<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission File Number 0-21163
CBES BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 43-1753244
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1001 North Jesse James Road, Excelsior Springs, Missouri 64024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 630-6711
-----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X . NO .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended June 30, 1997 were $8
million.
As of September 23, 1997, there were issued and outstanding 1,024,958
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the registrant, computed by reference to
the closing bid price of such stock on the Nasdaq Small Cap Market as of
September 23, 1997, was $17.9 million. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)
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DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of Form 10-KSB - Portions of Annual Report to Stockholders
for the fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Portions of Proxy Statement for 1997 Annual
Meeting of Stockholders.
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PART I
Item 1. Description of Business
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General
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CBES Bancorp, Inc. ("CBES Bancorp" and, with its subsidiaries, the
"Company") was formed in June 1996 at the direction of Community Bank of
Excelsior Springs, a Savings Bank ("Community Bank" or the "Bank") for the
purpose of owning all of the outstanding stock of the Bank issued upon the
conversion of the Bank from the mutual to stock form (the "Conversion"). On
September 27, 1996, CBES Bancorp acquired all of the shares of the Bank in
connection with the completion of the Conversion. All references to the Company,
unless otherwise indicated, at or before September 27, 1996 refer to the Bank.
The Company's common stock is quoted on the NASDAQ SmallCap Market under the
symbol "CBES".
Community Bank is a federally chartered 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
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation (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 June 30, 1997, Community Bank had total assets of $101.1
million, deposits of $70.7 million and stockholders' equity of $17.8 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 June 30, 1997, the Bank's total loan
portfolio was $104.2 million, of which 55.0% were one- to four-family
residential mortgage loans, 29.1% were construction and land loans (the vast
majority of which related to single-family residential properties), and 10.5%
were consumer loans. During the fiscal year ended June 30, 1997, the Bank
originated $15.4 million of fixed-rate one- to four-family residential mortgage
loans, of which $11.2 million, or 72.7%, were sold in the secondary market. See
"Lending Activities." To a substantially lesser extent, the Bank invests in
various investment securities, including mortgage-backed securities.
The executive office of the Company and the Bank is located at 1001 North
Jesse James Road, Excelsior Springs, Missouri 64024 and their telephone number
is (816) 630-6711.
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
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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 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
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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 June
30, 1997, the maximum amount which the Bank could have lent under this limit to
any one borrower and the borrower's related entities was approximately $3.8
million. At June 30, 1997, 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 June 30, 1997 was approximately $1.8 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 June 30, 1997, all
of these loans were performing in accordance with their terms.
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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 June 30,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------- -----------------
Amount Percent Amount Percent Amount Percent
-------- -------- ------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential..... $ 57,260 54.98% $52,661 57.81% $55,257 64.46%
Multi-family........................ 748 0.72 315 0.35 134 0.16
Commercial.......................... 1,520 1.46 1,082 1.19 818 0.95
Land................................ 3,393 3.26 4,006 4.40 1,992 2.32
Construction........................ 30,332 29.12 22,461 24.66 16,221 18.93
-------- ------ ------- ------ ------- ------
Total real estate loans.............. 93,253 89.54 80,525 88.39 74,422 86.82
-------- ------ ------- ------ ------- ------
Consumer loans:
Direct automobile loans............. 6,585 6.32 6,527 7.16 6,426 7.50
Indirect automobile loans........... 2,034 1.95 2,114 2.32 2,960 3.45
Deposit accounts.................... 548 0.53 499 0.55 524 0.61
Home improvement.................... 69 0.07 218 0.24 279 0.33
Commercial loans.................... 213 0.20 0 0.00 0 0.00
Other............................... 1,451 1.39 1,214 1.33 1,107 1.29
-------- ------ ------- ------ ------- ------
Total consumer loans............. 10,900 10.46 10,572 11.61 11,296 13.18
-------- ------ ------- ------ ------- ------
Total loan portfolio............. 104,153 100.00% 91,097 100.00% 85,718 100.00%
====== ====== ======
Less:
Loans in process.................... 12,350 11,015 6,391
Deferred loan origination fees and
discounts on loans, net........... 350 284 221
Allowance for loan losses........... 436 388 226
-------- ------- -------
Total loans receivable, net....... $ 91,017 79,410 $78,880
======== ======= =======
</TABLE>
5
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The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
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............. $ 10,263 9.85% $ 7,509 8.24% $ 6,924 8.08%
Multi-family.................... -- -- 31 0.03 44 0.05
Commercial...................... 509 0.49 147 0.16 -- --
Land............................ 180 0.17 678 0.74 280 0.33
Construction.................... 27,898 26.79 22,461 24.66 16,221 18.93
-------- ------ ------- ------ ------- -------
Total real estate loans.......... 38,850 37.30 30,826 33.83 23,469 27.38
-------- ------ ------- ------ ------- -------
Consumer loans................... 10,670 10.25 10,323 11.33 11,296 13.18
-------- ------ ------- ------ ------- -------
Total fixed-rate loans....... 49,520 47.55 41,149 45.16 34,765 40.56
-------- ------ ------- ------ ------- -------
Adjustable Rate Loans:
Real estate:
One- to four-family............. $ 46,997 45.12% $45,152 49.57% $48,333 56.39%
Multi-family.................... 748 0.72 284 0.31 90 0.10
Commercial...................... 1,011 0.97 935 1.03 818 0.95
Land............................ 3,213 3.08 3,328 3.65 1,712 2.00
Construction.................... 2,434 2.34 -- -- -- --
-------- ------ ------- ------ ------- -------
Total real estate loans.......... 54,403 52.23 49,699 54.56 50,953 59.44
-------- ------ ------- ------ ------- -------
Consumer loans................... 230 0.22 249 0.27 -- --
-------- ------ ------- ------ ------- -------
Total adjustable-rate loans.. 54,633 52.45 49,948 54.83 50,953 59.44
-------- ------ ------- ------ ------- -------
Total loan portfolio......... 104,153 100.00% 91,097 100.00% 85,718 100.00%
====== ====== =======
Less:
Loans in process................ 12,350 11,015 6,391
Deferred fees and discounts..... 350 284 221
Allowance for losses............ 436 388 226
-------- ------- -------
Total loans receivable, net... $ 91,017 $79,410 $78,880
======== ======= =======
</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 June 30, 1997, the Bank had $57.3 million, or 55.0% 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 longer-term fixed-rate residential real estate
loans. During fiscal 1997, the Bank retained in portfolio certain fixed-rate
mortgage loan originations which provided for a 30-year amortization schedule
with a 5-year balloon payment feature and certain second mortgage loans with
terms to maturity from two to 15 years. As of June 30, 1997, $10.3 million, or
9.8% 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.
6
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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 fiscal year ended June 30, 1997,
of the $15.4 million in fixed-rate residential one- to four-family loans
originated by the Bank, $11.2 million of such loans, or 72.7%, 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 $47.0
million, or 45.1% of the Bank's total loan portfolio at June 30, 1997. 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 fiscal year ended June 30, 1997, the Bank originated $15.4 million in
fixed-rate residential mortgage loans and $11.1 million of ARM loans. During
fiscal 1996, the Bank originated $19.1 million of fixed-rate residential
mortgage loans and $6.3 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. 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. 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
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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 June 30, 1997:
<TABLE>
<CAPTION>
Outstanding Percent of
Loan Balance/(1)/ Total
----------------- -----------
<S> <C> <C>
(Millions)
Speculative..................... $25,135 74.5%
Contract........................ 1,283 3.8
Construction.................... 3,914 11.6
------- -----
Total construction............. 30,332 89.9
Land............................ 3,393 10.1
------- -----
Total construction and land.. $33,725 100.0%
------- -----
</TABLE>
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/(1)/Includes loans in process.
At June 30, 1997, the Bank's $30.3 million of construction loans and
$3.4 million of land loans represented 29.1% and 3.3%, respectively, of total
loans receivable. At the same time, the Bank's $25.1 million of speculative
construction loans represented 24.1% 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,
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.
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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 June 30, 1997, the Bank had
8 borrowers for which speculative construction loans outstanding totaled more
than $1.0 million. The foregoing builders with speculative construction and land
loans totaling more than $1.0 million have 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
June 30, 1997, the Bank had speculative construction loans secured by properties
in 71 subdivisions of which 4 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 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 June 30, 1997, the Bank had total land loans of $3.4
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.
Multi-Family and Commercial Real Estate Lending. The Bank also
originates loans secured by multi-family and commercial real estate. At June 30,
1997, $2.3 million, or 2.5%, 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
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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 June 30, 1997, the Bank's consumer loan portfolio totaled $10.9 million, or
10.5% 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 June 30, 1997, the Bank's indirect automobile loans totaled
$2.0 million, or 2.2% of the Bank's loan portfolio and direct automobile loans
totalled $6.6 million, or 7.2% 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 June 30, 1997, the Bank's FHA Title I home improvement loans totaled
$165,000, or 0.2% of the Bank's loan portfolio.
10
<PAGE>
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 June 30, 1997, the Bank's
second mortgage/home equity loans totaled $1,870,000, or 2.1% 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 June 30, 1997, the Bank's lines of credit secured by first or second
mortgages totaled $1.5 million, or 1.7% 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 June 30, 1997, $110,000 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.
11
<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, 1997.
Mortgages 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, 1997 that
have predetermined interest rates is $27.1 million, and that have floating or
adjustable rates is $43.2 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,
- -----------------------------------
1998............................... $ 886 8.66% $ -- --% $ 151 8.86% $30,332 7.94%
1999............................... 182 8.55 -- -- 3 9.00 -- --
2000............................... 313 9.21 4 8.13 -- -- -- --
2001 and 2002...................... 2,260 9.81 557 9.27 628 8.77 -- --
2003 to 2007....................... 4,130 8.69 183 8.95 232 8.59 -- --
2008 to 2022....................... 17,204 8.14 851 8.52 651 8.62 -- --
2023 and following................. 32,285 8.18 673 8.89 1,728 8.59 -- --
------- ----- ------ ---- ------- ----- ------- ----
$57,260 8.28% $2,268 8.85% $3,393 8.64% $30,332 7.94%
<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,
- -----------------------------------
1998............................... $ 2,502 9.48% $33,871 8.08%
1999............................... 1,280 10.68 1,465 10.41
2000............................... 1,938 10.24 2,255 10.09
2001 and 2002...................... 5,089 9.77 8,534 9.68
2003 to 2007....................... 88 9.48 4,633 8.71
2008 to 2022....................... 3 9.00 18,709 8.17
2023 and following................. -- -- 34,686 8.21
------- ----- -------- ----
$10,900 9.89% $104,153 8.38%
</TABLE>
12
<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 fiscal year ended June 30, 1997, the
Bank originated $56.1 million in fixed-rate loans and $13.8 million in
adjustable-rate loans. For the year ended June 30, 1996, the Bank originated
$55.7 million in fixed-rate loans and $9.5 million in adjustable-rate loans.
In recent years, the Bank has not purchased loans. For the fiscal years
ended June 30, 1997 and 1996, 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 year ended June 30, 1997, the Bank sold
$11.2 million in conforming residential one- to four-family loans, compared to
$16.1 million for the year ended June 30, 1996. Virtually all of 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>
Year Ended June 30,
----------------------------
1997 1996 1995
--------- --------- --------
Originations by type: (In Thousands)
<S> <C> <C> <C>
Adjustable rate:
Real estate -
One- to four-family residential....... $11,103 $ 6,253 $19,693
Multi-family.......................... 488 52 --
Commercial............................ 243 399 382
Land.................................. 1,257 2,592 1,176
Consumer............................... 751 232 --
-------- ------- -------
Total adjustable rate................... 13,842 9,528 21,251
-------- ------- -------
Fixed rate:
Real estate -
One- to four-family residential....... 15,370 19,083 6,605
Land.................................. 244 452 198
Construction.......................... 30,596 27,460 19,903
Consumer............................... 9,329 8,680 10,956
------- ------- -------
Commercial Business..................... 213 -- --
Total fixed rate........................ 56,118 55,742 37,662
------- ------- -------
Total loans originated.................. 69,960 65,270 58,913
Sales and Repayments:
Real Estate -
One- to four-family residential........ 11,201 16,091 4,721
------- ------- -------
Total loans sold....................... 11,201 16,091 4,721
Principal repayments.................... 48,407 53,692 26,409
------- ------- -------
Total sales and repayments............. 59,608 69,783 31,130
Decrease (increase) in other items, net.. (1,449) (4,849) (2,356)
------- ------- -------
Net (decrease) increase................ $ 8,903 $ 336 $25,427
======= ======= =======
</TABLE>
13
<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
June 30, 1997, 1996 and 1995, the percentage of total loans delinquent 90 days
or more to net loans receivable were 0.54%, 0.47% and 0.19%, 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 June 30, 1997, the Bank has $168,000 in property classified as
real estate owned.
