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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-21163
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CBES BANCORP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 43-1753244
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1001 NORTH JESSE JAMES ROAD, 64024
EXCELSIOR SPRINGS, MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 630-6711
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
----------------
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, 1998 were $10.1
million.
As of September 16, 1998, there were issued and outstanding 1,031,851 and
1,024,958 shares respectively, 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 16, 1998, was $14.5 million. (The exclusion
from such amount of the market value of the shares owned by any person shall
not be deemed an admission by the registrant that such person is an affiliate
of the registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of Form 10-KSB--Portions of Annual Report to Stockholders
for the fiscal year ended June 30, 1998.
Part III of Form 10-KSB--Portions of Proxy Statement for 1998 Annual Meeting
of Stockholders.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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 offices in Kearney and Liberty, Community
Bank primarily serves communities located in Clay and Ray Counties and to a
lesser extent in surrounding counties in the State of Missouri. The Liberty
office commenced operations in March 1998. This office gives the Bank
visibility in the Kansas City northland area, which is experiencing good
growth and we expect to continue for the next few years. At June 30, 1998, the
Company had total assets of $123.9 million, deposits of $85.8 million and
stockholders' equity of $16.9 million.
Community Bank has been, and intends to continue to be, a community-oriented
financial institution offering selected financial services to meet the needs
of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio,
the Bank also has been an active participant in the secondary market,
originating residential mortgage loans for sale. At June 30, 1998, the Bank's
total loan portfolio was $134.6 million, of which 48.5% were one- to four-
family residential mortgage loans, 39.4% were construction and land loans (the
vast majority of which related to single-family residential properties), and
8.8% were consumer loans. During the fiscal year ended June 30, 1998, the Bank
originated $31.2 million of fixed-rate one- to four-family residential
mortgage loans, of which $22.8 million, or 73.1%, 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 offices in Kearney and Liberty. Excelsior Springs, Kearney, and
Liberty are located in Clay County, which is part of the Kansas City
Metropolitan Statistical Area. Excelsior Springs, Kearney, and Liberty are
small towns with 1990 populations estimated at 11,000, 2,000, and 20,000
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.
2
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Most of the employment in Clay County is provided by light manufacturing,
services and retail trade. Included among the largest employers in Clay County
are a number of hospitals (Liberty Hospital, Excelsior Springs Medical Center,
North Kansas City Hospital, and St. Luke's Northland Hospital), local school
districts and two community colleges. Employers in the manufacturing sector
include Ford Motor Company, Farmland Industries and Wilcox Electric. In the
immediate Excelsior Springs area, the largest employers are American Italian
Pasta, Precise Technology Incorporated, Douglas & Lomason, The Elms Hotel, 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 June 30,
1998, the twelve-month average unemployment rate in Clay County was 2.7% and
the twelve-month average unemployment rate in Ray County was 4.5%.
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
three offices are located, there are 36 commercial banks, 44 credit unions,
and 10 savings institutions.
LENDING ACTIVITIES
GENERAL. The Bank has emphasized and will continue to emphasize the
origination of one- to four-family residential mortgage loans. In recent
years, subject to market conditions, the Bank has emphasized the origination
for portfolio of ARM loans and the origination and sale of fixed-rate
residential mortgage loans. Due to the high level of construction activity in
southern Clay County in recent years, and in an effort to improve the yield on
overall interest-earning assets, the Bank has increased its portfolio of
residential construction loans. The Bank also originates land loans secured by
vacant land or building lots for which the borrower intends to ultimately
construct a residential property. The Bank also originates commercial real
estate and multi-family residential loans, which are generally offered on a
case-by-case basis as an accommodation to existing Bank customers. The Bank's
non-mortgage loans consist primarily of automobile loans, which are originated
on a direct and on an indirect basis.
Under OTS regulations, a thrift institution's loans-to-one borrower limit is
generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation--Federal Regulation of Savings Associations." At
June 30, 1998, the maximum amount which the Bank could have lent under this
limit to any one borrower and the borrower's related entities was
approximately $4.1 million. At June 30, 1998, 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, 1998 was
approximately $3.2 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, 1998, all of these loans were
performing in accordance with their terms.
