filed.
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
duration from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
documentation and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Excelsior Springs, Missouri on August
6, 1996.
CBES BANCORP, INC.
By: /s/ Larry E. Hermreck
------------------------------
Larry E. Hermreck
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Larry E. Hermreck Chief Executive Officer August 6, 1996
- ------------------------ (Principal Executive Officer)
Larry E. Hermreck
* Controller (Principal
- ------------------------ Accounting and Financial Officer)
Dennis Hartman
* Director
- ------------------------
Richard Cox
* Director
- ------------------------
Robert R. Lalumondier
Director
- ------------------------
Cecil E. Lamb
* Director
- ------------------------
Robert McCrorey
* Director
- ------------------------
Edgar Radley
* Director
- ------------------------
Rodney Rounkles
</TABLE>
*By: /s/ Larry E. Hermreck
----------------------------
Larry E. Hermreck
Chief Executive Officer
(Power of Attorney, signed June 21, 1996)
<PAGE>
As filed with the Securities and Exchange Commission on August 6, 1996
Registration No.333-6649
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE REGISTRATION STATEMENT
ON
FORM SB-2
--------------------------
CBES Bancorp, Inc.
Excelsior Springs, Missouri
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Engagement Letter between Community Bank of Excelsior Springs, A Savings Bank and Trident Securities,
Inc.*
1.2 Form of Agency Agreement among CBES Bancorp, Inc., Community Bank of Excelsior Springs, A
Savings Bank and Trident Securities, Inc.
2 Plan of Conversion*
3.1 Certificate of Incorporation of CBES Bancorp, Inc.*
3.2 Bylaws of CBES Bancorp, Inc.*
3.3 Charter of Community Bank of Excelsior Springs, A Savings Bank*
3.4 Bylaws of Community Bank of Excelsior Springs, A Savings Bank*
4 Form of Common Stock Certificate of CBES Bancorp, Inc.*
5 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding legality of securities being registered*
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick
8.2 State Tax Opinion of KPMG Peat Marwick LLP
8.3 Opinion of RP Financial, LC. with respect to Subscription Rights*
10.1 Proposed Stock Option and Incentive Plan*
10.2 Proposed Recognition and Retention Plan*
10.3 Form of Employment Agreement for Larry E. Hermreck*, Deryl R. Goettling, Margaret E. Teegarden
and Dennis D. Hartman
10.4 Employee Stock Ownership Plan*
10.5 Director Emeritus Agreements*
10.6 Salary Continuation Agreement with Officer*
21 Subsidiaries*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick (contained in Opinions included on Exhibits 5 and
8.1)*
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, LC.*
24 Power of Attorney (set forth on signature page)*
27.1 EDGAR Financial Data Schedule*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.1 Appraisal Agreement between Community Bank of Excelsior Springs, A Savings Bank and RP Financial,
LC.*
99.2 Appraisal Report of RP Financial, LC.*
99.3 Proxy Statement*
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form* and Certification Form
</TABLE>
_____________________________
* Previously filed.
<PAGE>
EXHIBIT 1.2
CBES BANCORP, INC.
Up to 1,207,500 Shares
of
Common Stock
(Par Value $.01 Per Share)
$10.00 Per Share
SALES AGENCY AGREEMENT
----------------------
August __, 1996
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
CBES Bancorp, Inc., a Delaware-chartered corporation ("Company"), and
Community Bank of Excelsior Springs, a Savings Bank, a federally chartered and
insured mutual savings bank ("Savings Bank"), hereby confirm as of the date
above their respective agreements with Trident Securities, Inc. ("Trident"), a
broker-dealer registered with the Securities and Exchange Commission
("Commission") and a member of the National Association of Securities Dealers,
Inc. ("NASD"), as follows:
1. Introduction. The Savings Bank intends to convert from a federally
------------
chartered mutual savings bank to a federally chartered stock savings bank as a
wholly- owned subsidiary of the Company (together with the Offerings, as defined
below, the issuance of shares of common stock of the Savings Bank to the
Company, and the incorporation of the Company, collectively the "Conversion")
pursuant to a plan of conversion adopted on May 14, 1996, ("Plan"). In
accordance with the Plan, the Company is offering shares of its common stock,
par value $.01 per share ("Shares" or the "Common Stock"), pursuant to
nontransferable subscription rights in a subscription offering ("Subscription
Offering"), in order of priority, to (i) the Savings Bank's Eligible Account
Holders (as defined in the Plan), (ii) the Savings Bank's Employee Stock
Ownership Plan ("ESOP"), (iii) the Savings Bank's Supplemental Eligible Account
Holders (as defined in the Plan), (iv) the Savings Bank's Other Members (as
defined in the Plan), and (v) directors, officers and employees of the Savings
Bank. Shares of the Common Stock not sold in the Subscription Offering are
being offered to the general public in a community offering, with preference
being given to natural persons residing in Clay and Ray Counties, Missouri
("Savings Bank's Local Community") ("Community Offering"), and, if necessary,
through a syndicate of NASD-registered broker-dealers managed by Trident in a
syndicated community offering ("Syndicated Community Offering"). The Community
Offering and the Syndicated Community Offering may commence any time during the
Subscription
<PAGE>
Trident Securities, Inc.
Page 2
Offering or after the expiration of the Subscription Offering. The Subscription
Offering, the Community Offering and the Syndicated Community Offering are
collectively referred to as the "Offerings." Purchases of Shares in the
Offerings are subject to certain limitations and restrictions as described in
the Plan.
The Company and the Savings Bank have been advised by Trident that it
intends to utilize its best efforts to assist the Company and the Savings Bank
with the sale of the Shares in the Subscription Offering and, if deemed
necessary, in the Community Offering and the Syndicated Community Offering.
2. Representations and Warranties.
------------------------------
(a) The Company and the Savings Bank jointly and severally represent and
warrant to Trident that:
(i) The Company has filed with the Commission a registration statement,
including exhibits and an amendment or amendments thereto, on Form SB-2
(No. 333-6649), including a Prospectus relating to the Offerings, for the
registration of the Shares under the Securities Act of 1933, as amended
("Securities Act"); and such registration statement has been declared
effective under the Securities Act and no stop order has been issued with
respect thereto and no proceedings therefor have been initiated or, to the
Company's best knowledge, threatened by the Commission. Except as the
context may otherwise require, such registration statement, as amended or
supplemented, on file with the Commission at the time the registration
statement became effective, including the Prospectus, financial statements,
schedules, exhibits and all other documents filed as part thereof, as
amended and supplemented, is herein called the "Registration Statement,"
and the prospectus, as amended or supplemented, on file with the Commission
at the time the Registration Statement became effective is herein called
the "Prospectus," except that if any prospectus filed by the Company with
the Commission pursuant to Rule 424(b) of the general rules and regulations
of the Commission under the Securities Act (together with the published
policies and actions of the Commission thereunder, the "Securities Act
Regulations") differs from the form of prospectus on file at the time the
Registration Statement became effective, the term "Prospectus" shall refer
to the Rule 424(b) prospectus from and after the time it is filed with or
mailed for filing to the Commission and shall include any amendments or
supplements thereto from and after their dates of effectiveness or use,
respectively.
(ii) The Savings Bank has filed an Application for Approval of
Conversion on Form AC, including exhibits (as amended or supplemented, the
"Form AC" or the "Conversion Application") with the Office of Thrift
Supervision ("OTS") under the Home Owners' Loan Act, as amended ("HOLA"),
and the rules and regulations, including published policies and actions, of
the OTS thereunder (collectively, the "OTS
<PAGE>
Trident Securities, Inc.
Page 3
Regulations"), which has been approved by the OTS; and the Prospectus and
the proxy statement for the solicitation of proxies from members for the
special meeting to approve the Plan ("Proxy Statement") included as part of
the Form AC have been approved for use by the OTS. No order has been issued
by the OTS preventing or suspending the use of the Prospectus or the Proxy
Statement and no action by or before the OTS revoking such approvals is
pending or, to the Savings Bank's best knowledge, threatened. The Company
has filed with the OTS the Company's application on Form H-e(1)-S ("Holding
Company Application") promulgated under the savings and loan holding
company provisions of the HOLA and the regulations promulgated thereunder
and has received approval of its acquisition of the Savings Bank from the
OTS.
(iii) As of the date hereof (i) the Registration Statement and the
Prospectus complied with the Securities Act and the Securities Act
Regulations, (ii) the Registration Statement does not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (iii) the
Prospectus does not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. Representations or warranties in this subsection
shall not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company or the Savings
Bank by or on behalf of Trident relating to Trident expressly for use in
the Registration Statement or Prospectus.
(iv) The Company has been duly incorporated as a Delaware corporation
and the Savings Bank has been duly organized as a mutual savings bank under
the laws of the United States, and each of them is validly existing and in
good standing under the laws of their jurisdiction of organization with
full power and authority to own its property and conduct its business as
described in the Registration Statement and Prospectus; the Savings Bank is
a member in good standing of the Federal Home Loan Bank of Des Moines; and
the deposit accounts of the Savings Bank are insured by the Savings
Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC") up to the applicable legal limits. Each of
the Company and the Savings Bank is not required to be qualified to do
business as a foreign corporation in any jurisdiction where non-
qualification would have a material adverse effect on the financial
condition, operations, business, properties or assets of the Company and
the Savings Bank.
(v) The Savings Bank has good, marketable and insurable title to all
assets material to its business and to those assets described in the
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except for liens for taxes not yet due,
except as described in the Prospectus and except as do not in the
<PAGE>
Trident Securities, Inc.
Page 4
aggregate have a material adverse effect upon the financial condition,
operations, business, properties or assets of the Savings Bank; and all of
the leases and subleases material to the financial condition, operations,
business, assets or properties of the Savings Bank, under which it holds
properties, including those described in the Prospectus, are in full force
and effect as described therein.
(vi) The Savings Bank does not own equity securities of or an equity
interest in any business enterprise except as described in the Prospectus.
CBES Service Corporation ("Subsidiary") is duly organized and in good
standing under the laws of the State of Missouri, with full power and
authority to own its property and conduct its business and is not required
to be qualified to do business as a foreign corporation in any jurisdiction
where the failure to be so qualified would have a material adverse effect
on the business, financial condition, operations, properties or assets of
the Subsidiary. The Subsidiary holds all licenses, certificates and permits
from governmental authorities necessary for the conduct of its business,
except where failure to obtain such licenses, permits or authorizations
would not have a material adverse effect on the financial condition,
operations, property, assets or business of the Subsidiary. All of the
outstanding stock of the Subsidiary has been duly authorized and is fully
paid and nonassessable, and such stock is owned directly by the Savings
Bank free and clear of any liens or encumbrances. The activities of the
Subsidiary are permitted to subsidiaries of a federally-chartered savings
bank by the OTS Regulations and the policies and practices of the OTS.
(vii) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by all necessary actions on the part of each of the Company and
the Savings Bank, and this Agreement is a valid and binding obligation of
each of the Company and the Savings Bank, enforceable in accordance with
its terms (except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization, conservatorship,
receivership or similar laws relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of insured financial
institutions and their holding companies, the accounts of whose
subsidiaries are insured by the FDIC, by general equity principles,
regardless of whether such enforceability is considered in a proceeding in
equity or at law, or laws relating to the safety and soundness of insured
depository institutions and their affiliates, and except to the extent that
the provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or by applicable law, including without limitation, Section
23A of the Federal Reserve Act, 12 U.S.C. Section 371c (("Section 23A")).
(viii) there is no litigation or governmental proceeding pending or, to
the best knowledge of the Company or the Savings Bank, threatened against
or involving the Company, the Savings Bank or the Subsidiary, or any of
their respective assets which
<PAGE>
Trident Securities, Inc.
Page 5
individually or in the aggregate would reasonably be expected to have a
material adverse effect on the financial condition, results of operations,
business, assets or properties of the Company, the Savings Bank or the
Subsidiary. Any litigation or governmental proceeding is not considered
"threatened" unless the potential litigation or governmental authority had
manifested to the management of the Company, the Savings Bank or the
Subsidiary a present intention to initiate such litigation or proceeding.
(ix) The Company and the Savings Bank have received the opinions of Luse
Lehman Gorman Pomerenk & Schick with respect to the federal income tax
consequences of the Conversion, and of KPMG Peat Marwick, LLP with respect
to Missouri income tax consequences of the Conversion, to the effect that
the Conversion will constitute a tax-free reorganization under the Internal
Revenue Code of 1986, as amended, and will not be a taxable transaction for
the Savings Bank or the Company under the laws of Missouri; and the facts
and representations made by the Company and the Savings Bank and relied
upon in rendering such opinions are accurate and complete, and neither the
Company nor the Savings Bank have taken any action inconsistent therewith.
(x) Neither the Company nor the Savings Bank nor the Subsidiary is in
violation of any rule or regulation of the OTS or the FDIC that could
reasonably be expected to result in any enforcement action against the
Company, the Savings Bank or the Subsidiary, or their officers or
directors, that might have a material adverse effect on the financial
condition, operations, businesses, assets or properties of the Company, the
Savings Bank, and the Subsidiary, taken as a whole.