The following table sets forth information with respect to the
Bank's delinquent loans at June 30, 1997.
<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 5 $269 0.47% 5 $237 0.41% 10 $506 0.88%
Consumer 7 25 0.23 5 24 0.23 12 49 0.46
Construction or
Development
Total 0 0 0 227 0.75 2 227 0.75
------ ------ -------- ------ ------ -------- ------ ------ --------
12 $294 0.32% 12 $488 0.54% 24 $782 0.86%
</TABLE>
14
<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 had no material restructured loans within the meaning of
SFAS No. 15.
<TABLE>
<CAPTION>
At June 30,
-----------------------------
1997 1996 1995
------- ------------ ------
(Dollars In Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 806 $ 324 $ 81
Consumer....................................... 110 88 52
------ ----- -----
Total....................................... 916 412 133
------ ----- -----
Accruing loans delinquent more than 90 days:/(1)/
One- to four-family............................ -- 232 17
Consumer....................................... -- -- --
------ ----- -----
Total....................................... -- 232 17
------ ----- -----
Foreclosed assets:
One- to four-family............................ 168 -- --
Land........................................... -- -- --
Consumer....................................... 73 11 12
------ ----- -----
Total....................................... 241 11 12
------ ----- -----
Total non-performing assets........................ $1,157 $ 655 $ 162
====== ===== =====
Total loans delinquent 90 days or more
to net loans receivable.......................... 0.54% 0.47% .19%
====== ===== =====
- -----------------
</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 fiscal year ended June 30, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $36,000. The amount that was included in
interest income on such loans was $35,000 for the fiscal year ended June 30,
1997.
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.
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.
15
<PAGE>
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 June 30, 1997, the Bank had classified a total of $327,912 of
its assets as substandard. At June 30, 1997, the Bank had $6,519 of its assets
classified as doubtful and had no assets classified as loss. At June 30, 1997,
total classified assets comprised $334,430, or 1.88% of the Bank's capital and
0.33% 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 June 30, 1997, 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 June 30, 1997, the Bank had $168,000 in 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 June 30, 1997, the Bank had a total allowance for loan losses
of $436,000, representing 37.7% of total non-performing loans and .48% of the
Bank's loans receivable, net. See Note 1 of the Notes to Consolidated Financial
Statements.
16
<PAGE>
The following table sets forth the allocation for loan losses by category for
the periods indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ----------------------------- --------------------------------
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.......... $ 41 $ 57,260 54.98% $ 44 $52,661 57.81% $ 34 $55,257 64.46%
Multi-family................. 3 748 0.72 2 315 0.34 1 134 0.16
Commercial real estate....... 9 1,520 1.46 6 1,082 1.19 4 818 0.95
Land......................... 30 3,393 3.26 23 4,006 4.40 8 1,992 2.32
Construction or development.. 208 30,332 29.12 172 22,461 24.66 58 16,221 18.93
Consumer..................... 145 10,900 10.46 141 10,572 11.60 121 11,296 13.18
---- ------- ------ ----- ------- ------
Total................... $436 $104,153 100.00% $388 $91,097 100.00% $ 226 $85,718 100.00%
======== ====== ==== ======= ------ ===== ======= ======
</TABLE>
17
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period.......... $ 388 $ 226 $ 163
------ ------ ------
Charge-offs:
One- to four-family.................... -- -- 10
Consumer............................... 53 107 161
------ ------ ------
53 107 171
Recoveries:
Consumer............................... 41 33 63
------ ------ ------
41 33 63
------ ------ ------
Net charge-offs......................... 12 74 108
Provision for loan losses............... 60 236 171
------ ------ ------
Balance at end of period................ $ 436 $ 388 $ 226
====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period..................... 0.01% 0.09% 0.16%
====== ====== ======
Ratio of allowance for loan loss to
ending loans receivable, net........... 0.48% 0.49% 0.29%
====== ====== ======
Ratio of allowance for loan loss to non-
performing assets at end of period..... 37.68% 59.24% 59.47%
====== ====== ======
</TABLE>
18
<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 June 30, 1997, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 6.37%. See"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 June 30,
1997, the Bank's investment in mortgage-backed securities totaled $154,352, or
0.15% of its total assets. At June 30, 1997 and 1996, 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>
Year Ended June 30,
---------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Purchases................ $ -- $ -- $ --
Sales.................... -- (2,914) --
Repayments............... (246) (554) (965)
------ ------- ------
Net increase (decrease).. $ (246) $(3,468) $ (965)
====== ======= ======
</TABLE>
19
<PAGE>
Other Investments. At June 30, 1997, the Bank's investment securities
other than mortgage-backed securities consisted of federal agency obligations,
FHLB stock and other FHLB interest-earning assets. The Bank no longer invests in
mutual funds.
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 June 30, 1997, 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 June 30, 1997 and 1996.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1997 1996 1995
--------------- --------------- ----------------
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............. $ 996 18.27% $1,974 34.87% $1,962 31.12%
Mutual funds............. -- -- -- -- 1,079 17.11
------ ------ ------ ------ ------ ------
Subtotal................... 996 18.27 1,974 34.87 3,041 48.23
Investment securities
held-to-maturity.......... $ 100 1.83% $ 100 1.77% $ 0 0%
------ ------ ------ ------ ------ ------
Subtotal................... $ 100 1.83% $ 100 1.77% $ 0 0%
FHLB stock................. 811 14.88 811 14.32 795 12.61
------ ------ ------ ------ ------ ------
Total investment
securities and
FHLB stock............. 1,907 34.98 2,885 50.96 3,836 60.84
------ ------ ------ ------ ------ ------
Other interest-earning
assets:
FHLB certificates of
deposit................. -- -- -- -- -- --
FHLB checking............ 3,544 65.02 2,776 49.04 2,417 38.34
FHLB daily time.......... -- -- -- -- 52 0.82
------ ------ ------ ------ ------ ------
Total other
interest-earnings
assets................. 3,544 65.02 2,776 49.04 2,469 39.16
------ ------ ------ ------ ------ ------
Total investment portfolio. $5,451 100.00% $5,661 100.00% $6,305 100.00%
====== ====== ====== ====== ====== ======
Average remaining life of
investment
securities available for
sale.................... 0.50 years 0.91 years 1.92 years
</TABLE>
20
<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 June 30, 1997.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------------
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>
Investment Securities............... $ 2 $ 15 $ 19 $ 64 $ 100 $ 100
----- ----- ----- ----- ----- -----
Federal agency obligations.......... $ 996 $ -- $ -- $ -- $ 996 $ 996
----- ----- ----- ----- ----- -----
Total investment securities......... $ 998 $ 15 $ 19 $ 64 $1096 $1096
===== ===== ===== ===== ===== =====
Weighted average yield.............. 4.76% 6.50% 6.50% 6.50% 4.92% 4.92%
</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. Typically, the Bank does not
use other forms of borrowings. At June 30, 1997, the Bank had $10.8 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 June 30, 1997, $30.8 million, or 59.8%
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.
21
<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,
--------------------------------------------------------
1997 1996 1995
----------------- ----------------- ------------------
Balance Percent Balance Percent Balance Percent
------- -------- ------- -------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings
Deposits:
Passbook savings..................... $ 3,726 5.27% $ 3,978 5.84% $ 3,740 5.48%
NOW accounts......................... 8,328 11.78 7,968 11.68 7,601 11.13
Money market accounts................ 5,394 7.63 6,235 9.15 5,874 8.61
Noninterest-bearing demand accounts.. 1,658 2.35 1,380 2.02 1,320 1.93
------- ------ ------- ------ ------- ------
Total non-certificates............. 19,106 27.03% 19,561 28.69% 18,535 27.15
------- ------ ------- ------ ------- ------
Certificates:
2.00 - 3.99%......................... 2 0.00 13 0.02 876 1.28
4.00 - 5.99%......................... 34,331 48.56 44,704 65.58 19,118 28.00
6.00 - 7.99%......................... 17,254 24.41 3,606 5.29 29,114 42.64
8.00 - 9.99%......................... -- -- 287 0.42 631 0.93
10.00% & over........................ -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total certificates................. 51,587 72.97% 48,610 71.31% 49,739 72.85
------- ------ ------- ------ ------- ------
Total......................... $70,693 100.00% $68,171 100.00% $68,274 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Deposit Activity
The following table sets forth the deposit activities of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.......................... $ 68,170 $ 68,274 $ 60,180
Deposits(1).............................. 225,732 164,947 161,534
Withdrawals.............................. 225,691 167,702 155,498
Interest credited........................ 2,482 2,651 2,058
-------- -------- --------
Ending balance........................... $ 70,693 $ 68,170 $ 68,274
======== ======== ========
Net (decrease) increase.................. $ 2,523 $ (104) $ 8,094
======== ======== ========
Percent (decrease) increase.............. 3.70% (0.15)% 13.45%
======== ======== ========
- ------------------
</TABLE>
(1) Does not reflect the rollover of certificates of deposit.
22
<PAGE>
Time Deposit Maturity Schedule
The following table shows weighted average rate and maturity information for
the Bank's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
Certificate accounts maturing in Weighted
- -------------------------------- Total Average Percent of
quarter ending: Balance Rate Total
- --------------- ------- --------- -----------
<S> <C> <C> <C>
September 30, 1997.................... $ 8,078 5.13% 15.69%
December 31, 1997..................... 7,518 5.16 14.60
March 31, 1998........................ 6,938 5.35 13.47
June 30, 1998......................... 8,256 5.57 16.03
September 30, 1998.................... 1,211 5.40 2.35
December 31, 1998..................... 2,024 5.75 3.93
March 31, 1999........................ 8,872 6.25 17.23
June 30, 1999......................... 1,557 5.89 2.90
September 30, 1999.................... 864 5.70 1.68
December 31, 1999..................... 699 6.14 1.30
March 31, 2000........................ 294 6.03 0.57
June 30, 2000......................... 172 5.88 0.34
Thereafter............................ 5,104 6.21 9.91
------- ------
Total............................. $51,587 100.00%
</TABLE>
The following table indicates the amount of the Bank's certificates of deposit
and other deposits by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over
or Less Months Months 12 Months Total
-------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificates of deposit
less than $100,000............. $7,728 $6,904 $14,547 $18,780 $47,959
Certificates of deposit of
$100,000 or more............... 350 614 647 2,017 3,628
------ ------ ------- ------- -------
Total certificates of
deposit...................... $8,078 $7,518 $15,194 $20,797 $51,587
====== ====== ======= ======= =======
</TABLE>
23
<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 June 30, 1997, the Bank had $10.8 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.
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>
Years Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
- ----------------
FHLB advances................... $10,750 $14,360 $15,877
Average Balance:
- ----------------
FHLB advances................... $ 9,154 $12,039 $ 7,919
<CAPTION>
At June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
FHLB advances................... $10,750 $12,000 $15,877
======= ======= =======
Weighted average interest rate.. 5.75% 5.80% 6.91%
</TABLE>
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
$2.0 million at June 30, 1997, 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 June 30, 1997,
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 June 30, 1997, the Bank's investment in
CBES was $1,000. Also, for the fiscal year ended June 30, 1997, CBES had pre-
tax income of approximately $0.
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
24
<PAGE>
limited regulation by the Federal Reserve Board. As the savings and loan
holding company of the Bank, the Company also is subject to federal regulation
and oversight. The purpose of the regulation of the Company and other holding
companies is to protect subsidiary savings 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.
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 1997 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, 1997, was approximately $29,149.
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 June 30, 1997,
the Bank's lending limit under this restriction was approximately $3.8 million.
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 adopted additional guidelines on asset
quality and earnings standards, which are designed to enhance early
identification and resolution of problems and problem assets.
25
<PAGE>
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 0% to .27% 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% 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.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March 31,
1995. The assessment was 65.7 basis points per $100 in deposits, payable on
November 30, 1996. For the Bank, the assessment amounted to $441,000 (or
$282,240 when adjusted for taxes), based on the Bank's deposits on March 31,
1995. In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and SAIF-insured
institutions. The FICO assessment will be 1.29 basis points per $100 in BIF
deposits and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits).
The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would eliminate
the federal thrift charter and OTS. The bills would require that all federal
savings associations convert to national banks or state depository institutions
by no later than January 1, 1998 in one bill and June 30, 1998 in the other and
would treat all state savings associations as state banks for purposes of
federal banking laws. Subject to a narrow grandfathering, all savings and loan
holding companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such proposals, any
lawful activity in which a savings association participates would be permitted
for up to two years following the effective date of its conversion to the new
charter, with two additional one-year extensions which may be granted as the
discretion of the regulator. The legislative proposals would also abolish the
OTS and transfer its functions to the federal bank regulators with respect to
the institutions and to the Federal Reserve Board with respect to the regulation
of holding companies. The Bank is unable to predict whether the legislation
will be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF funds will eventually be merged.
While the legislation has reduced the disparity between premiums paid
on BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least
26
<PAGE>
January 1, 1999. Under the legislation, the Bank anticipates that its ongoing
annual SAIF premiums will be approximately $46,500.
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 June 30, 1997, the Bank
had no intangible assets and a valuation allowance, net of tax under SFAS No.
115 of $(2,658).
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 June 30, 1997, the Bank had tangible capital of $12.5 million, or
12.4% of adjusted total assets, which is approximately $11.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets (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 June 30,
1997, the Bank had no intangibles which were subject to these tests.
At June 30, 1997, the Bank had core capital equal to $12.5 million, or
12.4% of adjusted total assets, which is $9.5 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
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 June 30, 1997, the Bank had $436,000 of general
loan valuation allowances, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Community Bank had
$257,000 of such exclusions from capital and assets at June 30, 1997.
27
<PAGE>
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 June 30, 1997, the Bank had total capital of $12.7 million
(including approximately $12.5 million in core capital, $436,000 in qualifying
supplementary capital and reduced by $257,000 for exclusions from capital) and
risk-weighted assets of $81.6 million (with no converted off-balance sheet
assets); or total capital of 15.6% of risk-weighted assets. This amount was
$6.2 million above the 8% requirement in effect on that date.
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. 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.
OTS regulations also authorize the OTS to require a depository
institution to maintain additional total capital to account for concentration of
credit risk or risks arising from non-traditional activities.
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. 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.
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 Holding Company's Common Stock.
28
<PAGE>
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.
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 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."
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.
29
<PAGE>
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
June 30, 1997, the Bank was in compliance with both requirements, with an
overall liquid assets ratio of 6.37% and a short-term liquid assets ratio of
5.07%.
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 June 30, 1997, 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 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
30
<PAGE>
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 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. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation plans that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to the other participating
employees.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to 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 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 Company generally
is not subject to activity restrictions. If the 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 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.
If the Bank fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings 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.
31
<PAGE>
Federal Securities Law
The stock of the Company will be registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board 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 June 30, 1997, 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 June 30, 1997, 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 7.6% and were 7.1% for fiscal 1997.
For the fiscal year ended June 30, 1997, dividends paid by the FHLB of Des
Moines to the Bank totaled approximately $57,000, which constitutes a $582
decrease over the amount of dividends received in fiscal year 1996. No
assurance can be given that such dividends will continue in the future at such
levels.
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.
32
<PAGE>
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), 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. For tax years beginning before December 31, 1995,
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). If a savings association elected the latter method, it
could claim, each year, a deduction based on a percentage of taxable income,
without regard to actual bad debt experience.
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 association over a period of years.
Under recently enacted legislation, the percentage of taxable income
method has been repealed for years beginning after December 31, 1995, and
"large" associations, i.e., the quarterly average of the association's total
assets or of the consolidated group of which it is a member, exceeds $500
million for the year, may no longer be entitled to use the experience method of
computing additions to their bad debt reserve. A "large" association must use
the direct write-off method for deducting bad debts, under which charge-offs are
deducted and recoveries are taken into taxable income as incurred. If the Bank
is not a "large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e, the balance
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the balance of such reserves as of the close of the
last tax year beginning before January 1, 1996, had the bank always computed the
additions to its reserves using the experience method. Postponement of the
recapture is possible for a two-year period if an association meets a minimum
level of mortgage lending for 1996 and 1997. As of June 30, 1997, the Bank's
bad debt reserve subject to recapture over a six-year period totaled
approximately $97,000.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratably over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of, shareholders.
In addition to the regular federal income tax, corporations, including
savings associations such as the Bank, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings
associations such as the Bank, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the 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 June 30, 1997, the Bank's excess for tax purposes totaled
approximately $1,700,000.
33
<PAGE>
The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
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 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 became 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 Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Employees
- ---------
At June 30, 1997, the Bank had a total of 43 full-time and 13 part-
time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be excellent.
Executive Officers of the Bank and the Company Who Are Not Directors
- --------------------------------------------------------------------
Larry E. Hermreck. Mr. Hermreck, age 57, has been with the Bank for
the past 24 years and has served as Chief Executive Officer for 19 years. In
that capacity, he is responsible for overseeing the day to day operations of the
Bank.
Deryl R. Goettling. Mr. Goettling, age 48, 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 48, 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 43, 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.
James V. Alderson. Mr. Alderson, age 51, 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.
34
<PAGE>
Item 2. Description of Property
- --------------------------------
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 June 30, 1997. The total
net book value of the Bank's premises and equipment (including land, buildings
and leasehold improvements and furniture, fixtures and equipment) at June 30,
1997 was approximately $1.2 million.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1997
- ---------------------------- -------- ----------- ---------------
(In thousands)
<S> <C> <C> <C>
Main Office: 1983 10,000 $1,109
1001 North Jesse James Road
Excelsior Springs, Missouri 64024
Branch Office: Leased 2,725 $129
178 West 6th Street (Expires January
Kearney, Missouri 64020 2000)
</TABLE>
Community Bank believes that its current facilities are adequate to
meet the present and foreseeable needs of the Bank and the Holding Company.
Item 3. Legal Proceedings
- --------------------------
The Company 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 the Company in the proceedings, that the resolution of these
proceedings should not have a material effect on the Company's financial
position or results of operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended June 30, 1997.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
- --------
Page 39 of the attached 1997 Annual Report to Shareholders is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
Pages 5 to 14 of the attached 1997 Annual Report to Shareholders
are herein incorporated by reference.
Item 7. Financial Statements
- -----------------------------
Pages 15 to 38 of the attached 1997 Annual Report to Shareholders
are herein incorporated by reference.
35
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
--------
Item 9. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on October 28, 1997.
Item 10. Executive Compensation
- --------------------------------
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on October 28, 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
October 28, 1997.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on October 28, 1997.
Item 13. Exhibits List and Reports on Form 8-K
- ------------------------------------------------
(a) (1) Financial Statements:
-----------------------------
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended June 30, 1997, is incorporated by reference
in this Form 10-KSB Annual Report as Exhibit 13.
<TABLE>
<CAPTION>
Page in
Annual
Annual Report Section Report
--------------------- -------
<S> <C>
Report of Independent Auditors........................................ 15
Consolidated Balance Sheets at June 30, 1997 and 1996................. 16
Consolidated Statements of Earnings for the Years ended June 30, 1997, 17
1996 and 1995........................................................
Consolidated Statements of Stockholders' Equity for the Years ended 18
June 30, 1997, 1996 and 1995.........................................
Consolidated Statements of Cash Flows for the Years ended June 30, 19
1997, 1996 and 1995..................................................
Notes to Consolidated Financial Statements............................ 21
</TABLE>
36
<PAGE>
(a)(2) Financial Statement Schedules - All financial statement schedules
-----------------------------
have been omitted as the information is either inapplicable or not required
under the related instructions.
(a)(3) Exhibits - The following exhibits are either filed or attached as
--------
part of this report or are incorporated herein by reference.
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- ---------------------------------------------- ---------------
<S> <C> <C>
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3.1 Certificate of Incorporation *
3.2 Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Proposed Stock Option and Incentive Plan *
10.2 Proposed Recognition and Retention Plan *
10.3 Employment Agreement with Larry E. Hermreck, *
Daryl 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 *
11 Statement re: computation of per None
share earnings
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountant
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- ----------- ---------------------------------------------- ---------------
<S> <C> <C>
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel None
24 Power of Attorney Not Required
27 Financial Data Schedule 27
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
</TABLE>
- -------------------
*Filed on June 21, 1996, as exhibits to the Registrant's Form SB-2
registration statement (Registration No. 333-6649), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K - No Form 8-K was filed during the last
-------------------
quarter of the year covered by this Form 10-KSB.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CBES BANCORP, INC.
Date: September 25, 1997 By: /s/ Larry E. Hermreck
------------------------------------------
Larry E. Hermreck, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Larry E. Hermreck By: /s/ Cecil E. Lamb
------------------------------------ ------------------------------
Larry E. Hermreck, Chief Executive Cecil E. Lamb, Director
Officer
(Principal Executive Officer)
Date: September 25, 1997 Date: September 25, 1997
By: /s/ Dennis Hartman By: /s/ Robert McCrorey
------------------------------------ ------------------------------
Dennis Hartman Robert McCrorey, Director
Controller (Principal Accounting and
Financial Officer)
Date: September 25, 1997 Date: September 25, 1997
By: /s/ Richard Cox By: /s/ Edgar Radley
------------------------------------ ------------------------------
Richard Cox, Director Edgar Radley, Director
Date: September 25, 1997 Date: September 25, 1997
By: /s/ Robert L. Lalumondier By: /s/ Rodney Rounkles
------------------------------------ ------------------------------
Robert L. Lalumondier, Director Rodney Rounkles, Director
Date: September 25, 1997 Date: September 25, 1997
39
<PAGE>
Index to Exhibits
Exhibit 13 1997 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 27 Financial Data Schedule
40
<PAGE>
EXHIBIT 13
<PAGE>
CBES BANCORP, INC.
1997 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
President's Message......................................................................................... 1
General Information......................................................................................... 2
Selected Consolidated Financial and Other Data.............................................................. 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................................ 5
Independent Auditors' Report................................................................................ 15
Consolidated Balance Sheets................................................................................. 16
Consolidated Statements of Earnings......................................................................... 17
Consolidated Statements of Stockholders' Equity............................................................. 18
Consolidated Statements of Cash Flows....................................................................... 19
Notes to Consolidated Financial Statements.................................................................. 21
Stockholder Information..................................................................................... 39
Corporate Information....................................................................................... 40
</TABLE>
<PAGE>
[CBES Bancorp, Inc. Letterhead]
September 26, 1997
Dear Fellow Shareholder:
The Board of Directors, Officers and Staff of CBES Bancorp, Inc. and its
wholly-owned subsidiary, Community Bank of Excelsior Springs, a Savings Bank,
are pleased to provide you with our first annual report.
1997 was our first year as a stock company after serving area communities for
more than sixty-five years as a mutual savings institution. Net earnings for
the fiscal year were $885,000, up from $577,000 for fiscal year 1996. The
increase was primarily due to an increase in net interest income of
$1,122,000, offset by the special assessment in the amount of $441,000 to
recapitalize the Savings Association Insurance Fund (SAIF). The one-time
expense related to the special assessment should result in lower SAIF
premiums in the future. Net earnings would have been $1,167,000 without the
SAIF assessment.
Loans receivable, net, increased to $91,000,000 at June 30, 1997, from
$79,400,000 at June 30, 1996, an increase of $11,600,000, due to increases in
one-to-four family portfolio loans of $4,600,000 and an increase in
construction loans of $7,900,000. Assets increased $11,247,000 to
$101,076,000 and stockholders equity increased $9,709,000.
Our goals continue to be to enhance shareholder value while fulfilling our
mission as a community-oriented financial institution committed to our
customers and the communities we serve.
Thank you for your confidence in our company, and we are looking forward to a
prosperous future.