(xi) RP Financial, LC. ("RP Financial"), the firm that prepared the
independent appraisal dated as of June __, 1996, is independent with
respect to the Company and the Savings Bank within the meaning of the OTS
Regulations. The Company and the Savings Bank believe RP Financial to be
experienced and expert in rendering appraisals of thrift institutions, and
nothing has come to the attention of the Company and the Savings Bank which
has caused them to believe that the appraisal by RP Financial was not
prepared in accordance with the requirements of the OTS Regulations.
(xii) KPMG Peat Marwick, LLP, the firm that certified the consolidated
financial statements of the Savings Bank filed as part of the Registration
Statement and the Conversion Application, is independent with respect to
the Company and the Savings Bank as required by the Securities Act, the
Securities Act Regulations, the Code of Professional Ethics of the American
Institute of Certified Public Accountants, and Title 12 of the Code of
Federal Regulations Parts 563c and 571, and nothing has come to the
attention of the Company and the Savings Bank which has caused them to
believe that such firm is not independent within the meaning of such
provisions.
<PAGE>
Trident Securities, Inc.
Page 6
(xiii) The consolidated financial statements and related notes which
are included in the Registration Statement and the Prospectus fairly
present the consolidated financial condition, earnings, equity and cash
flows of the Savings Bank at the respective dates thereof and for the
respective periods covered thereby and comply as to form with the
applicable accounting requirements of the Securities Act Regulations and
the OTS Regulations. Such financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved, except as set forth
therein, and such financial statements are consistent with financial
statements and other reports filed by the Savings Bank with the OTS, except
as GAAP may otherwise require. The financial tables in the Prospectus
accurately present the information purported to be shown thereby at the
respective dates thereof and for the respective periods covered thereby.
(xiv) There has been no material change in the financial condition,
operations, business, assets or properties of the Company, the Savings Bank
and the Subsidiary, taken as a whole, since the latest date as of which
such condition is set forth in the Prospectus, except as set forth therein;
and the capitalization, assets, properties and business of each of the
Company and the Savings Bank conform in all material aspects to the
descriptions thereof contained in the Prospectus. None of the Company, the
Savings Bank or the Subsidiary has any material liabilities of any kind,
contingent or otherwise, except as set forth in the Prospectus.
(xv) There has been no breach or default (or the occurrence of any
event which, with notice or lapse of time or both, would constitute a
default) under, or creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company, the
Savings Bank or the Subsidiary pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Company, the Savings Bank or the
Subsidiary is a party or by which any of them or any of their respective
assets or properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction or
decree, which breach, default, encumbrance or violation would have a
material adverse effect on the financial condition, operations, business,
assets or properties of the Company, the Savings Bank and the Subsidiary,
taken as a whole; all agreements which are material to the financial
condition, results of operations or business of the Company, the Savings
Bank and the Subsidiary, taken as a whole, are in full force and effect,
and no party to any such agreement has instituted or, to the best knowledge
of the Company, the Savings Bank and the Subsidiary, threatened any action
or proceeding wherein the Company, the Savings Bank or the Subsidiary would
be alleged to be in default thereunder.
<PAGE>
Trident Securities, Inc.
Page 7
(xvi) Neither the Company nor the Savings Bank nor the Subsidiary is
in violation of its respective charter, certificate of incorporation or
bylaws. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby by the Company and the Savings Bank
do not conflict with or result in a breach of the charter, certificate of
incorporation or bylaws of the Company or the Savings Bank (in either
mutual or stock form) or constitute a material breach of or default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of any
lien, charge or other encumbrance upon any of the properties or assets of
the Company or the Savings Bank pursuant to any of the terms, provisions or
conditions of, any material agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the
Savings Bank is a party (other than the establishment of a liquidation
account pursuant to the Plan) or violate any governmental license or permit
or any law, administrative regulation or order or court order, writ,
injunction or decree (subject to the satisfaction of certain conditions
imposed by the OTS in connection with its approval of the Conversion
Application), which breach, default, encumbrance or violation would have a
material adverse effect on the financial condition, operations or business
of the Company and the Savings Bank, taken as a whole.
(xvii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as otherwise may
be indicated or contemplated therein, none of the Company or the Savings
Bank has issued any securities which will remain issued at the Closing Date
or incurred any liability or obligation, direct or contingent, or borrowed
money, except borrowings or liabilities in the ordinary course of business,
or entered into any other transaction not in the ordinary course of
business and not consistent with prior practices, which is material in
light of the business of the Company and the Savings Bank, taken as a
whole.
(xviii) The issuance and the sale of the Shares of the Company have
been duly authorized by all necessary action of the Company and approved by
the OTS and, when issued in accordance with the terms of the Plan and paid
for, shall be validly issued, fully paid and nonassessable and shall
conform to the description thereof contained in the Prospectus; the
issuance of the Shares is not subject to preemptive rights, except as set
forth in the Prospectus; and good title to the Shares will be transferred
by the Company upon issuance thereof against payment therefor, free and
clear of all claims, encumbrances, security interests and liens against the
Company whatsoever. The issuance and sale of the capital stock of the
Savings Bank to the Company has been duly authorized by all necessary
action of the Savings Bank and the Company and all appropriate regulatory
authorities (subject to the satisfaction of various conditions imposed by
the OTS in connection with its approvals of the Conversion Application and
the Holding Company Application), and such capital stock, when issued in
accordance
<PAGE>
Trident Securities, Inc.
Page 8
with the terms of the Plan, will be fully paid and nonassessable and will
conform in all material respects to the description thereof contained in
the Prospectus.
(xix) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except such approvals as have been
obtained and except for the declaration of effectiveness of any required
post-effective amendment by the Commission and approval thereof by the OTS,
the issuance of the Savings Bank's Federal Stock Charter by the OTS and as
may be required under the "blue sky" or securities laws of various
jurisdictions.
(xx) All contracts and other documents required to be filed as
exhibits to the Registration Statement, the Conversion Application or the
Holding Company Application have been filed with the Commission or the OTS
or both, as the case may be.
(xxi) The Company, the Savings Bank and the Subsidiary have timely
filed all required federal, state and local franchise tax returns, and no
deficiency has been asserted with respect to such returns by any taxing
authorities, and the Company, the Savings Bank and the Subsidiary have paid
all taxes that have become due and, to the best of their knowledge, have
made adequate reserves for accrued tax liabilities, except where any
failure to make such filings, payments and reserves, or the assertion of
such a deficiency, would not have a material adverse effect on the
financial condition or results of operations of the Company, the Savings
Bank and the Subsidiary, taken as a whole.
(xxii) All of the loans represented as assets of the Savings Bank and
the Subsidiary as of the most recent date for which financial condition
data is included in the Prospectus meet or are exempt from all requirements
of federal, state or local law pertaining to lending, including without
limitation truth in lending (including the requirements of Regulation Z and
12 C.F.R. Part 226 and Section 563.99), real estate settlement procedures,
consumer credit protection, equal credit opportunity and all disclosure
laws applicable to such loans, except for violations which, if asserted,
would not have a material adverse effect on the Company, the Savings Bank
and the Subsidiary, taken as a whole.
(xxiii) The records of Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members (as those terms are defined in the Plan)
delivered to Trident by the Savings Bank or its agent for use during the
Conversion reviewed by the Savings Bank and are believed to be accurate,
reliable and complete and Trident shall have no liability to any person
relating to the reliability, accuracy or completeness of such records or
for any denial or allocation of a subscription to purchase shares to any
person based upon such records.
<PAGE>
Trident Securities, Inc.
Page 9
(xxiv) None of the Company, the Savings Bank or the Subsidiary or,
to the best knowledge of the Company, the Savings Bank and the Subsidiary,
the employees of the Company, the Savings Bank or the Subsidiary, has made
any payment of funds of the Company, the Savings Bank or the Subsidiary
prohibited by law, and no funds of the Company, the Savings Bank or the
Subsidiary have been set aside to be used for any payment prohibited by
law.
(xxv) To the best knowledge of the Company, the Savings Bank and the
Subsidiary, the Company, the Savings Bank and the Subsidiary are in
compliance with all laws, rules and regulations relating to environmental
protection and neither the Company, the Savings Bank nor the Subsidiary is
subject to liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or any similar law,
except for violations which, if asserted, would not have a material adverse
effect on the Company, the Savings Bank and the Subsidiary, taken as a
whole. There are no actions, suits, regulatory investigations or other
proceedings pending or, to the best knowledge of the Company, the Savings
Bank or the Subsidiary, threatened against the Company, the Savings Bank or
the Subsidiary relating to environmental protection. To the best knowledge
of the Company, the Savings Bank and the Subsidiary, no disposal, release
or discharge of hazardous or toxic substances, pollutants or contaminants,
including petroleum and gas products, as any of such terms may be defined
under federal, state or local law, has been caused by the Company, the
Savings Bank or the Subsidiary or, to the best knowledge of the Company,
the Savings Bank and the Subsidiary, and except as already disclosed in the
Prospectus, has occurred on, in or at any of the facilities or properties
owned or leased by the Company, the Savings Bank or the Subsidiary or in
which the Savings Bank or the Subsidiary has a security interest, except
such disposal, release or discharge which would not have a material adverse
effect on the financial condition, operations, business, assets or
properties of the Company, the Savings Bank or the subsidiary, taken as a
whole.
(xxvi) All documents delivered by the Savings Bank or the Company or
their representatives in connection with the issuance and sale of the
Common Stock, except for those documents that were prepared by parties
other than the Bank, the Company or their representatives, were, on the
dates on which they were delivered, true, complete and correct.
(b) Trident represents and warrants to the Company and the Savings Bank
that:
(i) Trident is registered as a broker-dealer and is in good standing
with the Commission and the NASD.
<PAGE>
Trident Securities
Page 10
(ii) Trident is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation, with full corporate power
and authority to provide the services to be furnished to the Company and
the Savings Bank hereunder.
(iii) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Trident, and this
Agreement is a legal, valid and binding obligation of Trident, enforceable
in accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws relating to or affecting the enforcement of creditors' rights
generally or the rights of creditors of registered broker-dealers accounts
of whose may be protected by the Securities Investor Protection Corporation
or by general equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, and except to the extent
that the provisions of Sections 8 and 9 hereof may be unenforceable as
against public policy or pursuant to Section 23A).
(iv) Trident and, to Trident's best knowledge, its employees, agents and
representatives who shall perform any of the services required hereunder to
be performed by Trident, shall be duly authorized and shall have all
licenses, approvals and permits necessary to perform such services, and
Trident is a registered selling agent in the jurisdictions in which the
Company is relying on such registration for the sale of the Shares, and
will remain so registered until the Conversion is consummated or
terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with the
charter or bylaws of Trident or violate, conflict with or constitute a
breach of, or default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, any material agreement, indenture
or other instrument by which Trident is bound or under any governmental
license or permit or any law, administrative regulation, authorization,
approval or order or court decree, injunction or order.
(vi) All funds received by Trident to purchase Common Stock will be
handled in accordance with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended ("Exchange Act").
(vii) No action or proceeding against Trident before the Commission, the
NASD, any state securities commission, or any state or federal court is
pending or, to Trident's best knowledge, threatened concerning Trident's
activities as a broker-dealer.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis
------------------------------------------------------
of the representations and warranties herein contained, but subject to the terms
and conditions herein
<PAGE>
Trident Securities, Inc.
Page 11
set forth, the Company and the Savings Bank hereby employ Trident as their agent
to utilize its best efforts to assist the Company with the Company's sale of the
Shares in the Offerings, and Trident hereby accepts such employment. The
employment of Trident hereunder shall terminate (a) forty-five (45) days after
the Subscription and Community Offering closes, unless the Company and the
Savings Bank, with the approval of the OTS, are permitted to extend such period
of time, or (b) upon consummation of the Conversion, whichever date shall first
occur.
In the event the Company is unable to sell a minimum of 892,500 Shares (or
such lesser amount as the OTS may permit) within the period herein provided,
this Agreement shall terminate, and the Company and the Savings Bank shall
refund promptly to any persons who have subscribed for any of the Shares, the
full amount which it may have received from them, together with interest as
provided in the Prospectus, and no party to this Agreement shall have any
obligation to the other party hereunder, except as set forth in Sections 6, 8, 9
and 10 hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the Savings
Bank until all Shares are sold and paid for will be made prior to the
commencement of the Subscription and Community Offering, with provision for
prompt refund to the purchasers as set forth above, or for delivery to the
Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares on or as soon as possible
following the Closing Date against payment to the Company by any means
authorized pursuant to the Prospectus, at the principal office of the Company,
1001 N. Jesse James Road, Excelsior Springs, Missouri, or at such other place as
shall be agreed upon between the parties hereto. The date upon which the
Company shall release or deliver the Shares sold in the Offerings, in accordance
with the terms hereof, is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the offering price of the Common Stock ordered on or
before twelve noon on the next business day following receipt or execution of an
order form by Trident to the Savings Bank for deposit in a segregated account or
(b) to solicit indications of interest in which event (i) Trident will
subsequently contact any potential subscriber indicating interest to confirm the
interest and give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgements of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident will
debit accounts of such subscribers on the third business day ("debit date")
following receipt of the confirmation referred to in (i), and (iv) Trident will
forward completed order forms together with such funds to the Savings Bank on or
before twelve noon on the next business day following the debit date for deposit
in a segregated account. Trident acknowledges
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Trident Securities, Inc.
Page 12
that if the procedure in (b) is adopted, subscribers' funds are not required to
be in their accounts until the debit date.