Sincerely,
/s/ Larry E. Hermreck
-----------------------
Larry E. Hermreck
Chief Executive Officer
1
<PAGE>
GENERAL INFORMATION
-------------------
CBES Bancorp, Inc. (the "Company") is a Delaware Corporation which is the
holding company for Community Bank of Excelsior Springs, a Savings Bank (the
"Bank"). The Company was organized by the Bank for the purpose of acquiring all
of the capital stock of the Bank in connection with the conversion of the Bank
from mutual to stock form, which was completed on September 27, 1996 (the
"Conversion"). The only significant assets of the Company are the capital stock
of the Bank, the Company's loan to the Company's Employee Stock Ownership Plan
(ESOP), the Company's loan to the Bank and the remaining net proceeds of the
Conversion retained by the Company of approximately $616,522. The business of
the Company initially consists of the business of the Bank.
The 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 Federal Deposit Insurance
Corporation (FDIC). Through its main office in Excelsior Springs and its branch
office in Kearney, Missouri, the Bank primarily serves communities located in
Clay and Ray Counties and to a lesser extent in surrounding counties in the
State of Missouri. At June 30, 1997, the Bank had total assets of $101.1
million, deposits of $70.7 million and total stockholders' equity of $17.8
million.
The 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.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
----------------------------------------------
Set forth below are selected consolidated financial and other data of the
Company. The financial data is derived in part from, and should be read in
conjunction with, the consolidated financial statements and notes thereto
presented elsewhere in this annual report.
<TABLE>
<CAPTION>
At or for the years ended June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands, except for share data)
<S> <C> <C> <C> <C> <C>
Selected financial condition data:
Total assets $ 101,076 89,830 93,100 68,543 66,158
Loans receivable, net 91,017 79,410 78,880 53,453 46,723
Mortgage-backed securities 154 400 3,870 4,834 6,406
Investment securities 1,096 2,074 3,041 3,032 4,631
FHLB stock 811 811 795 521 521
Other interest-bearing deposits 3,544 2,776 2,469 4,194 5,422
Deposits 70,693 68,170 68,274 60,180 58,751
FHLB advances 10,750 12,000 15,877 - -
Total equity 17,774 8,066 7,481 6,981 6,309
======= ======= ======= ======= =======
Selected operations data:
Total interest income 7,474 6,824 5,818 4,655 4,914
Total interest expense 3,534 4,006 3,146 2,093 2,472
------- ------- ------- ------- -------
Net interest income 3,940 2,818 2,672 2,562 2,442
Provision for loan losses 60 236 171 33 28
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 3,880 2,582 2,501 2,529 2,414
Loan fees and service charges 312 290 267 266 175
(Loss) gain on sale of loans, investments
and mortgage-backed securities 157 239 (272) 4 202
Other noninterest income 127 127 102 103 112
------- ------- ------- ------- -------
Total noninterest income 596 656 97 373 489
Total noninterest expense 3,106 2,338 2,133 1,849 1,729
------- ------- ------- ------- -------
Earnings before income
taxes 1,370 900 465 1,053 1,174
Income tax expense 485 323 301 352 424
------- ------- ------- ------- -------
Net earnings $ 885 577 164 701 750
======= ======= ======= ======= =======
Pro forma earnings per common share $ 0.94 - - - -
======= ======= ======= ======= =======
Pro forma average common shares
outstanding 945,907 - - - -
======= ======= ======= ======= =======
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At or for the years ended June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected financial ratios and other data:
Performance ratios:
Return on assets (ratio of net
earnings to average total assets) 0.94% 0.65% 0.21% 1.04% 1.15%
Return on equity (ratio of net
earnings to average equity) 5.79 7.42 2.27 10.52 12.75
Interest rate spread:
Average during period 3.66 2.90 3.11 3.60 3.52
End of period 3.17 4.12 2.19 3.42 3.66
Net interest margin 4.39 3.31 3.52 3.96 3.86
Ratio of noninterest expense to
average total assets 3.30(1) 2.61 2.70 2.75 2.64
Ratio of average interest earning
assets to average interest-
bearing liabilities 118.71 108.57 109.79 110.91 108.68
Quality ratios:
Nonperforming assets to total
assets at end of period 1.14 0.73 0.17 0.55 0.79
Allowance for loan losses to
nonperforming loans 37.68 60.34 150.67 57.80 31.06
Allowance for loan losses to
loans receivable, net 0.48 0.49 0.29 0.30 0.32
Capital ratios:
Equity to total assets at end
of period 17.59 8.99 8.04 10.18 9.54
Average equity to average assets 16.24 8.69 9.13 9.92 8.98
Number of full service offices 2 2 2 1 1
</TABLE>
(1) The ratio of noninterest expense to average total assets would have been
2.79% for the year ended June 30, 1997 if the $441,000 SAIF assessment had
not been incurred.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
General
- -------
The Company was formed in June 1996 by the Bank to become the holding company of
the Bank. The acquisition of the Bank by the Company was consummated on
September 27, 1996, in connection with the Bank's Conversion. All references to
the Company, unless otherwise indicated, at or before September 27, 1996 refer
to the Bank.
The Company's results of operations 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 Federal Home Loan Bank of Des Moines (FHLB) advances.
Net interest income is a function of the Company'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 Company, 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 Company's operating results are also affected
by the amount of its noninterest income, including gain on the sales of loans,
service charges, loan servicing income and other income. Noninterest 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 Company'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. Total assets increased $11.2 million, or 12.5%, to $101.1 million
at June 30, 1997 from $89.8 million at June 30, 1996. This was primarily due to
the proceeds from the sale of the Company's common stock, which generated net
proceeds of $8,917,000.
Loans Receivable, Net. Loans receivable, net, increased by $11.6 million, or
14.6%, to $91.0 million at June 30, 1997 from $79.4 million at June 30, 1996.
The increase is primarily due to increases in one-to-four family portfolio loans
of $4.3 million and an increase in construction loans of $7.9 million.
Mortgage-backed Securities. Mortgage-backed securities decreased by $246,000, or
61.4%, to $154,000 at June 30, 1997 from $400,000 at June 30, 1996. The decrease
was due to prepayments on loans which secure the Bank's mortgage-backed
securities.
Investment Securities. Investment securities decreased $1.0 million, or 47.2%,
to $1.1 million at June 30, 1997 from $2.1 million at June 30, 1996. The
decrease was due to the maturity of a $1.0 million government agency security.
Deposits. Deposits increased $2.5 million, or 3.7%, to $70.7 million at June 30,
1997 from $68.2 million at June 30, 1996. The increase in deposits is due to
$4.2 million in new certificates of deposit, offset by $1.8 million of Bank's
depositors' investment in common stock of the Company.
5
<PAGE>
Federal Home Loan Bank Advances. FHLB advances decreased $1.3 million from
$12.0 million at June 30, 1996 to $10.75 million at June 30, 1997. The decrease
is primarily due to $4.0 million of the net proceeds from the sale of the
Company's common stock used to pay down FHLB advances, offset by increased loan
demand which required additional FHLB advances.
Equity. Total stockholders' equity increased by $9.7 million to $17.8 million at
June 30, 1997 from $8.1 million at June 30, 1996, primarily due to the sale of
1,024,958 shares of common stock at an initial offering price of $10 per share
less the establishment of the Company's $820,000 ESOP plan and offering-related
costs of $513,000.
Net Interest Income Analysis
- ----------------------------
The schedule on the following page presents, for the periods indicated, the
total dollar amount of interest income from average interest-earnings assets and
the resultant yields, as well as the total dollar amount of interest expense on
average interest-bearing liabilities and resultant rates. All average balances
are monthly average balances. Management does not believe that the use of
monthly balances instead of daily balances has caused a material difference in
the information presented.
6
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
At June 30, 1997
------------------- Average Interest Average Interest
Outstanding Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance rate balance paid rate balance paid rate
------- ---- ------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 91,017 8.37% $ 84,115 7,297 8.68% $ 78,047 6,515 8.35%
Mortgage-backed securities 154 7.48 307 18 5.86 2,003 135 6.74
Investment securities 1,096 4.92 1,402 61 4.35 2,245 101 4.50
FHLB Stock 811 6.98 811 57 7.03 803 58 7.22
Other interest-bearing deposits 3,544 3.25 3,116 41 1.32 2,162 15 0.69
------ ---- ------ ----- ---- ------ ----- ----
Total interest-earnings assets(1) $ 96,622 8.13% $ 89,751 7,474 8.33% $ 85,260 6,824 8.00%
====== ==== ====== ===== ==== ====== ===== ====
Interest-bearing liabilities:
Passbook accounts $ 3,726 2.25% $ 4,065 91 2.24% $ 3,664 82 2.24%
Demand and NOW deposits 13,722 2.22 13,655 290 2.12 13,432 290 2.16
Certificate accounts 51,587 5.63 48,733 2,664 5.47 49,398 2,880 5.83
FHLB advances 10,750 6.15 9,153 489 5.34 12,039 754 6.26
------ ---- ------ ------ ---- ------ ----- ----
Total interest-bearing liabilities $ 79,785 4.96% $ 75,606 3,534 4.67% $ 78,533 4,006 5.10%
====== ==== ====== ====== ==== ====== ===== ====
Net interest income $ 3,940 2,818
===== =====
Net interest rate spread(2) 3.17% 3.66% 2.90%
==== ==== ====
Net interest-earnings assets $ 16,837 $ 14,145 $ 6,727
====== ====== ======
Net interest margin(3) 4.39% 3.31%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 118.71% 108.57%
====== ======
<CAPTION>
Year ended June 30,
----------------------------
1995
----------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
------- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 66,107 5,275 7.98%
Mortgage-backed securities 4,307 304 7.06
Investment securities 3,033 173 5.70
FHLB Stock 577 44 7.63
Other interest-bearing deposits 1,992 22 1.10
------ ----- ----
Total interest-earnings assets(1) $ 76,016 5,818 7.65%
====== ===== ====
Interest-bearing liabilities:
Passbook accounts $ 3,819 85 2.23%
Demand and NOW deposits 14,187 312 2.20
Certificate accounts 43,315 2,180 5.03
FHLB advances 7,919 569 7.19
------ ----- ----
Total interest-bearing liabilities $ 69,240 3,146 4.54%
====== ===== ====
Net interest income 2,672
=====
Net interest rate spread(2) 3.11%
====
Net interest-earnings assets $ 6,776
======
Net interest margin(3) 3.52%
====
Average interest-earning assets to
average interest-bearing liabilities 109.79%
======
</TABLE>
(1) Calculated net of deferred loan fees and discounts, loans in process and
loss reserves.
(2) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
7
<PAGE>
Rate/Volume Analysis
- --------------------
The following table 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 rates
(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>
Year ended June 30,
-----------------------------------------------------------------------
1997 vs 1996 1996 vs 1995
-------------------------------- --------------------------------
Increase (decrease) Increase (decrease)
due to Total due to Total
----------------- increase ------------------ increase
Volume Rate (decrease) Volume Rate (decrease)
------ ---- -------- ------ ---- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable $ 525 257 782 986 254 1,240
Mortgage-backed securities (101) (16) (117) (156) (13) (169)
Investment securities (37) (3) (40) (40) (32) (72)
FHLB stock 1 (2) (1) 13 1 14
Other interest-earning assets 9 17 26 (1) (6) (7)
--- --- ----- --- --- -----
Total interest-earning
assets 397 253 650 802 204 1,006
--- --- ----- --- --- -----
Interest-bearing liabilities:
Savings deposits 9 - 9 (3) - (3)
Demand and NOW - - - (16) (6) (22)
Certificate accounts (39) (177) (216) 328 372 700
Borrowings (164) (101) (265) 266 (81) 185
--- --- ----- --- --- -----
Total interest-bearing
liabilities (194) (278) (472) 575 285 860
--- --- ----- --- --- -----
Net interest income $ 591 531 1,122 227 (81) 146
=== === ===== === === =====
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1997 and June 30,
- ------------------------------------------------------------------------------
1996
- ----
Performance Summary. Net earnings for the year ended June 30, 1997 increased by
$308,000, or 53.4%, to $885,000 from $577,000 for the year ended June 30, 1996.
The results were impacted by an increase of $1,122,000 in net interest income
and a $176,000 decrease in provision for loan loss, offset by a $60,000 decrease
in noninterest income, a $768,000 increase in noninterest expense and a $162,000
increase in income taxes.
For the years ended June 30, 1997 and 1996, the returns on average assets were
.94% and .65%, respectively, while the returns on average equity were 5.79% and
7.42%, respectively.