Trident shall receive the following compensation and expense reimbursement
for its services hereunder:
(a) (i) a management fee of $150,000, and (ii) a commission to be
agreed upon by Trident and the Company for Shares sold by other member
firms of the NASD through a selected dealers arrangement in the Syndicated
Community Offering, which aggregate commission shall be determined at the
discretion of the Company and the Savings Bank with the advice of Trident.
All such fees shall be paid to Trident in next-day funds on the Closing
Date.
(b) Reimbursement for reasonable out-of-pocket allocable expenses,
including but not limited to travel, food, lodging and legal fees, incurred
by it whether or not the Offerings are successfully completed; provided,
however, that reimbursable legal fees will not exceed $25,000 and that
other reimbursable expenses will not exceed $10,000, and, provided further,
that neither the Company nor the Savings Bank shall reimburse Trident for
any of the foregoing expenses accrued after Trident shall have notified the
Company or the Savings Bank of its election to terminate this Agreement
pursuant to Section 11 hereof or after such time as the Company or the
Savings Bank shall have given notice in accordance with Section 12 hereof
that Trident is in breach of this Agreement. Full reimbursement of Trident
shall be made in next-day funds on the Closing Date or, if the Conversion
is not completed and is terminated for any reason, within ten (10) business
days of receipt by the Company of a written request detailing allocable
expenses from Trident for reimbursement of such expenses. Trident
acknowledges receipt of a $10,000 advance payment from the Savings Bank,
which shall be credited against the total reimbursement due Trident
hereunder. In the event this Agreement is terminated pursuant to Section 11
hereof, Trident shall be reimbursed only for its actual allocable expenses.
(c) Reimbursement for any expenses of the Company and the Savings Bank
set forth in Section 6 hereof to the extent paid by Trident on behalf of
the Company and the Savings Bank. Full reimbursement shall be made in next-
day funds on the Closing Date or, if the Conversion is not completed and is
terminated for any reason, within ten (10) business days of receipt by the
Company and the Savings Bank of a written request for such reimbursement
detailing such reimbursements.
Notwithstanding the limitations on reimbursement of Trident for its
allocable expenses provided in subsection (b) above and notwithstanding any
reimbursement of Trident pursuant to subsection (c) above, in the event that a
resolicitation or other event causes the Offerings to be extended beyond their
original expiration date, Trident shall be reimbursed for its reasonable
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Trident Securities, Inc.
Page 13
allocable expenses incurred during such extended period, provided that the
allowance for allocable expenses provided for in subsection (b) above has been
exhausted and subject to the following: such reimbursement shall be in an
amount equal to the product obtained by dividing $35,000 (the reimbursable
expenses and legal fees limitation set forth in Section (b) above by the total
number of days of the unextended Subscription Offering (calculated from the date
of the Prospectus to the intended close of the Subscription Offering as stated
in the Prospectus) and multiplying such product by the number of days of the
extension (that number of days from the date of the supplemental prospectus used
in the extended Subscription Offering to the closing of the extension of the
Subscription Offering described in such supplemental prospectus).
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
--------
assisting the Company on a best efforts basis in offering a minimum of 892,500
and a maximum of 1,207,500 Shares, subject to adjustment up to 1,388,625 Shares
(except as the OTS may permit to be decreased or increased) in the Offerings.
The Shares are to be offered to the public at the price set forth on the cover
page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Savings Bank jointly and
------------------
severally covenant and agree that:
(a) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus and through and including the Closing
Date, except as otherwise may be indicated or contemplated therein, neither the
Company nor the Savings Bank will issue any securities which will remain issued
at the Closing Date or incur any liability or obligation, direct or contingent,
or borrow money, except borrowings or liabilities in the ordinary course of
business, or enter into any other transaction not in the ordinary course of
business and consistent with prior practices, which is material in light of the
financial condition, operations, business, properties or assets of the Company
and the Savings Bank, taken as a whole.
(b) If any Shares remain unsubscribed following completion of the
Subscription Offering and the Community Offering, the Company (i) will, if
deemed necessary, promptly file with the Commission a post-effective amendment
to such Registration Statement relating to the results of the Subscription and
the Community Offerings, any additional information with respect to the proposed
plan of distribution and any revised pricing information or (ii) if no such
post-effective amendment is required, will file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information relating
to the results of the Subscription and Community Offerings and pricing
information pursuant to Rule 424(c) of the Securities Act Regulations, in either
case in a form reasonably acceptable to the Company and Trident.
(c) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company shall be within the range as set forth
in the Prospectus under the
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Trident Securities, Inc.
Page 14
caption "Capitalization," and no Common Stock of the Company shall be
outstanding immediately prior to the Closing Date (other than shares of Common
Stock issued in connection with the initial capitalization of the Company, which
shares will be canceled upon consummation of the Conversion); and the
certificates representing the Shares will conform in all material respects with
the requirements of applicable laws and OTS Regulations.
(d) At all times subsequent to the date of the Prospectus through and
including the Closing Date (i) the Registration Statement and the Prospectus
will comply with the Securities Act and the Securities Act Regulations, (ii) the
Registration Statement will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, and (iii) the Prospectus will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Agreements in this
subsection shall not apply to statements or omissions made in reliance upon and
in conformity with written information furnished to the Company or the Savings
Bank relating to Trident by or on behalf of Trident expressly for use in the
Registration Statement or Prospectus.
(e) Upon amendment of the Savings Bank's charter and bylaws as provided in
the OTS Regulations and completion of the sale by the Company of the Shares as
contemplated by the Prospectus, (i) the Savings Bank will be converted pursuant
to the Plan to a federally chartered capital stock savings bank with full power
and authority to own its property and conduct its business as described in the
Prospectus, (ii) all of the authorized and outstanding capital stock of the
Savings Bank will be owned of record and beneficially by the Company, and (iii)
the Company will have no direct subsidiaries other than the Savings Bank.
(f) The Company shall deliver to Trident, from time to time, such number of
copies of the Prospectus as Trident reasonably may request. The Company
authorizes Trident to use the Prospectus in any lawful manner in connection with
the offer and sale of the Shares.
(g) The Company will notify Trident immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration Statement
becomes effective or any supplement to the Prospectus has been filed, (ii) of
the issuance by the Commission of any stop order relating to the Registration
Statement or of the initiation or the threat of any proceedings for that
purpose, (iii) of the receipt of any notice with respect to the suspension of
the qualification of the Shares for offering or sale in any jurisdiction, and
(iv) of the receipt of any comments from the staff of the Commission relating to
the Registration Statement. If the Commission enters a stop order relating to
the Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible moment.
<PAGE>
Trident Securities, Inc.
Page 15
(h) During the time when a prospectus is required to be delivered under the
Securities Act, the Company will comply with all requirements imposed upon it by
the Securities Act and by the Securities Act Regulations to permit the
continuance of offers and sales of or dealings in the Shares in accordance with
the provisions hereof and the Prospectus. If during the period when the
Prospectus is required to be delivered in connection with the offer and sale of
the Shares any event relating to or affecting the Company and the Savings Bank,
taken as a whole, shall occur as a result of which it is necessary, in the
reasonable opinion of counsel for Trident, to amend or supplement the Prospectus
in order to make the Prospectus not false or misleading in light of the
circumstances existing at the time it is delivered to a purchaser of the Shares,
the Company forthwith shall prepare and furnish to Trident a reasonable number
of copies of an amendment or amendments or of a supplement or supplements to the
Prospectus (in form and substance reasonably satisfactory to counsel for
Trident) which shall amend or supplement the Prospectus so that, as amended or
supplemented, the Prospectus shall not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances existing at the time the Prospectus is
delivered to a purchaser of the Shares, not misleading. The Company will not
file or use any amendment or supplement to the Registration Statement or the
Prospectus unless Trident has been first furnished a copy or if Trident shall
reasonably object after having been furnished such copy. For the purposes of
this subsection the Company and the Savings Bank shall furnish such information
with respect to themselves as Trident from time to time may reasonably request.
(i) The Company and the Savings Bank will take all reasonably necessary
action as may be required to qualify or register the Shares for offer and sale
by the Company under the securities or blue sky laws of such jurisdictions as
Trident and the Company or its counsel may agree upon; provided, however, that
the Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any such jurisdiction. In each jurisdiction where
such qualification or registration shall be effected, the Company, unless
Trident agrees that such action is not necessary or advisable in connection with
the distribution of the Shares, shall file and make such statements or reports
as are, or reasonably may be, required by the laws of such jurisdiction.
(j) Appropriate entries will be made in the financial records of the
Savings Bank to establish a liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders (as those terms are
defined in the Plan) in accordance with the OTS Regulations.
(k) The Company will file a registration statement for the Common Stock
under Section 12(g) of the Exchange Act prior to completion of the Offerings
pursuant to the Plan and shall request that such registration statement be
effective upon completion of the Conversion. The Company shall maintain the
effectiveness of such registration for a minimum period of three years or for
such shorter period as may be required by applicable law.
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Trident Securities, Inc.
Page 16
(l) The Company will make generally available to its security holders as
soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the Securities Act Regulations) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date (as defined in said Rule 158) of the Registration
Statement.
(m) For a period of three (3) years from the date of this Agreement, the
Company will furnish to Trident, as soon as publicly available after the end of
each fiscal year, a copy of its annual report to shareholders for such year; and
the Company will furnish to Trident (i) as soon as publicly available, a copy of
each report or definitive proxy statement of the Company filed with the
Commission under the Exchange Act or mailed to shareholders, and (ii) from time
to time, such other public information concerning the Company as Trident may
reasonably request.
(n) The Company shall use the net proceeds from the sale of the Shares in
the manner set forth in the Prospectus.
(o) The Company shall not deliver the Shares until each and every condition
set forth in Section 7 hereof has been satisfied, unless such condition is
waived in writing by Trident.
(p) The Company shall advise Trident, if necessary, as to the allocation of
deposits, in the case of Eligible Account Holders and Supplemental Eligible
Account Holders, and votes, in the case of Other Members, and of the Shares in
the event of an oversubscription, and shall provide Trident final instructions
as to the allocation of the Shares ("Allocation Instructions") in such event and
the Allocation Instructions shall be accurate, reliable and complete. Trident
shall be entitled to rely on the Allocation Instructions and shall have no
liability in respect of its reliance thereon, including without limitation, no
liability for or related to any denial or grant of a subscription in whole or in
part.
(q) The Company and the Savings Bank will take such actions and furnish
such information as are reasonably requested by Trident in order for Trident to
comply with the NASD's "Interpretation Relating to Free-Riding and Withholding."
(r) At the Closing Date, the Company and the Savings Bank will have
completed the conditions precedent to, and shall have conducted the Conversion
in all material respects in accordance with, the Plan, OTS Regulations and all
other applicable laws, regulations, published decisions and orders, including
all terms, conditions, requirements and provisions precedent to the Conversion
imposed by the OTS.
(s) The Company will use its best efforts to obtain approval for and
maintain quotation of its shares of common stock on the Nasdaq stock market
effective on or prior to the Closing Date.
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Trident Securities, Inc.
Page 17
6. Payment of Expenses. Subject to Section 3(c) hereof, whether or not
-------------------
the Conversion is consummated, the Company and the Savings Bank shall pay the
following expenses: (a) all regulatory filing fees, including but not limited to
those payable to the Commission, OTS, "blue sky" authorities and the NASD
(including fees payable to the NASD for Trident's filing pursuant to the NASD
Corporate Finance Rule), (b) all stock issue and transfer taxes which may be
payable with respect to the sale of the Shares, (c) attorneys' fees of the
Company and the Savings Bank, (d) attorneys' fees relating to any required "blue
sky" laws research and filings, (e) telephone charges, (f) air freight, (g)
rental equipment, (h) supplies, (i) transfer agent and registrar fees and
expenses, (j) auditing and accounting fees and expenses, (k) costs of printing
and mailing all documents necessary in connection with the Conversion, and (l)
slide production expenses in connection with any community investor meetings to
be held by Trident.
7. Conditions of Trident's Obligations. Except as may be waived in
-----------------------------------
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
performance by the Company and the Savings Bank of their obligations hereunder,
and to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinion
of Luse Lehman Gorman Pomerenk & Schick, special counsel for the Company
and the Savings Bank, dated the Closing Date, addressed to Trident, in form
and substance reasonably satisfactory to counsel for Trident and stating
that:
(i) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, and the Savings Bank is validly existing in good standing as
a mutual savings bank under the laws of the United States, each with
full power and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) the Savings Bank is a member of the Federal Home Loan Bank of
Des Moines, and the deposit accounts of the Savings Bank are insured
by the SAIF up to the applicable legal limits, and no action or
proceeding to suspend or revoke such membership or insurance coverage
is pending or, to such counsel's Actual Knowledge, threatened;
(iii) the activities of the Savings Bank and the Subsidiary as
described in the Prospectus are permitted under the HOLA and OTS
Regulations;
(iv) the Subsidiary is validly existing as a corporation in good
standing under the laws of the State of Missouri with full power and
authority to own its properties and conduct its business as described
in the Prospectus; to such
<PAGE>
Trident Securities, Inc.
Page 18
counsel's Actual Knowledge, the Subsidiary has obtained all licenses,
permits and other governmental authorizations required for the conduct
of its business as described in the Prospectus, except where the
failure to obtain such licenses, permits or governmental authorization
would not have a material adverse effect on the financial condition,
operations, business, properties or assets of the Subsidiary; to such
counsel's Actual Knowledge, all of the leases and subleases material
to the business of the Subsidiary under which the Subsidiary holds
properties are in full force and effect; to such counsel's Actual
Knowledge, the Subsidiary is not in violation of its articles of
incorporation or bylaws; and to such counsel's Actual Knowledge, all
of the outstanding stock of the Subsidiary has been duly authorized
and is validly issued, fully paid and nonassessable, and such stock is
owned directly by the Savings Bank, free and clear of all material
liens, encumbrances or other claims or restrictions;
(v) the Company, the Savings Bank and the Subsidiary are each duly
qualified to do business and are in good standing as a foreign
corporation in each jurisdiction where the ownership or leasing of its
properties or the conduct of its business requires such qualification,
unless the failure to be so qualified would not have a material
adverse effect on the Company, the Savings Bank and the Subsidiary,
taken as a whole.
(vi) to such counsel's Actual Knowledge, the Savings Bank has
obtained all licenses, permits and other governmental authorizations
required for the conduct of its business as described in the
Prospectus, except where the failure to obtain such licenses, permits
or governmental authorizations would not have a material adverse
effect on the financial condition, operations, business, properties or
assets of the Company and the Savings Bank, taken as a whole; to such
counsel's Actual Knowledge, all of the leases and subleases material
to the business of the Savings Bank under which the Savings Bank holds
properties are in full force and effect; to such counsel's Actual
Knowledge, the Savings Bank is not in violation of its charter or
bylaws;
(vii) the Plan has been duly adopted and approved by the Boards of
Directors of the Savings Bank and the Company and the members of the
Savings Bank; the Plan complies with, and to such counsel's Actual
Knowledge, the Conversion has been effected in all material respects
in accordance with, the HOLA and the OTS Regulations; to such
counsel's Actual Knowledge, all of the terms, conditions, requirements
and provisions with respect to the Plan and the Conversion imposed by
the OTS, except with respect to the Conversion Application (which is
covered by opinion (xix) below) and the filing or submission of
certain required post-Conversion reports or other materials by the
<PAGE>
Trident Securities, Inc.
Page 19
Company or the Savings Bank, have been complied with by the Company
and the Savings Bank; and, to such counsel's Actual Knowledge, no
person has sought to obtain regulatory or judicial review of the final
action of the OTS in approving the Plan;
(viii) the Company has authorized Common Stock as set forth in the
Registration Statement and the Prospectus, and the description thereof
in the Registration Statement and the Prospectus is accurate and
complete in all material respects;
(ix) the issuance and sale of the Shares have been duly and
validly authorized by all necessary corporate action on the part of
the Company; the Shares, upon receipt of consideration and issuance in
accordance with the terms of the Plan and this Agreement, will be
validly issued, fully paid, nonassessable and, except as disclosed in
the Prospectus, free of preemptive rights, and good title thereto
shall be transferred by the Company free and clear of all claims,
encumbrances, security interests and liens created by the Company;
(x) the certificates for the Shares are in due and proper form and
comply in all material respects with applicable Delaware law and OTS
Regulations;
(xi) the issuance and sale of the capital stock of the Savings
Bank to the Company have been duly authorized by all necessary
corporate action of the Savings Bank and the Company and have received
the approval of the OTS, and such capital stock, upon receipt of
payment and issuance in accordance with the terms of the Plan, will be
validly issued, fully paid and nonassessable;
(xii) subject to the satisfaction of the conditions to the OTS
approval of the Conversion Application and the Holding Company
Application, no further approval, authorization, consent or other
order of any regulatory agency is required in connection with the
execution and delivery of this Agreement, the issuance and sale of the
Shares and the consummation of the Conversion, except with respect to
the issuance to the Savings Bank's Federal Stock Charter by the OTS,
and except as may be required under the "blue sky" securities laws of
various jurisdictions and the regulations of the NASD (as to which no
opinion need be rendered);
(xiii) the execution and delivery of this Agreement and the
consummation of the Conversion have been duly and validly authorized
by all necessary corporate action on the part of each of the Company
and the Savings Bank; and this Agreement is a legal, valid and binding
obligation of each of the Company
<PAGE>
Trident Securities, Inc.
Page 20
and the Savings Bank, enforceable in accordance with its terms (except
as the enforceability thereof may be limited by (i) bankruptcy,
insolvency, moratorium, reorganization, receivership, conservatorship
or other similar laws relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of depository
institutions whose accounts are insured by the FDIC or savings and
loan holding companies the accounts of whose subsidiaries are insured
by the FDIC; (ii) general equity principles, regardless of whether
such enforceability is considered in a proceeding in equity or at law,
or (iii) laws relating to the safety and soundness of insured
depository institutions and their affiliates, and except to the extent
that the provisions of Sections 8 and 9 hereof may be unenforceable as
against public policy or applicable law, including but not limited to,
Section 23A of the Federal Reserve Act, as amended);
(xiv) except as set forth in the Prospectus, there are no legal or
governmental proceedings pending or, to such counsel's Actual
Knowledge, threatened against or involving the assets of the Company,
the Savings Bank or the Subsidiary which would have a material adverse
effect on the Company, the Savings Bank and the Subsidiary, taken as a
whole (provided that for this purpose such counsel need not regard any
litigation or governmental procedure to be "threatened" unless the
potential litigant or government authority has manifested to the
management of the Company or the Savings Bank, or to such counsel, a
present intention to initiate such litigation or proceeding);
(xv) the statements in the Prospectus under the captions
"Regulation," "Taxation," "Dividends," "Certain Restrictions on
Acquisition of the Company" and "Description of Capital Stock,"
insofar as they are, or refer to, statements of federal law or legal
conclusions (excluding financial or statistical data or stock
valuation information included therein, as to which an opinion need
not be expressed), have been prepared or reviewed by such counsel and
are accurate and complete in all material respects;
(xvi) the Form AC has been approved by the OTS, and the Prospectus
and the Proxy Statement have been authorized for use by the OTS; the
Registration Statement has been declared effective by the Commission;
and no proceedings are pending by or before the Commission or the OTS
seeking to revoke or rescind the orders declaring the Registration
Statement effective or approving the Conversion Application or, to
such counsel's Actual Knowledge, are contemplated or threatened
(provided that for this purpose such counsel need not regard any
litigation or governmental procedure to be "threatened" unless the
potential litigant or government authority has manifested to the
management of the Company or the Savings Bank, or to such counsel, a
present intention to initiate such litigation or proceeding);
<PAGE>
Trident Securities, Inc.
Page 21
(xvii) the execution and delivery of this Agreement and the
consummation of the Conversion by the Company and the Savings Bank do
not conflict with or result in a breach of the charter, certificate of
incorporation or bylaws of the Company or the Savings Bank (in either
mutual or stock form), or, to such counsel's Actual Knowledge,
constitute a breach of or default (or an event which, with notice or
lapse of time or both, would constitute a default) under, give rise to
any right of termination, cancellation or acceleration contained in,
or result in the creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company or the
Savings Bank pursuant to any of the terms, provisions or conditions
of, any material agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company or the Savings
Bank is a party (other than the establishment of the liquidation
account pursuant to the Plan) or violate any governmental license or
permit or any enforceable published law, administrative regulation or
order or court order, writ, injunction or decree (subject to the
satisfaction of certain conditions imposed by the OTS in connection
with its approval of the Conversion Application and the Holding
Company Application), which breach, default, encumbrance or violation
would have a material adverse effect on the financial condition,
operations, business, assets or properties of the Company and the
Savings Bank taken as a whole;
(xviii) to such counsel's Actual Knowledge, there has been no
breach of any provision of the Company's, the Savings Bank's or the
Subsidiary's charter, certificate of incorporation or bylaws or breach
or default (or the occurrence of any event which, with notice or lapse
of time or both, would constitute a default) by the Company, the
Savings Bank or the Subsidiary under any agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which
the Company, the Savings Bank or the Subsidiary is a party or by which
any of them or any of their respective assets or properties may be
bound, which breach or default would have a material adverse effect on
the financial condition, operations, business, assets or properties of
the Company, the Savings Bank and the Subsidiary taken as a whole;
(xix) at the time the Conversion Application was approved by the
OTS and the Registration Statement was declared effective by the
Commission, the Conversion Application and the Registration Statement
(including the Prospectus and the Proxy Statement contained therein),
complied as to form in all material respects with the requirements of
the Securities Act, the HOLA, the Securities Act Regulations and the
OTS Regulations, as the case may be (except as to information provided
in writing by Trident with respect to Trident included therein and
financial statements, notes to financial statements, financial tables
and other financial and statistical data and stock valuation
information included
<PAGE>
Trident Securities, Inc.
Page 22
therein, as to which no opinion need be rendered); to such counsel's
Actual Knowledge, all documents and exhibits required to be filed with
the Conversion Application and the Registration Statement have been so
filed; and the descriptions in the Conversion Application and the
Registration Statement of such documents and exhibits are accurate and
complete in all material respects; and
(xx) upon the effectiveness of the Savings Bank's stock charter and
bylaws in accordance with applicable regulations and completion of the
sale by the Company of the Shares as contemplated by the Prospectus
and the Plan, (i) the Savings Bank will be converted to a permanent
capital stock savings bank under the laws of the United States with
full power and authority to own its property and conduct its business
as described in the Prospectus, and (ii) all of the outstanding
capital stock of the Savings Bank will be owned of record and, to such
counsel's Actual Knowledge, beneficially by the Company, free and
clear of all liens, charges, encumbrances and restrictions.
In rendering such opinions, such counsel may rely as to certain
matters of fact on certificates of executive officers and directors of the
Company and the Savings Bank and certificates of public officials delivered
pursuant hereto. Such counsel may assume that any agreement is the valid and
binding obligation of any parties to such agreement other than the Company, the
Savings Bank and the Subsidiary. The opinion of Luse Lehman Gorman Pomerenk &
Schick shall be limited to matters governed by federal law and, with respect to
clauses (i), (viii) and (xiii), the Delaware General Corporation Law and with
respect to clauses (ii) and (xv), the State of Missouri Business Corporation
Act. Such opinion shall be governed by, and interpreted in accordance with, the
Legal Opinion Accord ("Accord") of the ABA Section of Business Law (1991), and,
as a consequence, references in such opinion to such counsel's "Actual
Knowledge" shall be as such term is defined in the Accord (or knowledge based on
certificates). For purposes of such opinion, no proceeding shall be deemed to be
pending, no order or stop order shall be deemed to be issued, and no action
shall be deemed to be instituted unless, in each case, a director or executive
officer of the Company or the Savings Bank, or its counsel, shall have received
a copy of such proceeding, order, stop order or action. Such opinion may be
limited to statutes, regulations and judicial interpretations and to facts as
they exist as of the date of such opinions. In rendering such opinion, such
counsel need assume no obligation to revise or supplement it should such
statutes, regulations and judicial interpretations be changed by legislative or
regulatory action, judicial decision or otherwise. Such counsel need express no
view, opinion or belief with respect to whether any proposed or pending
legislation, if enacted, or any proposed or pending regulations or policy
statements issued by any regulatory agency, whether or not promulgated pursuant
to any such legislation, would affect the validity of the execution and delivery
by the Company and the Savings Bank of this Agreement or the issuance of the
Shares.
<PAGE>
Trident Securities, Inc.
Page 23
(b) At the Closing Date, Trident shall receive the letter of Luse
Lehman Gorman Pomerenk & Schick, special counsel for the Company and the
Savings Bank, dated the Closing Date, addressed to Trident, in form and
substance reasonably satisfactory to counsel for Trident and to the effect
that: (i) based on such counsel's participation in conferences with
representatives of the Company, the Savings Bank, its counsel, the
independent appraiser, the independent certified public accountants,
Trident and its counsel, review of documents and applicable law (including
the requirements of Form SB-2) and the experience such counsel has gained
in its practice under the Securities Act (relying as to factual matters on
certificates of officers and other written factual representations by the
Company and the Savings Bank), nothing has come to such counsel's
attention that would lead it to believe that the Registration Statement,
as amended or supplemented (except as to information in respect of Trident
contained therein and except as to the financial statements, notes to
financial statements, financial tables and other financial and statistical
data and stock valuation information contained therein, as to which such
counsel need express no view), at the time it became effective contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made,
not misleading, and that the Prospectus, as amended or supplemented
(except as to information in respect of Trident contained therein and
except as to financial statements, notes to financial statements,
financial tables and other financial and statistical data and stock
valuation information contained therein as to which such counsel need
express no view), at the time the Prospectus was filed with the Commission
under Rule 424(b) of the Securities Act regulations and at the Closing
Date, contained any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading (in
issuing such letter, such counsel may indicate that it has not confirmed
the accuracy or completeness of or otherwise verified the factual
information contained in the Registration Statement or the Prospectus and
that it does not assume any responsibility for the accuracy or
completeness thereof.)
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the sale of the Shares as herein contemplated and related
proceedings, and for the purpose of evidencing the accuracy, completeness
or satisfaction of any of the representations, warranties or conditions
herein contained, including but not limited to, resolutions of the Board
of Directors of the Company and the Savings Bank regarding the
authorization of this Agreement and the transactions contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material adverse change in the
financial condition, business, operations, assets or properties of the
Company and the Savings Bank, taken as a whole,
<PAGE>
Trident Securities, Inc.