A provision in the Omnibus Appropriation Bill passed by Congress and signed by
President Clinton on September 30, 1996, included a special assessment to
recapitalize the SAIF. The assessment of 65.7 cents per $100 of qualifying
accounts as of March 31, 1995 created a pretax expense of $441,000 to the Bank.
Without the SAIF assessment, net income would have been $1,166,800, return on
average assets would have been 1.24%, return on average equity would have been
7.63% and earnings per share would have been $1.23 for the fiscal year ended
June 30, 1997.
8
<PAGE>
The recapitalization of SAIF is anticipated to reduce premiums for deposit
insurance from 23 cents per $100 of deposits to 6.4 cents per $100 of deposits.
The 6.4 cents is anticipated for the years 1997 through 1999, then decreasing
further to 2.4 cents from year 2000 to 2017, assuming a merger of SAIF and the
Bank Insurance Fund (BIF).
Net Interest Income. Net interest income increased from $2.8 million for the
fiscal year ended June 30, 1996 to $3.9 million for the current fiscal year, an
increase of $1.1 million. This reflects an increase of $0.7 million in interest
income to $7.5 million from $6.8 million and a decrease in interest expense of
$500,000 to $3.5 million from $4.0 million. The net increase was primarily due
to an increase in the ratio of average interest-earning assets to average
interest-bearing liabilities to 118.71% in 1997 from 108.57% in 1996.
For the year ended June 30, 1997, the average yield on interest-earning assets
was 8.33% compared to 8.00% for 1996. The average cost of interest-bearing
liabilities was 4.67% for the year ended June 30, 1997, a decrease from 5.10%
for 1996. The average balance of interest-earning assets increased $4.5 million
to $89.8 million for the year ended June 30, 1997, compared to $85.3 million for
fiscal 1996. During the same period, the average balance of interest-bearing
liabilities decreased by $2.9 million to $75.6 million for the year ended June
30, 1997 from $78.5 million in fiscal 1996.
The average interest rate spread was 3.66% for the year ended June 30, 1997,
compared to 2.90% for fiscal 1996. The average net interest margin increased to
4.39% for the year ended June 30, 1997, compared to 3.31% for the year ended
June 30, 1996.
Provision for Loan Losses. During the year ended June 30, 1997, the Company
recorded a $60,000 provision for loan losses in accordance with its
classification of assets policy. The Company's loan portfolio consists primarily
of one-to-four family mortgage loans, construction loans and consumer loans and
has experienced charge-offs of $60,000 and $236,000 in the past two years. The
allowance for loan losses of $436,000 or .48% of loans receivable, net at June
30, 1997, compares to $388,000 or .49% of loans receivable, net at June 30,
1996. The allowance for loan losses as a percentage of nonperforming assets was
37.68% at June 30, 1997, compared to 60.34% at June 30, 1996, due to an increase
in the Company's nonperforming assets during fiscal 1997. Nonperforming assets
aggregated $1,157,000 at June 30, 1997; including nonaccruing one-to-four family
residential loans of $573,000.
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions dictate. Although the Company maintains its allowance for loan losses
at a level considered to be adequate, 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 the future.
Noninterest Income. For the year ended June 30, 1997, noninterest income
decreased by $60,000, or 9.1%, compared to the year ended June 30, 1996, due
primarily to a decrease in the net realized gain on sale of investment and
mortgage-backed securities available-for-sale of $54,000 during the year ended
June 30, 1996. There were no sales during the year ended June 30, 1997.
Noninterest Expense. Noninterest expense increased $768,000 to $3.1 million for
the year ended June 30, 1997 from $2.3 million for the year ended June 30, 1996.
Of this increase, $441,000 was attributable to the one-time special SAIF
assessment, $240,000 was attributable to compensation, due to general wage
increases and ESOP-related expense and $102,000 due to an increase in other
noninterest expense, primarily due to expenses incurred as a publicly-owned
stock institution.
9
<PAGE>
Income Taxes. Income taxes increased $162,000 to $485,000 for the year ended
June 30, 1997 from $323,000 for the year ended June 30, 1996. The increase is
due to the increase in pretax income. The Company's effective tax rate was 35%
for fiscal year 1997 and 36% for fiscal 1996.
Comparison of Operating Results for the Years Ended June 30, 1996 and June 30,
- -----------------------------------------------------------------------------
1995
- ----
Performance Summary. Net earnings for the year 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 noninterest 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 years 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 is offset by 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 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. The increase in the provision for loan losses for the 1996 period resulted
from a review of the loan portfolio, consideration of past loan loss experience,
current economic conditions and other factors, including the increase in
nonperforming loans at June 30, 1996 compared to June 30, 1995.
Noninterest Income. For the year ended June 30, 1996, noninterest income
increased $559,000 to $656,000 from $97,000 for the year ended June 30, 1995.
Included in noninterest 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 for a gain of $185,000. During the year ended June 30, 1995, the Bank sold
$4.7 million of such loans for 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
noninterest income increased $25,000 for the year ended June 30, 1996, 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.
Noninterest Expense. Noninterest expense increased $206,000 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 $123,000 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.
10
<PAGE>
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.
Asset Liability Management
- --------------------------
Savings institutions such as the Company 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.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997, which are expected to
reprice or mature in each of the future time periods shown, assuming a 12%
annual prepayment rate for fixed-rate real estate loans, a 10% annual prepayment
rate for mortgage-backed securities, an 8% annual prepayment rate for
adjustable-rate real estate loans and an 8% annual prepayment 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.
<TABLE>
<CAPTION>
Maturing or Repricing
------------------------------------------------------------------------
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-earnings assets:
Loans receivable, net (1) $ 73,916 8,737 4,232 2,299 1,833 91,017
Mortgage-backed securities 62 32 25 35 - 154
Investment securities 998 6 6 18 68 1,096
Investments in other financial
institutions 3,544 - - - - 3,544
FHLB stock 811 - - - - 811
------ ------ ------ ------ ------ ------
Total interest-earning
assets (1) 79,331 8,775 4,263 2,352 1,901 96,622
------ ------ ------ ------ ------ ------
Interest-earning liabilities:
Savings deposits 3,726 - - - - 3,726
Demand and NOW deposits 13,722 - - - - 13,722
Certificate accounts 31,813 14,789 2,954 2,031 - 51,587
FHLB advances 7,750 3,000 - - - 10,750
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities 57,011 17,789 2,954 2,031 - 79,785
------ ------ ------ ------ ------ ------
Interest sensitivity gap $ 22,320 (9,014) 1,309 321 1,901 16,837
====== ====== ====== ====== ====== ======
Cumulative interest sensitivity gap $ 22,320 13,306 14,615 14,936 16,837 16,837
====== ====== ====== ====== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 139.15% 49.33% 144.31% 115.81% - % 121.10%
====== ====== ====== ====== ====== ======
Ratio of cumulative gap to total
assets 22.08% 13.16% 14.46% 14.78% 16.66% 16.66%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Calculated net of deferred loans fees, loan discounts, loans in process and
loan loss reserves.
11
<PAGE>
Net Portfolio Value
- -------------------
In order to encourage institutions to reduce their interest rate risk, the
Office of Thrift Supervision (OTS) adopted a rule incorporating an interest rate
risk ("IRR") component into the 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 net portfolio value ("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 ("bp") 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 rules provide 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 June 30, 1997, as calculated by the
OTS, based on information provided to the OTS by the Bank.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
------------------------------------------------------
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of PV Assets
----------------------------------------------------------------------- -----------------------------
Change
in rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp 15,449 -1,773 -10% 15.42% -96 bp
+300 bp 16,286 -936 -5% 16.00% -38 bp
+200 bp 16,964 -258 -1% 16.44% +5 bp
+100 bp 17,312 +91 +1% 16.59% +20 bp
0 bp 17,222 16.39%
-100 bp 16,675 -547 -3% 15.82% -57 bp
-200 bp 15,889 -1,333 -8% 15.06% -133 bp
-300 bp 15,122 -2,100 -12% 14.31% -208 bp
-400 bp 14,505 -2,716 -16% 13.68% -271 bp
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in both
the computation of NPV and in the analysis presented in prior tables 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 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.
Occasionally, 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.
12
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, FHLB advances, repayments
and prepayments of loans and mortgage-backed securities, 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 Company is originating adjustable-rate
mortgages, construction loans and consumer loans. For the fiscal years ended
June 30, 1997 and 1996, the Bank originated loans for its portfolio in the
amount of $58 million and $50 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 withdrawable 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 6.37% and
7.50%, respectively, at June 30, 1997 and 1996.
The Company's most liquid assets are cash and cash equivalents, which include
short-term investments. At June 30, 1997 and 1996, cash and cash equivalents
were $4.1 million and $3.5 million, respectively.
Liquidity management for the Company is both an ongoing and long-term component
of the Company's asset liability management strategy. Excess funds generally are
invested in overnight deposits at the FHLB. Should the Company require funds
beyond its ability to generate them internally, additional sources of funds are
available through advances from the FHLB. The Company would pledge its FHLB
stock or certain other assets as collateral for such advances.
At June 30, 1997, the Bank had outstanding loan commitments of $791,000 and
undisbursed loans in process of $12.3 million.
Certificates of deposit which are scheduled to mature in one year or less at
June 30, 1997 were $31.8 million. Management believes that a significant portion
of such deposits will remain with the Bank.
At June 30, 1997, the Bank had tangible capital of $12.5 million, or 12.4% of
total adjusted assets, which is approximately $11.0 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. The Bank
had core capital of $12.5 million, or 12.4% of adjusted total assets, which is
$9.5 million above the minimum leverage ratio requirement of 3.0% in effect on
that date. The Bank had total risk-based capital of $12.7 million and total
risk-weighted assets of $81.6 million, or total capital of 15.6% of
risk-weighted assets. This was $6.2 million above the 8.0% requirement in effect
on that date.
13
<PAGE>
Recent Accounting Developments
- ------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which
revises the calculation and presentation provisions of Accounting Principles
Board Opinion 15 and related interpretations. Statement No. 128 is effective for
the Company's fiscal year ending June 30, 1998. Retroactive application will be
required. If the provisions of SFAS No. 128 had been applied for the year ended
June 30, 1997, basic earnings per share would have been $.94 and diluted
earnings per share would have been $.94.