Page 24
since the latest date as of which such condition is set forth in the
Prospectus, except as referred to or contemplated therein; (ii) there
shall have been no transaction entered into by the Company or the Savings
Bank after the latest date as of which the financial condition of the
Company or the Savings Bank is set forth in the Prospectus other than
transactions referred to or contemplated therein, transactions in the
ordinary course of business, and transactions which are not material to
the Company and the Savings Bank, taken as a whole; (iii) none of the
Company or the Savings Bank shall have received from the OTS or Commission
any directive (oral or written) to make any change in the method of
conducting their respective businesses which is material to the business
of the Company and the Savings Bank, taken as a whole, with which they
have not complied; (iv) no action, suit or proceeding, at law or in equity
or before or by any federal or state commission, board or other
administrative agency, shall be pending or threatened against the Company
or the Savings Bank or affecting any of their respective assets, wherein
an unfavorable decision, ruling or finding would have a material adverse
effect on the business, operations, financial condition or income of the
Company and the Savings Bank, taken as a whole; and (v) the Shares shall
have been qualified or registered for offering and sale by the Company
under the securities or "blue sky" laws of such jurisdictions as Trident
and the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of
the Company and the Savings Bank, dated the Closing Date, to the effect
that: (i) they have examined the Prospectus and, at the time the
Prospectus became authorized for final use, the Prospectus did not contain
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading with respect to
the Company or the Savings Bank; (ii) since the date the Prospectus became
authorized for final use, no event has occurred which should have been set
forth in an amendment or supplement to the Prospectus which has not been
so set forth, including specifically, but without limitation, any material
adverse change in the business, financial condition, operations, assets or
properties of the Company or the Savings Bank and, the conditions set
forth in clauses (ii) through (iv) inclusive of subsection (d) of this
Section 7 have been satisfied; (iii) no order has been issued by the
Commission or the OTS to suspend the Offerings or the effectiveness of the
Prospectus, and, to the best knowledge of such officers, no action for
such purposes has been instituted or threatened by the Commission or the
OTS; (iv) to the best knowledge of such officers, no person has sought to
obtain review of the final actions of the OTS approving the Plan; and (v)
all of the representations and warranties contained in Section 2 of this
Agreement are true and correct, with the same force and effect as though
expressly made on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other
documents, (i) copies of the letters from the OTS authorizing the use of
the Prospectus and the Proxy
<PAGE>
Trident Securities, Inc.
Page 25
Statement, (ii) a copy of the order of the Commission declaring the
Registration Statement effective; (iii) copy of the certificate from the
OTS evidencing the corporate existence of the Savings Bank; (iv) copy of
the certificate from the FDIC evidencing the insured status of the Savings
Bank, (v) a copy of the letter from the appropriate Delaware authority
evidencing the incorporation (and, if generally available from such
authority, good standing) of the Company; (vi) a copy of the Company's
certificate of incorporation certified by the appropriate Delaware
governmental authority; and, (vii) if available, a copy of the letter from
the OTS approving the Savings Bank's Federal Stock Charter.
(g) As soon as available after the Closing Date, Trident shall
receive a certified copy of the Savings Bank's Federal Stock Charter as
executed by the OTS.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from KPMG Peat Marwick, LLP, independent
certified public accountants, addressed to Trident and the Company, in
substance and form reasonably satisfactory to counsel for Trident, with
respect to the consolidated financial statements of the Savings Bank and
certain financial information contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance reasonably satisfactory to counsel for Trident from KPMG Peat
Marwick, LLP, independent certified public accountants, dated the Closing
Date and addressed to Trident and the Company, confirming the statements
made by them in the letter delivered by them pursuant to the preceding
subsection as of a specified date not more than five (5) days prior to the
Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the Savings
Bank prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Savings Bank to Trident as to the statements made therein. If any condition to
Trident's obligations hereunder to be fulfilled prior to or at the Closing Date
is not so fulfilled, Trident may terminate this Agreement or, if Trident so
elects, may waive in writing any such conditions which have not been fulfilled,
or may extend the time of their fulfillment.
8. Indemnification.
---------------
(a) The Company and the Savings Bank jointly and severally agree to
indemnify and hold harmless Trident, its officers, directors and employees and
each person, if any, who controls Trident within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever and shall further promptly
reimburse such persons for any legal or other expenses reasonably
<PAGE>
Trident Securities, Inc.
Page 26
incurred by each or any of them in investigating, preparing to defend or
defending against any action, proceeding or claim (whether commenced or
threatened) arising out of or based upon any untrue or alleged untrue statement
of a material fact or the omission or alleged omission of a material fact
required to be stated or necessary to make the statements, in light of the
circumstances under which they were made, not misleading in (i) the Registration
Statement or the Prospectus or (ii) any application (including the Form AC) or
other document or communication (in this Section 8 collectively called
"Application") prepared or executed by or on behalf of the Company, the Savings
Bank or based upon written information furnished by or on behalf of the Company
or the Savings Bank, filed in any jurisdiction to register or qualify the Shares
under the securities laws thereof or filed with the OTS or Commission with
respect to the offering of the Shares, unless such statement or omission was
made in reliance upon and in conformity with information furnished in writing to
the Company or the Savings Bank with respect to Trident by or on behalf of
Trident expressly for use in the Prospectus or any amendment or supplement
thereof or in any Application, as the case may be.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii) any
records of Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members (as those terms are defined in the Plan) delivered to Trident by
the Savings Bank or its agents for use during the Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Savings Bank, their officers, directors and employees and each person, if any,
who controls the Company and the Savings Bank within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, to the same extent
as the foregoing indemnity from the Company and the Savings Bank to Trident, but
only with respect to statements or omissions, if any, made in the Prospectus or
any amendment or supplement thereof, in any Application or to a purchaser of the
Shares in reliance upon, and in conformity with, information furnished in
writing to the Company or the Savings Bank with respect to Trident by or on
behalf of Trident expressly for use in the Prospectus or any amendment or
supplement thereof or in any Application.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of any action, proceeding or claim (whether commenced or threatened) such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of such
action, proceeding or claim; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 8. In case any such action
is brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with the other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to
<PAGE>
Trident Securities, Inc.
Page 27
such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than the
reasonable cost of investigation except as otherwise provided herein. In the
event the indemnifying party elects to assume the defense of any such action and
retain counsel acceptable to the indemnified party, the indemnified party may
retain additional counsel, but shall bear the fees and expenses of such counsel
unless (i) the indemnifying party shall have specifically authorized the
indemnified party to retain such counsel or (ii) the parties to such suit
include such indemnifying party and the indemnified party, and such indemnified
party shall have been advised by counsel that one or more material legal
defenses may be available to the indemnified party which may not be available to
the indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the indemnifying
party's obligation to bear the fees and expenses of such counsel. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for all indemnified parties in connection with any one action,
proceeding, claim or suit or separate but similar or related actions,
proceedings or claims in the same jurisdiction arising out of the same general
allegations or circumstances. An indemnifying party against whom indemnity may
be sought shall not be liable to indemnify an indemnified party under this
Section 8 if any settlement of any such action is effected without such
indemnifying party's consent. To the extent applicable, this Section 8 is
subject to and limited by public policy and the provisions of applicable law,
including but not limited to, Section 23A.
9. Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Savings Bank other than in accordance with its terms, the Company and the
Savings Bank or Trident shall contribute to the aggregate losses, liabilities,
claims, damages, and expenses of the nature contemplated by said indemnity
agreement incurred by the Company and the Savings Bank or Trident (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Savings Bank on the one hand and Trident on the other from the
offering of the Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above, but also the
relative fault of the Company or the Savings Bank on the one hand and Trident on
the other hand in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Savings Bank on the one hand and Trident on the other shall be
deemed to be in the same proportion as the total net proceeds from the
Conversion received by the Company and the Savings Bank bear to the total fees
received by Trident under this Agreement. The relative fault of the Company or
the Savings Bank on the one hand and Trident on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the
<PAGE>
Trident Securities, Inc.
Page 28
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Savings Bank or by Trident and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Savings Bank and Trident agree that it would not be
just and equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, Trident
shall not be required to contribute any amount in excess of the amount by which
fees owed Trident pursuant to this Agreement exceeds the amount of any damages
which Trident has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. To the extent applicable, this
Section 9 is subject to and limited by public policy and the provisions of
applicable law, including but not limited to, Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
--------------------------------------------------------
respective indemnities of the Company and the Savings Bank and Trident and the
representation and warranties of the Company and the Savings Bank and of Trident
set forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company or the Savings Bank
or any controlling person or indemnified party referred to in Section 8 hereof,
and shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Savings Bank and any such controlling persons shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make it, in
Trident's reasonable opinion, impracticable to proceed with the offering of the
Shares; or if trading on the New York Stock Exchange shall have suspended; or if
the United States shall have become involved in a war or major hostilities; or
if a general banking moratorium has been declared by a state or federal
authority which has material effect on the Savings Bank or the Conversion; or if
a moratorium in foreign exchange trading by major international banks or persons
has been declared; or if
<PAGE>
Trident Securities, Inc.
Page 29
there shall have been a material change in the capitalization, condition or
business of the Company, or if the Savings Bank shall have sustained a material
or substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not said loss shall have
been insured; or if there shall have been a material change in the condition or
prospects of the Company or the Savings Bank.
(b) Any party hereto may terminate this Agreement by giving notice
pursuant to Section 12 hereof of a material breach of this Agreement by the
other party at any time after this Agreement becomes effective.
(c) If this Agreement is terminated as provided in this Section 11, the
party terminating this Agreement shall notify the non-terminating party promptly
by telephone or telegram, confirmed by letter.
(d) If this Agreement is terminated by Trident for any of the reasons set
forth in subsection (a) above, and to fulfill its obligations, if any, pursuant
to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand, the Company and
the Savings Bank shall pay Trident the full amount so owing thereunder.
(e) The Savings Bank may terminate the Conversion in accordance with the
terms of the Plan. Such termination shall be without liability to any party,
except that the Company and the Savings Bank shall be required to fulfill their
obligations pursuant to Sections 3(b), 3(c), 6, 8(a), 9 and 10 of this
Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Breyer & Aguggia, 1300 I Street, N.W., Suite 470
East, Washington, D.C. 20005, Attention: Paul M. Aguggia, Esquire) and if sent
to the Company or the Savings Bank, shall be mailed, delivered or telegraphed
and confirmed to CBES Bancorp, Inc. or Community Bank of Excelsior Springs, a
Savings Bank, 1001 North Jesse James Road, Excelsior Springs, Missouri 64024,
Attention: Larry E. Hermreck, President (with a copy to Luse Lehman Gorman
Pomerenk & Schick, 5335 Wisconsin Avenue, NW, Washington, DC 20015, Attention:
Robert I. Lipsher, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Savings Bank and the
controlling and other persons referred to in Section 8 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained.
<PAGE>
Trident Securities, Inc.
Page 30
14. Construction. Unless preempted by federal law, this Agreement shall
------------
be governed by and construed in accordance with the substantive laws of North
Carolina.
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
<PAGE>
Trident Securities, Inc.
Page 31
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
CBES Bancorp, Inc.
By: _____________________________________
Larry E. Hermreck
President
COMMUNITY BANK OF EXCELSIOR SPRINGS
By: _____________________________________
Larry E. Hermreck
President
Agreed to and accepted as of
the date first written above:
TRIDENT SECURITIES, INC.
By: ______________________________
Name:
Title:
<PAGE>
LUSE LEHMAN GORMAN POMERENK & SCHICK letterhead
August 5, 1996
Board of Directors
Community Bank of
Excelsior Springs, A Savings Bank
1001 N. Jesse James Road
Excelsior Springs, Missouri 64024
Re: Federal Income Tax Consequences Relating to Conversion of the
Bank from a Federal Mutual Savings Institution to a Federal
Stock Savings Institution and the Acquisition of the Stock
Institution's Stock by a Stock Holding Company
Gentlemen:
In accordance with your request, set forth herein is the opinion of this
firm relating to the federal income tax consequences of the proposed conversion
("Conversion") of Community Bank of Excelsior Springs, A Savings Bank (the
"Bank") from a federal mutual savings institution to a federal stock savings
institution (the "Stock Bank"), and the formation of a holding company parent to
be known as CBES Bancorp, Inc. (the "Holding Company"), which will acquire all
of the outstanding stock of the Stock Bank.
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including but not limited
to the Plan of Conversion as adopted by the Bank on May 14, 1996 (the "Plan");
the Federal Mutual Charter and Bylaws of the Bank; and the Certificate of
Incorporation and Bylaws of the Holding Company. In such examination, we have
assumed, and have not independently verified, the genuineness of all signatures
on original documents where due execution and delivery are requirements to the
effectiveness thereof. Terms used but not defined herein, whether capitalized
or not, shall have the same meanings as defined in said documents.
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 2
In issuing our opinion, we have assumed that the Plan has been duly and
validly authorized and has been approved and adopted by the board of directors
of the Bank at a meeting duly called and held; that the Bank will comply with
the terms and conditions of the Plan, and that the various representations and
warranties which are provided to us are accurate, complete, true and correct.
Accordingly, we express no opinion concerning the effect, if any, of variations
from the foregoing. We specifically express no opinion concerning tax matters
relating to the Plan under state and local tax laws and under Federal income tax
laws except on the basis of the documents and assumptions described above.
In issuing the opinion set forth below, we have relied solely on existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code");
existing and proposed Treasury Regulations (the "Regulations") thereunder;
current administrative rulings, notices and procedures; and court decisions.
Such laws, regulations, administrative rulings, notices and procedures and court
decisions are subject to change at any time. Any such change could affect the
continuing validity of the opinions set forth below. This opinion is as of the
date hereof, and we disclaim any obligation to advise you of any change in any
matter considered herein after the date hereof.
In rendering our opinion, we have assumed that the persons and entities
identified in the Plan of Conversion will at all times comply with the
requirements of Code Section 368(a)(1)(F), the other applicable state and
Federal laws and the representations of the Bank. In addition, we have assumed
that the activities of the persons and entities identified in the Plan will be
conducted strictly in accordance with the Plan. Any variations may affect the
opinions we are rendering.
For purposes of this opinion, we are relying on the representations
provided to us by the Bank, as set forth below.
REPRESENTATIONS
---------------
1. The Conversion is implemented in accordance with the terms of the Plan
of Conversion (the "Plan") and all conditions precedent contained in the Plan
shall be performed or waived prior to the consummation of the Conversion.
2. The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account ("Liquidation Account") of Stock Bank to be
received under the Plan, in each instance, shall be equal to the fair market
value of the membership interests (i.e.,
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 3
withdrawable deposit accounts, voting and liquidation rights) in the Bank
surrendered in exchange therefor.
3. Holding Company and Stock Bank each have no plan or intention to
redeem or otherwise re-acquire any of the stock issued in the proposed
transaction.
4. To the best of the knowledge of the management of the Bank, there is
no plan or intention by any member of the Bank, who holds more than 1% of the
qualifying deposits in the Bank, and there is no plan or intention on the part
of the remaining members to dispose of their withdrawable deposit accounts in
Stock Bank that would reduce their aggregate interest in the Liquidation Account
as of the Effective Date of the Conversion, to less than 50% of the value of
their interests in the Bank as of the same date.
5. Immediately following the consummation of the proposed transaction,
Stock Bank will possess the same assets and liabilities as the Bank held
immediately prior to the proposed transaction, plus proceeds from the sale of
stock of Stock Bank to Holding Company.
6. Assets used to pay expenses of the Conversion (without reference to
the expenses of the Direct Community Offering) and all distributions (except for
regular normal interest payments and other payments in the normal course of
business made by the Bank immediately preceding the transaction) will in the
aggregate constitute less than one percent (1%) of the net assets of the Bank.
7. Following the proposed transaction, Stock Bank will continue the
historic business of the Bank or use a significant portion of the Bank's
historic business assets in a business.
8. Stock Bank has no plan or intention to sell or otherwise dispose of
any of the assets of the Bank acquired in the proposed transaction, except for
dispositions in the ordinary course of business.
9. There is no plan or intention for Stock Bank to be liquidated or
merged with another corporation following the Conversion.
10. Both Stock Bank and Holding Company have no plan or intention, either
currently or at the time of the Conversion, to issue additional shares of stock
following the proposed transaction, other than shares that may be issued to
employees and/or directors pursuant to certain stock option and stock incentive
plans or that may be issued to employee benefit plans.
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 4
11. Stock Bank has no plan or intention to reacquire any of its stock
issued in the proposed transaction.
12. The Bank is not under the jurisdiction of a court in any Title 11 or
similar case within the meaning of Section 368(a)(3)(A). The proposed
transaction does not involve a receivership, foreclosure, or similar proceeding
before a federal or state agency involving a financial institution to which
Section 585 or 593 of the Code applies.
13. Compensation to be paid to depositor-employees of the Bank, Stock Bank
or Holding Company will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
14. No shares of Holding Company Conversion Stock will be issued to or
purchased by depositor-employees of the Bank, Stock Bank or Holding Company at a
discount or as compensation in the proposed transaction.
15. No cash or other property will be given to Eligible Account Holders or
others in lieu of (a) non-transferable subscription rights or (b) an interest in
the Liquidation Account of Stock Bank.
16. Bank utilizes a reserve for bad debts in accordance with Section 593
of the Internal Revenue Code of 1986, as amended (the "Code") and, following the
conversion, Stock Bank shall likewise utilize a reserve for bad debts in
accordance with Section 593 of the Code.
17. At the time of the proposed transaction, the fair market value of the
assets of the Bank on a going concern basis will equal or exceed the amount of
its liabilities to be assumed plus the amount of liabilities to which the
transferred assets are subject. Bank will have a positive regulatory net worth
at the time of the Conversion.
18. Bank, Stock Bank and Holding Company are corporations within the
meaning of Section 7701(a)(3) of the Code. Bank and Stock Bank are domestic
building and loan associations within the meaning of Section 7701(a)(19)(C) of
the Code.
19 Neither Bank nor Stock Bank is an investment company as defined in
Sections 368(a)(2)(F)(iii) and (iv) of the Code.
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 5
20. The exercise price of the subscription rights received by the Bank's
Eligible Account Holders and Supplemental Eligible Account Holders to purchase
Holding Company Stock will be equal to the fair market value of the Holding
Company Conversion Stock at the time of the completion of the proposed
transaction as determined by an independent appraisal.
21. The Bank has received or will receive an opinion from an independent
appraiser to the effect that the subscription rights to be received by Eligible
Account Holders and Supplemental Eligible Account Holders and other eligible
subscribers do not have any ascertainable fair market value.
22. The Bank's savings depositors will pay expenses of the conversion
solely attributable to them, if any. Holding Company and the Bank will pay
their own expenses for the transaction and will not pay any expenses solely
attributable to the savings depositors or to the Holding Company stockholders.
The stockholders of Holding Company will pay the expenses incurred by themselves
in connection with the proposed transaction.
23. The Eligible Account Holders', Supplemental Eligible Account Holders',
and Other Members' proprietary interests in the Bank arise solely by virtue of
the fact that they are account holders in the Bank.
24 No creditors of the Bank or the depositors in their role as creditors,
have taken any steps to enforce their claims against the Bank by instituting
Bankruptcy or other legal proceedings, in either a court or appropriate
regulatory agency, that would eliminate the proprietary interests of the members
prior to the Conversion of the Bank including depositors as equity holders of
the Bank.
25. The liabilities of the Bank assumed by Stock Bank plus the
liabilities, if any, to which the transferred assets are subject were incurred
by the Bank in the ordinary course of its business and are associated with the
assets transferred.
26. Holding Company has no plan or intention to sell or otherwise dispose
of the stock of Stock Bank received by it in the proposed transaction.
27. No amount of deposit accounts or deposits as of the Eligibility Record
Date will be excluded from participation in the Liquidation Account.
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 6
OPINION
-------
Based on the foregoing, and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed Conversion:
1. The change in the form of operation of the Bank from a federal mutual
savings institution to a federal stock savings institution, as
described above, will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended
("Code"), and no gain or loss will be recognized to either the Bank or
to the Stock Bank as a result of such conversion. (See Rev.
Rul. 80-105, 1980-1 C.B. 78). The Bank and the Stock Bank will each be
a party to a reorganization within the meaning of Section 368(b) of
the Code. (Rev. Rul. 72-206, 1972-1 C.B. 104)
2. No gain or loss will be recognized by the Stock Bank on the receipt of
money from the Holding Company in exchange for shares of common stock
of the Stock Bank. (Section 1032(a) of the Code).
3. The Holding Company will recognize no gain or loss upon receipt of
money from stockholders in exchange for shares of Holding Company
Conversion Stock. (Section 1032(a) of the Code).
4. The assets of the Bank will have the same basis in the hands of the
Stock Bank as in the hands of the Bank immediately prior to the
Conversion. (Section 362(b) of the Code).
5. The holding period of the assets of the Bank to be received by the
Stock Bank will include the period during which the assets were held by
the Bank prior to the Conversion. (Section 1223(2) of the Code).
6. No gain or loss will be recognized by the depositors of the Bank upon
the issuance to them of withdrawable deposit accounts in the Stock Bank
in the same dollar amount as their deposit accounts in the Bank plus an
interest in the Liquidation Account of the Stock Bank, as described
above,
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 7
in exchange for their deposit accounts in the Bank. (Section 354(a) of
the Code).
7. The basis of the depositors' deposit accounts in the Stock Bank
received by the depositors of the Bank will be the same as the basis of
their deposit accounts in the Bank surrendered in exchange therefor.
The basis of each account holder's interests in the Liquidation Account
of the Stock Bank received by the depositors will be zero, that being
the cost of such property. The basis of the non-transferable
subscription rights will be zero, provided that such subscription
rights are not deemed to have a fair market value and that the
subscription price of such stock issuable upon exercise of such rights
is equal to the fair market value of such stock. The basis of the
Holding Company Conversion Stock to its stockholders will be the
purchase price thereof, increased by the basis, if any, of the
subscription rights exercised. (Section 1012 of the Code). The
stockholder's holding period will commence upon the exercise of the
subscription rights. (Section 1223(6) of the Code).
8. Provided that the amount to be paid for Holding Company Stock pursuant
to the exercise of subscription rights is equal to the fair market
value of such Common Stock, no gain or loss will be recognized by
depositors under the Plan upon the distribution to them of non-
transferable subscription rights to purchase shares of Holding Company
Conversion Stock. (Rev. Rul. 56-572, 1956-2 C.B. 234).
9. For purposes of Section 381 of the Code, the Stock Bank will be treated
as if there had been no reorganization. Accordingly, the taxable year
of the Bank will not end on the effective date of the Conversion merely
because of the transfer of assets of the Bank to the Stock Bank, and
the tax attributes of the Bank will be taken into account by the Stock
Bank as if there had been no reorganization. (Treas.
Reg. (S)1.381(b)-(1)(a)(2)).
10. The part of the taxable year of the Bank before the reorganization and
the part of the taxable year of the Stock Bank after the reorganization
will constitute a single taxable year of the Stock Bank. (Treas. Reg.
(S)1.381(b)-1(a)(2); Rev. Rul. 57-276, 1957-1 C.B. 126).
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 8
11. Pursuant to the provisions of Section 381(c)(4) of the Code and Treas.
Reg. Section 1.381(c)(4)-1(a)(1)(ii), the Stock Bank will succeed to
and take into account, immediately after the reorganization, those
accounts of the Bank which represent bad debt reserves in respect of
which the Bank has taken a bad debt deduction for taxable years ending
on or before the date of the transfer. The bad debt reserves will not
be required to be restored to the gross income of either the Bank or
the Stock Bank for the taxable year of the transfer, and such bad debt
reserves will have the same character in the hands of the Stock Bank as
they would have had in the hands of the Bank if no distribution or
transfer had occurred. (Section 593(e) of the Code).
12. Regardless of any book entries that are made for the establishment of
the Liquidation Account, the Conversion, as described above, will not
diminish the accumulated earnings and profits of the Stock Bank
available for the subsequent distribution of dividends within the
meaning of Section 316 of the Code. (Treas. Reg. (S)1.312-11(b) and
(c)). The creation of the Liquidation Account on the records of the
Stock Bank will have no effect on its taxable income, deductions for
additions to reserves for bad debts under Section 593 of the Code, or
distributions to stockholders under Section 593(e) of the Code. (Rev.
Rul. 68-475, 1968-2 C.B. 259).
13. A shareholder's holding period for Holding Company Conversion Stock
acquired through the exercise of the Subscription Rights shall begin on
the date on which the Subscription Rights are exercised. (Section
1223(6) of the Code.) The holding period for the Holding Company
Conversion Stock purchased pursuant to the Community Offering or Public
Offering or under other purchase arrangements will commence on the date
following the date on which such stock is purchased.
(Rev. Rul. 70-598, 1970-2 C.B. 168).
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign or other tax considerations. If any of the information on
which we have relied is incorrect, or if changes in the relevant facts occur
after the date hereof, our opinion could be affected thereby.
<PAGE>
Board of Directors
Community Bank of
Excelsior Springs
August 5, 1996
Page 9
Moreover, our opinion is based on the case law, Code, Treasury Regulations
thereunder and Internal Revenue Service rulings as they now exist. These
authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion. This opinion is not binding on the Internal Revenue
Service and there can be no assurance, and none is hereby given, that the
Internal Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
CONSENT
-------
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 or other applicable form ("Registration
Statement") of the Holding Company filed with the Securities and Exchange
Commission with respect to the Conversion and as an exhibit to the application
for Conversion on Form AC ("Form AC") of the Bank filed with the OTS with
respect to the Conversion. We also hereby consent to the references to this
firm in the prospectus which is a part of both the Registration Statement and
the Form AC.
USE OF OPINION
--------------
This opinion is rendered solely for the benefit of the Holding Company, the
Bank and prospective investors in connection with the proposed transactions
described herein and is not to be relied upon or used for any other purpose
without our prior written consent.
Very truly yours,
/s/ Luse Lehman Gorman Pomerenk & Schick, P.C.