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 Company's operations. Nearly all the
assets and liabilities of the Company are financial, unlike most industrial
companies. As a result, the Company's performance is directly impacted by
changes in interest rates which are indirectly influenced by inflationary
expectations. The Company'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 Company'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 Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
CBES Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of CBES Bancorp,
Inc. and subsidiary as of June_30, 1997 and 1996 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company'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 CBES
Bancorp, Inc. and subsidiary as of June_30, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
September 12, 1997
15
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 588,056 683,769
Interest-bearing deposits in other financial institutions 3,544,294 2,775,590
Investment securities available-for-sale (note 3):
U.S. government and agency obligations (amortized cost of
$1,000,750 and $2,002,250 in 1997 and 1996, respectively) 996,320 1,974,500
Investment securities held-to-maturity 100,000 100,000
Mortgage-backed securities held-to-maturity (estimated fair value of
$156,176 and $392,162 in 1997 and 1996, respectively) (note 4) 154,352 400,394
Loans held-for-sale, net 696,617 366,000
Loans receivable, net (note 5) 90,320,430 79,043,759
Accrued interest receivable:
Loans receivable 688,408 597,484
Investment securities 20,028 25,178
Mortgage-backed securities 1,697 3,175
Real estate owned 168,204 --
Stock in Federal Home Loan Bank (FHLB), at cost 810,700 810,700
Office property and equipment, net (note 6) 1,237,823 1,272,907
Deferred income tax benefit (note 9) 7,000 23,000
Cash surrender value of life insurance and other assets 1,742,557 1,753,504
------------- -----------
Total assets $ 101,076,486 89,829,960
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits (note 7) $ 70,692,900 68,169,560
FHLB advances (note 8) 10,750,000 12,000,000
Accrued expenses and other liabilities 741,009 525,177
Accrued interest payable on deposits 97,966 111,227
Advance payments by borrowers for property taxes and insurance 725,518 691,797
Current income taxes payable 294,604 266,309
------------- -----------
Total liabilities 83,301,997 81,764,070
Stockholders' equity:
Common stock, $.01 par; 3,500,000 authorized;
1,024,958 shares issued 10,250 --
Additional paid-in capital 9,728,357 --
Retained earnings, substantially restricted (notes 10, 11 and 13) 8,777,980 8,082,540
Unearned employee benefits (note 10) (739,440) --
Unrealized losses on available-for-sale securities, net of tax (2,658) (16,650)
----------- -----------
Total stockholders' equity 17,774,489 8,065,890
Commitments (note 5)
------------- -----------
Total liabilities and stockholders' equity $ 101,076,486 89,829,960
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CBES BANCORP, INC AND SUBSIDIARY
Consolidated Statements of Earnings
Three years ended June 30, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $ 7,296,558 6,515,006 5,274,865
Mortgage-backed securities 18,133 135,461 304,343
Investment securities 61,247 100,448 173,022
Other 98,075 72,957 65,633
---------- ----------- -----------
Total interest income 7,474,013 6,823,872 5,817,863
---------- ----------- -----------
Interest expense:
Deposits (note 7) 3,045,250 3,251,677 2,577,149
FHLB advances 488,766 753,745 568,783
---------- ----------- -----------
Total interest expense 3,534,016 4,005,422 3,145,932
---------- ----------- -----------
Net interest income 3,939,997 2,818,450 2,671,931
Provision for loan losses (note 5) 59,693 235,828 171,277
---------- ----------- -----------
Net interest income after provision for loan losses 3,880,304 2,582,622 2,500,654
---------- ----------- -----------
Noninterest income:
Gain on sales of loans, net 156,708 184,899 42,106
Customer service charges 214,863 197,577 193,017
Loan servicing fees 97,623 92,247 73,774
Net realized gain on sale of investment and mortgage-backed
securities available-for-sale - 54,205 -
Writedown of investment in mutual fund (note 3) - - (314,148)
Other 127,051 127,161 101,940
---------- ----------- -----------
Total noninterest income 596,245 656,089 96,689
---------- ----------- -----------
Noninterest expense:
Compensation, payroll taxes and fringe benefits (note 10) 1,443,398 1,203,276 1,080,572
Office property and equipment 297,454 274,213 245,411
Data processing 165,612 171,257 162,722
Federal insurance premiums (note 7) 532,794 157,259 139,020
Advertising 73,036 60,253 55,875
Real estate owned and repossessed assets 34,542 14,351 23,243
Other 559,666 457,902 425,704
---------- ----------- -----------
Total noninterest expense 3,106,502 2,338,511 2,132,547
---------- ----------- -----------
Earnings before income taxes 1,370,047 900,200 464,796
Income taxes (note 9) 485,487 323,376 301,238
---------- ----------- -----------
Net earnings $ 884,560 576,824 163,558
========== =========== ===========
Pro forma net earnings per share (note 2) $ 0.94 - -
========== =========== ===========
Pro forma average common shares outstanding 945,907 - -
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Three years ended June 30, 1997
<TABLE>
<CAPTION>
Net gain
Additional Unearned (loss) on
Common paid-in Retained employee available-for-
stock capital earnings benefits sale securities Total
----- ------- -------- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Change in gain (loss) on
available-for-sale securities - - - - 22,216 22,216
------ --------- --------- -------- ------ ----------
Balance at June 30, 1995 - - 7,505,716 - (24,858) 7,480,858
Net earnings - - 576,824 - - 576,824
Change in gain (loss) on
available-for-sale securities - - - - 8,208 8,208
------ --------- --------- -------- ------ ----------
Balance at June 30, 1996 - - 8,082,540 - (16,650) 8,065,890
Sale of common stock, net
of offering costs 10,250 9,685,124 - - - 9,695,374
Unearned ESOP shares - - - (819,960) - (819,960)
Net earnings - - 884,560 - - 884,560
Dividend declared ($.20 per share) - - (189,120) - - (189,120)
Allocation of ESOP shares - 43,233 - 80,520 - 123,753
Change in gain (loss) on
available-for-sale securities - - - - 13,992 13,992
------ --------- --------- -------- ------ ----------
Balance at June 30, 1997 10,250 9,728,357 8,777,980 (739,440) (2,658) 17,774,489
====== ========= ========= ======== ====== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CBES BANCORP, INC AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three years ended June 30, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 884,560 576,824 163,558
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loan losses 59,693 235,828 171,277
Depreciation 147,587 132,335 118,250
Allocation of ESOP shares 123,753 -- --
Net realized gain on sale of securities available-for-sale -- (54,205) --
Writedown of investment in mutual fund -- -- 314,148
Loss (gain) on disposition of real estate owned, net 14,930 -- (5,822)
Proceeds from sale of loans held for sale 11,444,211 16,276,153 4,763,106
Origination of loans held for sale (11,618,120) (14,938,346) (6,134,640)
Gain on sale of loans, net (156,708) (184,899) (42,106)
Premium amortization and accretion of discounts and
deferred loan fees (330,292) (282,871) (301,901)
Provision for deferred income taxes 6,672 (55,472) 21,464
FHLB stock dividends -- (16,000) --
Changes in assets and liabilities:
Accrued interest receivable (84,296) (53,786) (183,758)
Other assets 10,947 (172,428) (28,821)
Accrued expenses and other liabilities 121,272 47,989 180,940
Accrued interest payable on deposits (13,261) 6,458 42,933
Current income taxes payable 28,295 271,869 (56,737)
----------- ---------- ----------
Net cash provided by (used in) operating activities 639,243 1,789,449 (978,109)
----------- ---------- ----------
Cash flows from investing activities:
Net increase in loans receivable (11,194,574) (1,632,432) (23,956,731)
Purchase of investment securities held-to-maturity -- (100,000) --
Purchase of FHLB stock -- -- (273,500)
Maturity of investment securities available-for-sale 1,000,000 -- --
Sales of investment securities available-for-sale -- 4,046,846 --
Mortgage-backed securities principal repayments 243,910 553,490 964,384
Change in FHLB time deposits -- -- 1,600,000
Purchase of office property and equipment (112,503) (116,890) (213,041)
Proceeds from sale of real estate owned 9,000 -- 29,772
Purchase of life insurance policies -- -- (1,420,000)
----------- ---------- ----------
Net cash provided by (used in) investing activities $(10,054,167) 2,751,014 (23,269,116)
----------- ---------- ----------
(Continued)
</TABLE>
19
<PAGE>
CBES BANCORP, INC AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs $ 8,875,414 -- --
(Decrease) increase in deposits 2,523,340 (104,916) 8,094,031
Proceeds from FHLB advances 32,250,000 23,650,000 32,000,000
Repayments of FHLB advances (33,500,000) (27,526,915) (16,123,085)
Increase in advance payments by borrowers for property
taxes and insurance 33,721 (172,983) 62,911
Dividends paid (94,560) -- --
----------- ----------- -----------
Net cash (used in) provided by financing activities 10,087,915 (4,154,814) 24,033,857
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 672,991 385,649 (213,368)
Cash and cash equivalents at the beginning of the period 3,459,359 3,073,710 3,287,078
----------- ----------- -----------
Cash and cash equivalents at the end of the period $ 4,132,350 3,459,359 3,073,710
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 360,000 122,000 336,510
=========== =========== ===========
Cash paid during the period for interest $ 3,547,276 3,998,964 3,102,999
=========== =========== ===========
Supplemental schedule of noncash investing and financing activities:
Conversion of loans to real estate owned $ 192,134 -- 10,897
=========== =========== ===========
Loans made to finance sales of real estate owned $ 9,000 -- 68,000
=========== =========== ===========
Dividends declared and payable $ 94,560 -- --
=========== =========== ===========
Issuance of ESOP shares 819,960 -- --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
(1) Conversion and Acquisition of the Association by the Company
------------------------------------------------------------
CBES Bancorp, Inc. (the Company) was incorporated in September 1996
for the purpose of becoming the savings and loan holding company
of Community Bank of Excelsior Springs, a Savings Bank (the
Bank) in connection with the Bank's conversion from a federally
chartered mutual savings and loan to a federally chartered stock
savings and loan. Pursuant to its Plan of Conversion, on
September 19, 1996, the Company issued and sold 1,024,958 shares
of its common stock, in a subscription and community offering to
the Bank's depositors and borrowers, the Company's employee
stock ownership plan and the general public. Total proceeds of
the offering, net of costs and funding the ESOP, were
approximately $8,875,000. The Company utilized $4,858,000 of the
net proceeds to acquire all of the common stock issued by the
Bank in connection with its conversion. The remaining proceeds
were retained by the Company and used to fund a loan to the Bank
to facilitate the paydown of borrowings from the FHLB.
The acquisition of the Association by the Company was accounted for
in a manner similar to the pooling-of-interests method.
Accordingly, the accounting basis of the assets, liabilities and
equity accounts of the Association remained the same as prior to
the conversion and acquisition and were not adjusted to their
fair values, and no purchase accounting adjustments were
recorded.
In order to grant priority to eligible account holders in the event
of future liquidation, the Association, at the time of
conversion, established a liquidation account in the amount
equal to the Association's capital as of September 30, 1996
($8,065,000). In the event of the future liquidation of the
Association, eligible account holders and supplemental eligible
account holders who continue to maintain their deposit accounts
shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account will be
decreased as the balance of the eligible account holders and
supplemental eligible account holders is reduced based on an
annual determination of such balances. The Association may not
declare or pay a cash dividend to the Company on, or repurchase
any of, its common stock if the effect thereof would cause the
retained earnings of the Association to be reduced below the
amount required for the liquidation account. Except for such
restrictions, the existence of the liquidation account does not
restrict the use or application of the Bank's retained earnings.
(Continued)
21
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and the Bank and its wholly-owned subsidiary, CBES Service
Corporation. Amounts for 1996 and 1995 are those of the Bank.
Significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, all investments with a
maturity of three months or less at date of purchase are considered
cash equivalents.
(c) Mortgage-backed and Investment Securities
The Company classifies its investment and mortgage-backed securities
portfolio as held-to-maturity, which are recorded at amortized cost,
or available-for-sale, which are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on available-
for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized, in
accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." Transfers of securities from available-for-sale to held-
to-maturity are recorded at fair value at the date of transfer and
unrealized holding gains or losses are amortized over the remaining
life of the security.
Pursuant to SFAS No. 115 and implementation guidance issued in November
1995 by the Financial Accounting Standards Board, the Company
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 on December 5, 1995. These
securities were sold on December 11, 1995.
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.
Premiums and discounts on mortgage-backed and investment securities are
amortized using the interest method over the life of the securities.
Realized gains and losses on sales are included in income using the
specific identification method for determining cost of the securities
sold.
(Continued)
22
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(d) Loans
-----
The Company determines at the time of origination whether mortgage loans
will be held for the Company's portfolio or sold in the secondary
market. Loans originated and intended for sale in the secondary market
are recorded at the lower of aggregate 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. Loans held for sale amounted to
$697,000 and $366,000 at June 30, 1997 and 1996, respectively.
The Company defers all loan origination, commitment and related fees and
certain direct origination costs related to loans generated for the
Bank's portfolio. The Bank amortizes the net fees over the expected
life of the individual loans using the interest method.
SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan," were adopted effective July 1, 1995. They require that impaired
loans be measured based on the present value of future cash flows
discounted at the loan's effective interest rate. The impact of these
statements on the consolidated financial statements of the Company was
immaterial.
(e) Allowance for Loan 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 the Company'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)
23
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(f) Mortgage Banking Activities
---------------------------
At June 30, 1997 and 1996, the Bank was servicing loans for others
amounting to $29,812,000 and $31,088,000, respectively. Loan servicing
fees include servicing fees from investors and certain charges
collected from borrowers, such as late payment fees, which are
recorded when received. The amount of escrow balances held for
borrowers at June 30, 1997 and 1996 amounted to $264,000 and $263,000,
respectively.
(g) 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.
(h) Stock in Federal Home Loan Bank of Des Moines
---------------------------------------------
The Bank is a member of the Federal Home Loan Bank (FHLB) system. As a
member, the Bank 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, (b) 5% of outstanding FHLB advances, or (c) .3% of
total assets. FHLB stock is carried at cost in the accompanying
consolidated balance sheets.
(i) Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, which range from three to thirty
years. Major replacements and betterments are capitalized while normal
maintenance and repairs are charged to expense when incurred. Gains or
losses on dispositions are reflected in current operations.