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
1085\taxopin
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF PEAT MARWICK LLP APPEARS HERE]
July 1, 1996
PRIVATE AND CONFIDENTIAL
Board of Directors
Community Bank of Excelsior Springs,
A Savings Bank
1001 North Jesse James Road
Excelsior Springs, Missouri 64024
Gentlemen:
Missouri Savings and Loan Association Privilege Tax Consequences of the
Conversion of Community Bank of Excelsior Springs, A Savings Bank from a Federal
Mutual Savings Institution to a Federal Stock Savings Institution
You have requested an opinion on the Missouri Savings and Loan Association
Privilege Tax consequences of the proposed conversion ("Conversion") of
Community Bank of Excelsior Springs ("Bank") from a federal mutual savings
institution to a federal stock savings institution ("Stock Bank"), pursuant to
the Plan of Conversion as adopted by the Bank on May 14, 1996.
CBES Bancorp, Inc. ("Holding Company") was organized in June 1996 by the Bank
for the purpose of acquiring all of the outstanding capital stock of Stock Bank,
which will be issued in the Conversion. The only significant assets of the
Holding Company will be the capital stock of the Stock Bank, the note evidencing
its loan to fund the Stock Bank's ESOP and approximately 50% of the net proceeds
from the Conversion. An offering is being made for the issuance of common stock
of the Holding Company, which will retain up to 50% of the net proceeds of the
issuance of the common stock and will use the remaining 50% of the net proceeds
to purchase all of the stock of Stock Bank issued in the Conversion.
The firm of Luse Lehman Gorman Pomerenk & Schink ("Firm") has acted as special
counsel to the Bank for purposes of this Conversion and they have furnished the
Bank with their opinion regarding the Federal income tax consequences of the
Conversion ("Federal Tax Opinion"). For purposes of this opinion, we are
relying on the representations provided to the Firm by the Bank, as set forth
below.
<PAGE>
[LOGO OF PEAT MARWICK LLP APPEARS HERE]
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 2
REPRESENTATIONS
1. The Conversion is implemented in accordance with the terms of the Plan of
Conversion (the "Plan") and all conditions precedent contained in the Plan
shall be performed or waived prior to the consummation of the Conversion.
2. The fair market value of the withdrawable deposit accounts plus interest in
the liquidation account ("Liquidation Account") of Stock Bank to be received
under the Plan, in each instance, shall be equal to the fair market value of
the membership interests (i.e., withdrawable deposit accounts, voting and
liquidation rights) in the Bank surrendered in exchange therefor.
3. Holding Company and Stock Bank each have no plan or intention to redeem or
otherwise re-acquire any of the stock issued in the proposed transaction.
4. To the best of the knowledge of the management of the Bank, there is no plan
or intention by any member of the Bank, who holds more than 1% of the
qualifying deposits in the Bank, and there is no plan or intention on the
part of the remaining members to dispose of their withdrawable deposit
accounts in Stock Bank that would reduce their aggregate interest in the
Liquidation Account as of the Effective Date of the Conversion, to less than
50% of the value of their interests in the Bank as of the same date.
5. Immediately following the consummation of the proposed transaction, Stock
Bank will possess the same assets and liabilities as the Bank held
immediately prior to the proposed transaction, plus proceeds from the sale of
stock of Stock Bank to Holding Company.
6. Assets used to pay expenses of the Conversion (without reference to the
expenses of the Direct Community Offering) and all distributions (except for
regular normal interest payments and other payments in the normal course of
business made by the Bank immediately preceding the transaction) will in the
aggregate constitute less than one percent (1%) of the net assets of the
Bank.
7. Following the proposed transaction, Stock Bank will continue the historic
business of the Bank or use a significant portion of the Bank's historic
business assets in the business.
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 3
8. Stock Bank has no plan or intention to sell or otherwise dispose of any of
the assets of the Bank acquired in the proposed transaction, except for
dispositions in the ordinary course of business.
9. There is no plan or intention for Stock Bank to be liquidated or merged with
another corporation following the Conversion.
10. Both Stock Bank and Holding Company have no plan or intention, either
currently or at the time of the Conversion, to issue additional shares of
stock following the proposed transaction, other than shares that may be
issued to employees and/or directors pursuant to certain stock option and
stock incentive plans or that may be issued to employee benefit plans.
11. Stock Bank has no plan or intention to reacquire any of its stock issued in
the proposed transaction.
12. The Bank is not under the jurisdiction of a court in any Title 11 or similar
case within the meaning of Section 368(a)(3)(A). The proposed transaction
does not involve a receivership, foreclosure, or similar proceeding before a
federal or state agency involving a financial institution to which Section
585 or 593 of the Code applies.
13. Compensation to be paid to depositor-employees of the Bank, Stock Bank or
Holding Company will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
14. No shares of Holding Company Conversion Stock will be issued to or purchased
by depositor-employees of the Bank, Stock Bank or Holding Company at a
discount or as compensation in the proposed transaction.
15. No cash or other property will be given to Eligible Account Holders or
others in lieu of (a) non-transferable subscription rights or (b) an
interest in the Liquidation Account of Stock Bank.
16. Bank utilizes a reserve for bad debts in accordance with Section 593 of the
Internal Revenue Code of 1986, as amended (the "Code") and, following the
conversion, Stock Bank shall likewise utilize a reserve for bad debts in
accordance with Section 593 of the Code.
17. At the time of the proposed transaction, the fair market value of the assets
of the Bank on a going concern basis will equal or exceed the amount of its
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 4
liabilities is to be assumed plus the amount of liabilities to which the
transferred assets are subject. Bank will have a positive regulatory net
worth at the time of the Conversion.
18. Bank, Stock Bank and Holding Company are corporations within the meaning of
Section 7701(a)(3) of the Code. Bank and Stock Bank are domestic building
and loan associations within the meaning of Section 7701(a)(19)(C) of the
Code.
19. Neither Bank nor Stock Bank is an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv) of the Code.
20. The exercise price of the subscription rights received by the Bank's
Eligible Account Holders and Supplemental Eligible Account Holders to
purchase Holding Company Stock will be equal to the fair market value of the
Holding Company Conversion Stock at the time of the completion of the
proposed transaction as determined by an independent appraisal.
21. The Bank has received or will receive an opinion from an independent
appraiser to the effect that the subscription rights to be received by
Eligible Account Holders and Supplemental Eligible Account Holders and other
eligible subscribers do not have any ascertainable fair market value.
22. The Bank's savings depositors will pay expenses of the conversion solely
attributable to them, if any. Holding Company and the Bank will pay their
own expenses for the transaction and will not pay any expenses solely
attributable to the savings depositors or to the Holding Company
stockholders. The stockholders of Holding Company will pay the expenses
incurred by themselves in connection with the proposed transaction.
23. The Eligible Account Holders', Supplemental Eligible Account Holders', and
Other Members' proprietary interests in the Bank arise solely by virtue of
the fact that they are account holders in the Bank.
24. No creditors of the Bank or the depositors in their role as creditors, have
taken any steps to enforce their claims against the Bank by instituting
Bankruptcy or other legal proceedings, in either a court or appropriate
regulatory agency, that would eliminate the proprietary interests of the
members prior to the Conversion of the Bank including depositors as equity
holders of the Bank.
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 5
25. The liabilities of the Bank assumed by Stock Bank plus the liabilities, if
any, to which the transferred assets are subject were incurred by the Bank
in the ordinary course of its business and are associated with the assets
transferred.
26. Holding Company has no plan or intention to sell or otherwise dispose of the
stock of Stock Bank received by it in the proposed transaction.
27. No amount of deposit accounts or deposits as of the Eligibility Record Date
will be excluded from participation in the Liquidation Account.
The Federal Tax Opinion contains the following opinions regarding the Federal
income tax consequences of the transactions described herein.
1. The change in the form of operation of the Bank from a federal mutual savings
institution to a federal stock savings institution, as described above, will
constitute a reorganization within the meaning of Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended ("Code"), and no gain or loss will
be recognized to either the Bank or to the Stock Bank as a result of such
conversion. (See Rev. Rul. 80-105, 1980-1 C.B. 78). The Bank and the Stock
Bank will each be a party to a reorganization within the meaning of Section
368(b) of the Code. (Rev. Rul. 72-206, 1972-1 C.B. 104)
2. No gain or loss will be recognized by the Stock Bank on the receipt of money
from the Holding Company in exchange for shares of common stock the Stock
Bank. (Section 1032(a) of the Code).
3. The Holding Company will recognize no gain or loss upon receipt of money from
stockholders in exchange for shares of Holding Company Conversion Stock.
(Section 1032(a) of the Code).
4. The assets of the Bank will have the same basis in the hands of the Stock
Bank as in the hands of the Bank immediately prior to the Conversion.
(Section 362(b) of the Code).
5. The holding period of the assets of the Bank to be received by the Stock Bank
will include the period during which the assets were held by the Bank prior
to the Conversion. (Section 1223(2) of the Code).
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 6
6. No gain or loss will be recognized by the depositors of the Bank upon the
issuance to them of withdrawable deposit accounts in the Stock Bank in the
same dollar amount as their deposit accounts in the Bank plus an interest in
the Liquidation Account of the Stock Bank, as described above, in exchange
for their deposit accounts in the Bank. (Section 354(a) of the Code).
7. The basis of the depositors' deposit accounts in the Stock Bank received by
the depositors of the Bank will be the same as the basis of their deposit
accounts in the Bank surrendered in exchange therefor. The basis of each
account holder's interests in the Liquidation Account of the Stock Bank
received by the depositors will be zero, that being the cost of such
property. The basis of the non-transferable subscription rights will be
zero, provided that such subscription rights are not deemed to have a fair
market value and that the subscription price of such stock issuable upon
exercise of such rights is equal to the fair market value of such stock. The
basis of the Holding Company Conversion Stock to its stockholders will be
the purchase price thereof, increased by the basis, if any, of the
subscription rights exercised. (Section 1012 of the Code). The stockholder's
holding period will commence upon the exercise of the subscription rights.
(Section 1223(6) of the Code).
8. Provided that the amount to be paid for Holding Company Stock pursuant to
the exercise of subscription rights is equal to the fair market value of
such Common Stock, no gain or loss will be recognized by depositors under
the Plan upon the distribution to them of non-transferable subscription
rights to purchase shares of Holding Company Conversion Stock. (Rev. Rul.
56-572, 1956-2 C.B. 234).
9. For purposes of Section 381 of the Code, the Stock Bank will be treated as
if there has been no reorganization. Accordingly, the taxable year of the
Bank will not end on the effective date of the Conversion merely because of
the transfer of assets of the Bank to the Stock Bank, and the tax attributes
of the bank will be taken into account by the Stock Bank as if there had
been no reorganization. (Treas. Reg. (S)1.381(b)-(1)(a)(2)).
10. The part of the taxable year of the Bank before the reorganization and the
part of the taxable year of the Stock Bank after the reorganization will
constitute a single taxable year of the Stock Bank. (Treas. Reg.
(S)1.381(b)-(1)(a)(2); Rev. Rul. 57-276, 1957-1 C.B. 126).
11. Pursuant to the provisions of Section 381(c)(4) of the Code and Treas. Reg.
Section 1.381(c)(4)-1(a)(1)(ii), the Stock Bank will succeed to and take
into account, immediately after the reorganization, those accounts of the
Bank which represent bad debt reserves in respect of which the Bank has
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 7
taken a bad debt deduction for taxable years ending on or before the date of
transfer. The bad debt reserves will not be required to be restored to the
gross income of either the Bank or the Stock Bank for the taxable year of
the transfer, and such bad debt reserves will have the same character in the
hands of the Stock Bank as they would have had in the hands of the Bank if
no distribution or transfer had occurred. (Section 593(e) of the Code).
12. Regardless of any book entries that are made for the establishment of the
Liquidation Account, the Conversion, as described above, will not diminish
the accumulated earnings and profits of the Stock Bank available for the
subsequent distribution of dividends within the meaning of Section 316 of
the Code. (Treas. Reg. (S)1.312-11(b) and (c)). The creation of the
Liquidation Account on the records of the Stock Bank will have no effect on
its taxable income, deductions for additions to reserves for bad debts under
Section 593 of the Code, or distributions to stockholders under Section
593(e) of the Code. (Rev. Rul. 68-475, 1968-2 C.V. 259).
13. A shareholder's holding period for Holding Company Conversion Stock acquired
through the exercise of the Subscription Rights shall begin on the date on
which the Subscription Rights are exercised. (Section 1223(6) of the Code).
The holding period for the Holding Company Conversion Stock purchased
pursuant to the Community Offering or Public Offering or under other
purchase arrangements will commence on the date following the date on which
such stock is purchased. (Rev. Rul. 70-598, 1970-2 C.B. 168).
STATEMENT OF MISSOURI LAW
Chapter 148 of the Missouri Revised Statutes, in part, imposes a privilege tax
on savings and loan associations doing business in Missouri. This franchise tax
is measured by net income and is imposed at a rate of 7 percent of the
association's "net income."
Section 148.630 of the Missouri Revised Statutes provides as follows:
1. "Net income" means gross income as defined in subsection 2 of this section
minus the deductions allowed in subsection 3 of this section;
2. "Gross income" shall include all gains, profits, earnings and other income
of the taxpayer from whatever sources derived during the income period;
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 8
3. In computing net income there shall be allowed as deductions all ordinary
and necessary expenses paid or incurred by the taxpayer during the income
period in carrying on its trade or business."