(j) Income Taxes
------------
The Company records deferred tax assets and liabilities for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective income tax bases. The effect on
deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
(Continued)
24
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(k) Effect of New Financial Accounting Standards
--------------------------------------------
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was adopted 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 did not have a material effect on the
consolidated financial statements.
(l) Use of Estimates
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(m) Pro Forma Earnings Per Share
----------------------------
Pro forma earnings per share assumes the common shares issued in September
of 1996 had been outstanding for all of the year ended June 30, 1997
and further assumes no earnings on reinvested proceeds from the sale
of the shares. Shares issued to the Employee Stock Ownership Plan are
not included in this computation until they are allocated to plan
participants (see note 10).
(3) Investment Securities
---------------------
A summary of investment securities available-for-sale at June 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
June 30, 1997:
U. S. government and agency oblig-
ations maturing within one year $ 1,000,750 - (4,430) 996,320
========= ========= ===== =========
June 30, 1996:
U. S. government and agency oblig-
ations maturing within one year $ 1,000,000 - (8,400) 991,600
U. S. government and agency oblig-
ations maturing after one year but
within five years 1,002,250 - (19,350) 982,900
--------- --------- ------ ---------
$ 2,002,250 - (27,750) 1,974,500
========= ========= ====== =========
</TABLE>
(Continued)
25
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
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 year
ended June 30, 1996, the Bank recognized gross gains of $5,011 and no
gross losses on proceeds of $1,083,687 from the sale of its investment
in a mutual fund.
(4) Mortgage-backed Securities
--------------------------
Mortgage-backed securities held-to-maturity consisted of the following at
June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
cost gains losses fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
June 30, 1997:
Federal Home Loan
Mortgage Corporation
(FHLMC) participation
certificates $ 152,047 1,977 (198) 153,826
Pass-through certificate
guaranteed by Government
National Mortgage
Association (GNMA) 2,305 45 - 2,350
------- ------- ---- --------
$ 154,352 2,022 (198) 156,176
======= ======= ==== ========
June 30, 1996:
Federal Home Loan
Mortgage Corporation
(FHLMC) participation
certificates $ 397,558 1,425 (9,664) 389,319
Pass-through certificate
guaranteed by Government
National Mortgage
Association (GNMA) 2,836 7 - 2,843
------- ------- ----- --------
$ 400,394 1,432 (9,664) 392,162
======= ======= ===== ========
</TABLE>
During the year ended June 30, 1996, the Bank recognized gross gains of
$52,722 and gross losses of $3,528 on proceeds of $2,963,159 from the
sale of mortgage-backed securities available-for-sale (see note 2(c)).
(Continued)
26
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(5) Loans Receivable
----------------
Loans receivable consisted of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate:
One-to-four family residential $ 56,562,611 52,294,663
Construction 30,332,097 22,460,608
Land 3,392,727 4,005,713
Commercial 1,520,262 1,082,598
Multifamily 747,921 315,304
Consumer loans 10,900,375 10,572,028
----------- -----------
103,455,993 90,730,914
Less:
Loans in process 12,349,562 11,015,102
Deferred loan origination fees
and discounts on loans, net 350,001 284,053
Allowance for loan losses 436,000 388,000
----------- -----------
$ 90,320,430 79,043,759
=========== ===========
</TABLE>
At June 30, 1997 and 1996, the Bank was committed to originate first
mortgage loans aggregating approximating $791,000 and $1,982,000,
respectively, of which $31,000 and $190,000 was committed to be sold
to a third party. Fixed rate loan commitments approximated $791,000 at
June 30, 1997, with rates ranging from 8.00% to 9.00% and $1,691,000
at June 30, 1996, with rates ranging from 7.75% to 9.00%. There were
no commitments to buy loans at June 30, 1997 or 1996.
The Company had loans to directors and officers at June 30, 1997 and 1996
which carry terms similar to those for other loans. A summary of such
loans is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $ 1,357,000 972,000
New loans 176,000 633,000
Payments (284,000) (248,000)
--------- ---------
Balance at end of year $ 1,249,000 1,357,000
========= =========
</TABLE>
(Continued)
27
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
A summary of activity in the allowance for loan losses for the years ended
June 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 388,000 226,000 163,000
Provision for loan losses 59,693 235,828 171,277
Charge-offs (52,874) (107,408) (171,386)
Recoveries 41,181 33,580 63,109
------- --------- ---------
Balance at end of year $ 436,000 388,000 226,000
======= ========= =========
</TABLE>
Nonaccrual loans at June 30, 1997 and 1996 aggregated approximately
$916,000 and $412,000, respectively. Gross interest income which would
have been recorded had the nonaccruing loans been in accordance with
their original terms amounted to $36,000 and $34,000 for the years
ended June 30, 1997 and 1996, respectively. The amount that was
included in income on such loans was $35,000 and $28,000 for the years
ended June 30, 1997 and 1996, respectively.
The 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.
(6) Premises and Equipment
Office property and equipment consist of the following at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and land improvements $ 171,130 171,130
Office buildings 1,321,053 1,321,053
Furniture and equipment 881,958 769,455
--------- ---------
2,374,141 2,261,638
Less accumulated depreciation 1,136,318 988,731
--------- ---------
$ 1,237,823 1,272,907
========= =========
</TABLE>
(Continued)
28
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(7) Deposits
Deposit balances at June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance by interest rate:
Noninterest bearing
demand accounts - $ 1,658,159 2% $ 1,378,795 2%
NOW accounts 1.75 - 2.25 8,327,763 12 7,967,617 12
Money market 2.50 - 2.75 5,394,253 8 6,235,135 9
Passbook accounts 2.25 - 2.75 3,726,022 5 3,977,740 6
---------- ----- ---------- -----
19,106,197 27 19,559,287 29
---------- ----- ---------- -----
Certificate accounts: 2.00 - 2.99 1,850 - 13,462 -
3.00 - 3.99 - - - -
4.00 - 4.99 888,761 1 1,658,854 2
5.00 - 5.99 33,442,412 48 43,045,110 63
6.00 - 6.99 17,237,712 24 3,445,487 5
7.00 - 7.99 15,968 160,037 -
8.00 - 8.99 - - 287,323 1
---------- ----- ---------- -----
51,586,703 73 48,610,273 71
---------- ----- ---------- -----
$70,692,900 100% $68,169,560 100%
========== ===== ========== =====
Weighted average interest rate
on deposits at period end 4.62% 4.47%
==== ====
Contractual maturity of certificate accounts:
Under 12 months $30,789,852 60% $38,189,808 79%
12 to 24 months 13,663,487 26 4,968,501 10
24 to 36 months 2,028,949 4 1,522,494 3
36 to 48 months 1,482,116 3 866,610 2
48 to 60 months 1,502,400 3 631,194 1
Over 60 months 2,119,899 4 2,431,666 5
---------- ----- ---------- -----
$51,586,703 100% $48,610,273 100%
========== === ========== =====
</TABLE>
At June 30, 1997 and 1996, deposits of $100,000 or more totaled $3,628,000
and $4,074,000, respectively.
The components of interest expense on deposits for the years ended June 30,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NOW, passbook, Super NOW and
money market demand $ 380,897 372,422 397,213
Certificates of deposit 2,664,353 2,879,255 2,179,936
--------- --------- ---------
$3,045,250 3,251,677 2,577,149
========= ========= =========
</TABLE>
(Continued)
29
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
During 1997, the Federal Deposit Insurance Corporation imposed a one-time
special assessment on Savings Association Insurance Fund (SAIF)
assessable deposits. The assessment on the Company's SAIF deposits
was $441,000 and is included in federal insurance premiums in the
accompanying 1997 consolidated statements of earnings.
(8) FHLB Advances
-------------
The Company had the following debt outstanding from the Federal Home Loan
Bank of Des Moines at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
$1,000,000 advance, interest at 5.86%
due June 1998 $ 1,000,000 1,000,000
$3,000,000 advance, interest at 5.86%
due June 1998 3,000,000 -
$3,000,000 advance, interest at 5.60%
due May 2000 3,000,000 -
$3,000,000 advance, interest at 6.14%
due September 2000 - 3,000,000
$2,000,000 advance, interest at 5.81%
due October 1996 - 2,000,000
$1,000,000 advance, interest at 5.77%
due June 1997 - 1,000,000
Borrowings under a $8,000,000 line of credit,
interest at approximately 50 basis points above
the U. S. Treasury Bill rate (5.75% and 5.57%
at June 30, 1997 and 1996) maturing May 1998 3,750,000 5,000,000
---------- ----------
$10,750,000 12,000,000
========== ==========
</TABLE>
The advances and lines of credit to the FHLB are collateralized by first
mortgage loans.
Scheduled maturities of FHLB advances at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending June 30, Amount
-------------------- ------
<S> <C>
1998 $ 7,750,000
1999 -
2000 3,000,000
-----------
$ 10,750,000
===========
</TABLE>
(Continued)
30
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(9) Income Taxes
------------
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Year ended June 30, 1997:
Current $ 407,807 61,680 469,487
Deferred 15,000 1,000 16,000
------- ------ -------
$ 422,807 62,680 485,487
======= ====== =======
Year ended June 30, 1996:
Current $ 354,792 23,584 378,376
Deferred (65,000) 10,000 (55,000)
------- ------ -------
$ 289,792 33,584 323,376
======= ====== =======
</TABLE>
Income tax expense has been provided at effective rates of 35.3%, 35.9%
and 64.8% (applied to earnings before taxes) for the years ended June
30, 1997, 1996 and 1995, 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0 34.0
Items affecting federal income tax rate:
Employee stock ownership plan .6 - -
Writedown of investment in mutual fund - - 26.1
Increase in cash surrender value of
life insurance policies, net of
nondeductible premiums (1.0) (1.6) -
State income tax net of federal benefit 1.3 3.3 5.0
Other .5 .2 (.3)
---- ---- ----
Effective income tax rate 35.4% 35.9 64.8
==== ==== ====
</TABLE>
(Continued)
31
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
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
June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued compensation $ 58,000 33,000
Allowance for loan losses 150,000 127,000
Unrealized losses on assets available-for-sale 2,000 11,000
Other - 1,000
------- -------
Deferred income tax asset 210,000 172,000
------- -------
Loan origination fees (124,000) (68,000)
Fixed assets (65,000) (65,000)
Other (14,000) (16,000)
------- -------
Deferred income tax liability (203,000) (149,000)
------- -------
Net deferred income tax benefit $ 7,000 23,000
======= =======
</TABLE>
(10) Benefit Plans
-------------
Deferred Compensation Plan
--------------------------
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 years ended June 30, 1997, 1996 and 1995 was
approximately $45,000, $39,000 and $14,000, respectively.
The Directors/Officers and their beneficiaries are general unsecured
creditors of the Bank for all amounts due under these agreements.
(Continued)
32
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
Employee Stock Ownership Plan
-----------------------------
Qualified employees of the Company and Bank participate in an Employee
Stock Ownership Plan (the ESOP). In connection with the conversion
described in note 1, the ESOP borrowed $819,960 from the Company, the
proceeds of which were used to acquire 81,996 shares of the Company's
common stock. Contributions from the Company and the Bank, along with
dividends on unallocated shares of common stock, are used by the ESOP
to make payments of principal and interest on the loan. Under the
terms of the ESOP, contributions are allocated to participants using
a formula based upon compensation. Participants are fully vested
after five years. Because the Company has provided the ESOP's
borrowing, the unearned compensation is presented as a reduction of
stockholders' equity in the accompanying June 30, 1997 consolidated
balance sheet. As of June 30, 1997, 8,052 shares were allocated to
participants. Compensation and benefits expense in 1997, representing
the fair value of allocated shares, was approximately $124,000. The
fair value of the remaining unallocated shares at June 30, 1997
aggregated approximately $1,322,000.
401(k) Plan
-----------
During June 1996, the Company established a defined contribution 401(k)
plan covering substantially all employees. The plan provides for
discretionary employer contributions. Employer contributions were
$4,000 and $1,000 in 1997 and 1996, respectively.
(11) Retained Earnings
-----------------
Retained earnings at June 30, 1997 and 1996 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.
(12) Financial Instruments With Off-balance Sheet Risk and Concentrations of
-----------------------------------------------------------------------
Credit Risk
-----------
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet customer financing needs.
These financial instruments consist principally of commitments to
extend credit. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on balance
sheet instruments. The Bank's exposure to credit loss in the event of
nonperformance by the other party is represented by the contractual
amount of those instruments. The Bank does not generally require
collateral or other security on unfunded loan commitments until such
time that loans are funded.
(Continued)
33
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
In addition to financial instruments with off-balance sheet risk, the Bank
is exposed to varying risks associated with concentrations of credit
relating primarily to lending activities in specific geographic
areas. The Bank's principal lending area consists of the
agricultural-based rural communities northeast of Kansas City and the
Bank's loans are primarily to residents of or secured by properties
located in its principal lending area. Accordingly, the ultimate
collectibility of the Bank's loan portfolio is dependent upon market
conditions in that area. This geographic concentration is considered
in management's establishment of the allowance for loan losses.
(13) Regulatory Capital Requirements
-------------------------------
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated
thereunder require institutions to have a minimum regulatory tangible
capital equal to 1.5% of total assets, a minimum 3% leverage capital
ratio 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 national
banks. FIRREA also specifies the required ratio of housing-related
assets in order to qualify as a savings institution.
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
the Bank, which are defined as well capitalized, must generally have
a leverage (core) capital ratio of at least 5%, a Tier I risk-based
capital ratio of at least 6% and a total risk-based capital ratio of
at least 10%. 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 such institutions.
The Bank met all regulatory capital requirements at June 30, 1997 and
1996. The Bank's actual and required capital amounts and ratios as of
June 30, 1997 were as follows:
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
----------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to tangible assets $ 12,542,000 12.4% $ 1,516,000 1.5% $ - - %
Tier I leverage (core) capital
(to adjusted tangible assets) 12,542,000 12.4 3,032,000 3.0 5,053,000 5.0
Risk-based capital
(to risk-weighted assets) 12,721,000 15.6 6,524,000 8.0 8,155,000 10.0
Tier I leverage risk-based capital
(to risk-weighted assets) 12,542,000 15.4 - - 4,893,000 6.0
========== ==== ========= === ========= ====
</TABLE>
(Continued)
34
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(14) Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of estimated fair value for financial instruments
held by the Company. Fair value estimates of the Company's financial
instruments as of June 30, 1997 and 1996, including methods and
assumptions utilized, are set forth below:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Investment securities $ 996,320 996,000 2,074,500 2,075,000
=============== ============== =============== =============
Mortgage-backed securities $ 154,352 156,000 400,394 392,000
=============== ============== =============== =============
Loans, net of loans in process $ 91,106,431 93,208,000 79,715,812 80,823,000
=============== ============== =============== =============
Noninterest bearing demand deposit $ 1,658,159 1,658,000 1,378,795 1,379,000
Money market and NOW deposits 13,722,016 13,722,000 14,202,752 14,203,000
Passbook accounts 3,726,022 3,726,000 3,977,740 3,978,000
Certificate accounts 51,586,703 51,239,000 48,610,273 48,423,000
--------------- -------------- --------------- -------------
Total deposits $ 70,692,900 70,345,000 68,169,560 67,983,000
=============== ============== =============== =============
</TABLE>
Methods and Assumptions Utilized
--------------------------------
The carrying amount of cash and cash equivalents and accrued interest
receivable and payable are considered to be approximate fair value
based on the short-term nature of these items. The advances on FHLB
line of credit are considered to approximate fair value based on the
contractual rates approximating the rates currently available to the
Company.
The estimated fair value of mortgage-backed and investment securities,
except certain obligations of states and political subdivisions, is
based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of
certain obligations of states and political subdivisions is not
readily available through market sources other than dealer
quotations, so fair value estimates are based upon quoted market
prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
(Continued)
35
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
The estimated fair value of the Company's loan portfolio is based on the
segregation of loans by collateral type, interest terms and
maturities. In estimating the fair value of each category of loans,
the carrying amount of the loan is reduced by an allocation of the
allowance for loan losses. Such allocation is based on management's
loan classification system which is designed to measure the credit
risk inherent in each classification category. The estimated fair
value of performing variable rate loans is the carrying value of such
loans, reduced by an allocation of the allowance for loan losses. The
estimated fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the interest rate risk
inherent in the loan, reduced by an allocation of the allowance for
loan losses. The estimate of maturity is based on the Company's
historical experience with repayments for each loan classification,
modified, as required, by an estimate of the effect of current
economic and lending conditions. The fair value for significant
nonperforming loans, if any, is the estimated fair value of the
underlying collateral based on recent external appraisals or other
available information, which generally approximates carrying value,
reduced by an allocation of the allowance for loan losses.
The estimated fair value of deposits with no stated maturity, such as
noninterest bearing deposits, savings, money market accounts,
passbook accounts and NOW accounts, is equal to the amount payable on
demand. The fair value of interest-bearing time deposits is based on
the discounted value of contractual cash flows of such deposits. The
discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates. Fair value estimates are based on existing
balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
(Continued)
36
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
(15) Parent Company Condensed Financial Statements
---------------------------------------------
Presented below are financial statements of the Company (Parent only) as
of and for the period from inception to June 30, 1997:
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30, 1997
<S> <C>
Cash and cash equivalents $ 98,923
Investment securities held-to-maturity 517,598
Investment in subsidiary 12,538,587
ESOP loan receivable 750,475
Loan receivable from subsidiary 4,000,000
-------------
Total assets $ 17,905,583
=============
Dividends payable $ 102,496
Other liabilities 28,598
-------------
Total liabilities 131,094
-------------
Stockholders' equity 17,774,489
-------------
Total liabilities and stockholders' equity $ 17,905,583
=============
<CAPTION>
Condensed Income Statement
Period from inception (September 28, 1996) to June 30, 1997
<S> <C>
Interest income $ 200,955
Expense (141,767)
----------
Income before equity in undistributed
earnings of Bank 59,188
Equity in earnings of Bank 825,372
----------
Net income $ 884,560
==========
</TABLE>
(Continued)
37
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
Condensed Statement of Cash Flows
Period from inception (September 28, 1996) to June 30, 1997
<TABLE>
<S> <C>
Cash provided by operations:
Net earnings $ 884,560
Change in other liabilities 26,284
Undistributed earnings of Bank (825,372)
-----------
Cash provided by operations 85,472
Cash used by investing activities:
Net increase in loans receivable (4,750,475)
Investment in Bank (4,319,290)
-----------
Cash used in investing activities (9,069,765)
Cash provided by financing activities:
Proceeds from stock offering, net of conversion costs 9,695,374
Dividends paid (94,560)
-----------
Cash provided by financing activities 9,600,814
Cash and cash equivalents at June 30, 1997 $ 616,521
===========
</TABLE>
38
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARIES
EXCELSIOR SPRINGS, MISSOURI
STOCKHOLDER INFORMATION
-----------------------
Annual Meeting
- --------------
The Annual Meeting of Stockholders will be held at 4:00 p.m., Excelsior Springs,
Missouri time on October 28, 1997, at Community Bank of Excelsior Springs, a
Savings Bank located at 1001 N. Jesse James Road, Excelsior Springs, Missouri
64024.
Stock Listing
- -------------
CBES Bancorp, Inc. common stock is traded on the National Association of
Securities Dealers, Inc. Small Cap Market under the symbol "CBES."
Price Range of Common Stock
- ---------------------------
The per share price range of the common stock and the dividends declared or paid
for each quarter since the common stock began trading on September 30, 1996 is
set forth below. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions:
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW DIVIDENDS
----------- ---- --- ---------
<S> <C> <C> <C>
First Quarter $13.00 $12.25 $ -
Second Quarter $14.25 $12.375 $ -
Third Quarter $17.50 $14.00 $.10
Fourth Quarter $18.00 $15.875 $.10
</TABLE>
A $.10 per share dividend was declared by the Board of Directors on June 25,
1997, payable July 21, 1997 to stockholders of record on July 8, 1997. The stock
price information set forth in the table above was provided by the National
Association of Securities Dealers, Inc. Automated Quotation System.
At June 30, 1997, there were 1,024,958 shares issued and 1,024,958 shares
outstanding of CBES Bancorp, Inc. (CBES) common stock (including unallocated
ESOP shares) and there were approximately 436 registered holders of record.
Shareholders and General Inquiries Transfer Agent
- ---------------------------------- --------------
Larry E. Hermreck Registrar and Transfer Co.
Chief Executive Officer 10 Commerce Drive
CBES Bancorp, Inc. Cranford, New Jersey 07016
1001 N. Jesse James Road
Excelsior Springs, Missouri 64024
(816)-630-6711
Annual and Other Reports
- ------------------------
A copy of CBES Bancorp, Inc.'s Annual Report on Form 10-KSB for the year ended
June 30, 1997, as filed with the Securities and Exchange Commission, may be
obtained without charge by contacting Larry E. Hermreck, Chief Executive
Officer, CBES Bancorp, Inc., 1001 N. Jesse James Road, Excelsior Springs,
Missouri 64024.
39
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARIES
EXCELSIOR SPRINGS, MISSOURI
CORPORATE INFORMATION
---------------------
Company and Bank Address
- ------------------------
1001 N. Jesse James Road Telephone: (816) 630-6711
Excelsior Springs, Missouri 64024 Fax: (816) 630-1663
Board of Directors
- ------------------
Robert McCrorey-Chairman of the Board and President of CBES Bancorp, Inc. and
Community Bank of Excelsior Springs, a Savings Bank; and Mortgage Loan Officer.
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 Radley-Vice Chairman of the Board of Community Bank of Excelsior Springs,
a Savings Bank. Mr. Radley is the retired owner and operator of a Coast to Coast
hardware store, which he operated until 1990.
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.
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.
CBES Bancorp, Inc. Executive Officers
- -------------------------------------
Robert McCrorey Larry E. Hermreck
Chairman of the Board and President Chief Executive Officer
Dennis D. Hartman
Chief Financial Officer
Community Bank of Excelsior Springs, a Savings Bank Executive Officers
- ----------------------------------------------------------------------
Robert McCrorey Larry E. Hermreck
Chairman of the Board and President Chief Executive Officer
Edgar Radley Deryl R. Goettling
Vice Chairman of the Board Mortgage Loan Department
Manager
Margaret E. Teegarden James V. Alderson
Savings Department Manager Consumer Loan Department
Manager
(Continued)
40
<PAGE>
Independent Accountants Special Counsel
- ----------------------- ---------------
KPMG Peat Marwick LLP Luse, Lehman, Gorman,
1000 Walnut, Suite 1600 Pomerenk, and Schick
Post Office Box 13127 5335 Wisconsin Ave. N.W., Suite 400
Kansas City, Missouri 64199 Washington, DC 20015
41
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of
Parent Subsidiary Percentage Owned Incorporation
- ------ ---------- ---------------- ---------------
<S> <C> <C> <C>
CBES Bancorp, Inc. Community Bank 100% Federal
of Excelsior
Springs,
a Savings Bank
Community Bank of CBES Service 100% Missouri
Excelsior Springs, Corporation
a Savings Bank
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 588,056
<INT-BEARING-DEPOSITS> 3,544,294
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 996,320
<INVESTMENTS-CARRYING> 254,352
<INVESTMENTS-MARKET> 256,176
<LOANS> 91,017,047
<ALLOWANCE> 436,000
<TOTAL-ASSETS> 101,076,486
<DEPOSITS> 70,692,900
<SHORT-TERM> 10,750,000
<LIABILITIES-OTHER> 741,009
<LONG-TERM> 0
0
0
<COMMON> 10,250
<OTHER-SE> 17,764,239
<TOTAL-LIABILITIES-AND-EQUITY> 101,076,486
<INTEREST-LOAN> 7,296,558
<INTEREST-INVEST> 79,380
<INTEREST-OTHER> 98,075
<INTEREST-TOTAL> 7,474,013
<INTEREST-DEPOSIT> 3,045,250
<INTEREST-EXPENSE> 3,534,016
<INTEREST-INCOME-NET> 3,939,997
<LOAN-LOSSES> 59,693
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 559,666
<INCOME-PRETAX> 1,370,047
<INCOME-PRE-EXTRAORDINARY> 884,560
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 884,560
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 8.33
<LOANS-NON> 916,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 388,000
<CHARGE-OFFS> 53,000
<RECOVERIES> 41,000
<ALLOWANCE-CLOSE> 436,000
<ALLOWANCE-DOMESTIC> 436,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