As quoted above, the language of the Missouri Statute defining "gross income" is
nearly identical to Section 61 of the Code, which defines gross income as "all
income from whatever source derived." Further, in accordance with long-standing
state administrative policy and with the tax return form used to compute the
Missouri privilege tax, federal taxable income is the starting point in
computing Missouri net income for privilege tax purposes.
OPINION
Because Federal taxable income is the starting point in computing Missouri net
income for privilege tax purposes and because based on the Federal Tax Opinion
there is no Federal taxable income to Bank or Stock Bank as a result of the
Conversion then it is the opinion of KPMG Peat Marwick LLP (KPMG) that there
will be no Missouri privilege tax to Bank or Stock Bank as result of the
Conversion.
Our opinions contained herein are expressly limited to the Missouri Savings and
Loan Association privilege tax discussed above and are specifically predicated
upon the Federal Tax Opinion being correct, and because the federal tax rules
are the starting point for Missouri purposes we are assuming the Federal Tax
Opinion is correct. No opinion, either express or implied, is given on any
matter not expressly discussed above.
Our opinions expressed herein are based solely upon current provisions of the
Missouri Revised Statutes, as amended, including applicable regulations
thereunder and current judicial and administrative authority. Any future
amendments of the Missouri Revised Statutes, or applicable regulations, or new
judicial decisions or administrative interpretations, any of which could be
retroactive in effect, could cause us to modify our opinion. No opinion is
expressed herein with regard to any federal tax matter or state tax consequences
of the Conversion under any section of the Missouri Revised Statutes except if
and to the extent specifically addressed.
In particular, it is expressly understood and agreed to by Bank, Stock Bank, and
Holding Company that KPMG is relying solely on the Federal Tax Opinion in all
<PAGE>
Board of Directors
Community Bank of Excelsior Springs
July 1, 1996
Page 9
respects relating to the Federal tax consequences of the matters described
herein. KPMG has not independently verified the accuracy of any matter
contained in the Federal Tax Opinion and should any matter addressed therein not
be correct, it could cause the Missouri Savings and Loan Association Privilege
Tax opinion contained herein to also be incorrect.
Since this letter is rendered in advance of the closing of this transaction, we
have assumed that the transaction will be consummated in accordance with the
Plan of Conversion as well as all the information and representations referred
to herein. Any change in the transaction could cause us to modify our opinion.
Very truly yours,
/s/ KPMG Peat Marwick LLP
- ---------------------------------
KPMG Peat Marwick LLP
DMF:waj
<PAGE>
EXHIBIT 10.3
[Form of Employment Agreement for Mr. Goettling, Ms. Teegarden and Mr. Hartman]
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this ___
day of __________, 199_, by and between Community Bank of Excelsior Springs, a
Savings Bank (hereinafter referred to as the "Bank" whether in mutual or stock
form), and ______________ (the "Employee").
WHEREAS, the Employee is currently serving as ___________________ of the
Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will
convert to capital stock form as the subsidiary of CBES Bancorp, Inc. (the
"Holding Company"), subject to the approval of the Bank's members and the Office
of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of the
Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company or
the Bank, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee to take effect as stated in Section 2
hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
-----------
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding Company within the
meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect
on the date hereof; or (ii) would be required to be reported in response to Item
1 of the current report on Form 8-K, as in effect on the date hereof, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange
<PAGE>
Act), directly or indirectly of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
securities; (3) individuals who are members of the board of directors of the
Bank or the Holding Company on the date hereof (the "Incumbent Board") cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the nominating committee serving under an Incumbent Board, shall
be considered a member of the Incumbent Board; or (4) a reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Bank or the
Holding Company or a similar transaction in which the Bank or the Holding
Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of the Bank or
the Holding Company or the acquisition of securities of the Bank by the Holding
Company in connection with the Conversion. In the application of 12 C.F.R. Part
574 to a determination of a Change in Control, determinations to be made by the
OTS or its Director under such regulations shall be made by the Board of
Directors.
(b) The term "Commencement Date" means the date of completion of
Conversion.
(c) The term "Date of Termination" means the date upon which the
Employee ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written consent, and shall
include a material diminution of or interference with the Employee's duties,
responsibilities and benefits as _________ of the Bank, including (without
limitation) any of the following actions unless consented to in writing by the
Employee: (1) a change in the principal workplace of the Employee to a location
outside of a 30 mile radius from the Bank's headquarters office as of the date
hereof; (2) a material demotion of the Employee; (3) a material reduction in the
number or seniority of other Bank personnel reporting to the Employee or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other than
as part of a Bank- or Holding Company-wide reduction in staff; (4) a material
adverse change in the Employee's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the Bank or
the Holding Company; and (5) a material permanent increase in the required hours
of work or the workload of the Employee. The term "Involuntary Termination"
does not include Termination for Cause or termination of employment due to
retirement, death, disability or suspension or temporary or permanent
prohibition from participation in the conduct of the Bank's affairs under
Section 8 of the Federal Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of
2
<PAGE>
any provision of this Agreement. The Employee shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee has engaged in conduct described in
the preceding sentence and specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of eighteen (18)
----
months commencing on the Commencement Date, subject to earlier termination as
provided herein. Beginning on the first six month anniversary of the
Commencement Date, and on each six month anniversary thereafter, the term of
this Agreement shall be extended for a period of six months in addition to the
then-remaining term, provided that (1) the Bank has not given notice to the
-------------
Employee in writing at least 90 days prior to such anniversary that the term of
this Agreement shall not be extended further; and (2) prior to such anniversary,
the Board of Directors of the Bank explicitly reviews and approves the
extension. Reference herein to the term of this Agreement shall refer to both
such initial term and such extended terms.
3. Employment. The Employee is employed as _____________ of the Bank. As
----------
such, the Employee shall render administrative and management services as are
customarily performed by persons situated in similar executive capacities, and
shall have such other powers and duties of an officer of the Bank as the Board
of Directors may prescribe from time to time.
4. Compensation.
------------
(a) Salary. The Bank agrees to pay the Employee during the term of
------
this Agreement, not less frequently than monthly, the salary established by the
Board of Directors, which shall be at least the Employee's salary in effect as
of the Commencement Date. The amount of the Employee's salary shall be reviewed
by the Board of Directors, beginning not later than the first anniversary of the
Commencement Date. Adjustments in salary or other compensation shall not limit
or reduce any other obligation of the Bank under this Agreement. The Employee's
salary in effect from time to time during the term of this Agreement shall not
thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
---------------------
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
--------
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
-------- ----
accounts for such expenses as required under such policies and procedures.
3
<PAGE>
5. Benefits.
--------
(a) Participation in Retirement and Employee Benefit Plans. The
------------------------------------------------------
Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life and disability insurance, medical and dental
coverage, education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate.
(b) Fringe Benefits. The Employee shall be eligible to participate in,
---------------
and receive benefits under, any fringe benefit plans which are or may become
applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid
----------------
vacation in accordance with the policies established by the Bank's Board of
Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Bank may determine in its discretion.
7. Termination of Employment.
-------------------------
(a) Involuntary Termination. The Board of Directors may terminate the
-----------------------
Employee's employment at any time, but, except in the case of Termination for
Cause, termination of employment shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. In the event of
Involuntary Termination other than in connection with or within twelve (12)
months after a Change in Control, (1) the Bank shall pay to the Employee during
the remaining term of this Agreement, the Employee's salary at the rate in
effect immediately prior to the Date of Termination, payable in such manner and
at such times as such salary would have been payable to the Employee under
Section 4 if the Employee had continued to be employed by the Bank, and (2) the
Bank shall provide to the Employee during the remaining term of this Agreement
substantially the same health benefits as the Bank maintained for its executive
officers immediately prior to the Date of Termination.
(b) Termination for Cause. In the event of Termination for Cause,
---------------------
the Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(c) Voluntary Termination. The Employee's employment may be
---------------------
voluntarily terminated by the Employee at any time upon 90 days written notice
to the Bank or upon such shorter period as may be agreed upon between the
Employee and the Board of Directors of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee the
Employee's salary and benefits only through the Date of Termination, at the time
such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination in
-----------------
connection with or within 12 months after a Change in Control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, (1) pay to the Employee in a lump sum in
cash within 25 business days after the
4
<PAGE>
Date of Termination an amount equal to 150% of the Employee's salary during the
preceding calendar year, including bonuses and any other cash compensation paid
to the Employee during that year; and (2) provide to the Employee during the
remaining term of this Agreement substantially the same health benefits as the
Bank maintained for its executive officers immediately prior to the Change in
Control.
(e) Death; Disability. In the event of the death of the Employee
-----------------
while employed under this Agreement and prior to any termination of employment,
the Employee's estate, or such person as the Employee may have previously
designated in writing, shall be entitled to receive from the Bank the salary of
the Employee through the last day of the calendar month in which the Employee
died. If the Employee becomes disabled as defined in the Bank's then current
disability plan, if any, or if the employee is otherwise unable to serve as
______________, this Agreement shall continue in full force and effect, except
that the salary paid to the Employee shall be reduced by any disability
insurance payments made to Employee on policies of insurance maintained by the
Bank at its expense.
(f) Temporary Suspension or Prohibition. If the Employee is suspended
-----------------------------------
and/or temporarily prohibited from participating in the conduct of the Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12
U.S.C. (S) 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (1) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is removed
-----------------------------------
and/or permanently prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12
U.S.C. (S) 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
-------------------
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this Agreement
-------------------------
shall be terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank: (1) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA; or (2) by the Director or his or her
designee, at the time the Director or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by any
such action.
5
<PAGE>
8. Certain Reduction of Payments by the Bank.
-----------------------------------------
(a) Notwithstanding any other provision of this Agreement, if payments
under this Agreement, together with any other payments received or to be
received by the Employee in connection with a Change in Control would be deemed
to include an "excess parachute payment" pursuant to Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), then benefits under this
Agreement shall be reduced (not less than zero) to the extent necessary to avoid
the payment of an excess parachute payment by the Bank. The Employee shall
determine the allocation of such reduction among payments to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
(S) 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination, or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
--------------
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
11. No Assignments.
--------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 7(d) hereof. For purposes of implementing the provisions of
this Section 11(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors,
6
<PAGE>
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amounts would still be payable to the Employee
hereunder if the Employee had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Employee's devisee, legatee or other designee or if there is no
such designee, to the Employee's estate.
12. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. Headings. The headings used in this Agreement are included solely for
--------
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
-------------
United States to the extent applicable and otherwise by the laws of the State of
Missouri.
17. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
[Remainder of Page Intentionally Left Blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: COMMUNITY BANK OF EXCELSIOR
SPRINGS, A SAVINGS BANK
- ---------------------------- --------------------------------
Secretary By:
Its:
Employee
--------------------------------
8
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
--------------------
The Board of Directors
Community Bank of Excelsior Springs, a Savings Bank
We consent to the use in this Registration Statement of CBES Bancorp, Inc. Form
SB-2 and the Application for Conversion on Form AC of our report dated August
25, 1995, on the consolidated financial statements of Community Bank of
Excelsior Springs, a Savings Bank and subsidiary as of June 30, 1995 and 1994,
and for the fiscal years ended June 30, 1995 and 1994, and to the references to
our firm under the headings "Legal and Tax Matters" and "Experts" in the related
prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Kansas City, Missouri
July 31, 1996
<PAGE>
CERTIFICATION FORM
(This Signed Form Must Accompany A Signed Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE
("COMMON STOCK"), OF CBES BANCORP, INC. (THE "CORPORATION"), THE PROPOSED
HOLDING COMPANY FOR COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
("COMMUNITY BANK" OR THE "BANK"), ARE NOT GUARANTEED BY THE CORPORATION,
COMMUNITY BANK OR THE FEDERAL GOVERNMENT.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Office of Thrift Supervision
Regional Director, Frederick R. Casteel, at (214) 281-2000.
I further certify that, before purchasing the shares of Common Stock of the
Corporation, I received a copy of the Prospectus dated August xx, 1996 which
discloses the nature of the shares of Common Stock being offered thereby, and
describes the following risks involved in an investment in the Common Stock
under the heading "Risk Factors" beginning on page xx of the Prospectus:
1. Increased Credit and Other Risks Associated with Construction and Land
Lending.
2. Geographical Concentration of Loans.
3. Credit Risks and Risks to Collateral Values Associated with Automobile
Lending.
4. Potential Inadequacy of Allowance for Loan Losses.
5. Reduced Return on Equity.
6. Takeover Defensive Provisions.
7. Interest Rate Risk Exposure.
8. Regulatory and Statutory Provisions.
9. Employment Agreements and Other Benefit Plans; Voting Control of
Directors and Executive Officers and Possible Dilutive Effects.
10. Regulatory Oversight.
11. Recapitalization of SAIF, Disparity Between BIF and SAIF Premiums.
12. Pending Legislation Limiting Deduction of Bad Debt.
13. Competition.
14. Risk of Delayed Offering.
15. Absence of Active Market for the Common Stock.
16. Possible Consequences of Amendment to Plan of Conversion.
For a more detailed description of the risks involved in the offering, see
"Risk Factors" at pages xx through xx of the Prospectus.
Signature:
-------------------------------
Signature:
-------------------------------
(Note: If stock is to be held jointly, both parties must sign)
----
Date:
---------------------