3
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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,
---------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family
residential............... $ 65,502 48.65% $ 57,260 54.98% $52,661 57.81%
Multi-family............... 1,602 1.19 748 0.72 315 0.35
Commercial................. 2,768 2.06 1,520 1.46 1,082 1.19
Land....................... 4,243 3.15 3,393 3.26 4,006 4.40
Construction............... 48,641 36.12 30,332 29.12 22,461 24.66
-------- ------ -------- ------ ------- ------
Total real estate loans.. 122,756 91.17 93,253 89.54 80,525 88.39
-------- ------ -------- ------ ------- ------
Consumer loans:
Direct automobile loans.... 7,166 5.32 6,585 6.32 6,527 7.16
Indirect automobile loans.. 2,348 1.75 2,034 1.95 2,114 2.32
Deposit accounts........... 616 0.46 548 0.53 499 0.55
Home improvement........... 19 0.01 69 0.07 218 0.24
Commercial loans........... 286 0.21 213 0.20 0 0.00
Other...................... 1,455 1.08 1,451 1.39 1,214 1.33
-------- ------ -------- ------ ------- ------
Total consumer loans..... 11,890 8.83 10,900 10.46 10,572 11.61
-------- ------ -------- ------ ------- ------
Total loan portfolio..... 134,646 100.00% 104,153 100.00% 91,097 100.00%
====== ====== ======
Less:
Loans in process........... 18,661 12,350 11,015
Deferred loan origination
fees and discounts on
loans, net................ 494 350 284
Allowance for loan losses.. 669 436 388
-------- -------- -------
Total loans receivable,
net..................... $114,822 $ 91,017 $79,410
======== ======== =======
</TABLE>
4
<PAGE>
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rates at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
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........ $ 15,634 11.61% $ 10,263 8.24% $ 7,509 8.24%
Multi-family............... -- -- -- -- 31 0.03
Commercial................. 1,630 1.21 509 0.49 147 0.16
Land....................... 800 0.59 180 0.17 678 0.74
Construction............... 48,641 36.13 27,898 26.79 22,461 24.66
-------- ------ -------- ------ ------- ------
Total real estate loans.. 66,705 49.54 38,850 37.30 30,826 33.83
-------- ------ -------- ------ ------- ------
Consumer loans............... 11,609 8.62 10,670 10.25 10,323 11.33
-------- ------ -------- ------ ------- ------
Total fixed-rate loans... 78,314 58.16 49,520 47.55 41,149 45.16
-------- ------ -------- ------ ------- ------
Adjustable Rate Loans:
Real estate:
One- to four-family........ $ 49,868 37.04% $ 46,997 45.12% $45,152 49.57%
Multi-family............... 1,602 1.19 748 0.72 284 0.31
Commercial................. 1,138 0.84 1,011 0.97 935 1.03
Land....................... 3,443 2.56 3,213 3.08 3,328 3.65
Construction............... -- -- 2,434 2.34 -- --
-------- ------ -------- ------ ------- ------
Total real estate loans.. 56,051 41.63 54,403 52.23 49,699 54.56
-------- ------ -------- ------ ------- ------
Consumer loans............... 281 0.21 230 0.22 249 0.27
-------- ------ -------- ------ ------- ------
Total adjustable-rate
loans................... 56,332 41.84 54,633 52.45 49,948 54.83
-------- ------ -------- ------ ------- ------
Total loan portfolio..... 134,646 100.00% 104,153 100.00% 91,097 100.00%
====== ====== ======
Less:
Loans in process........... 18,661 12,350 11,015
Deferred fees and
discounts................. 494 350 284
Allowance for losses....... 669 436 388
-------- -------- -------
Total loans receivable,
net..................... $114,822 $ 91,017 $79,410
======== ======== =======
</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, 1998, the Bank had $65.5 million, or 48.6% 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 1998, 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,
1998, $15.6 million, or 11.6% of the Bank's loan portfolio, consisted of
fixed-rate residential
5
<PAGE>
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.
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,
1998, of the $31.2 million in fixed-rate residential one- to four-family loans
originated by the Bank, $22.8 million of such loans, or 73.1%, were sold in the
secondary mortgage market.
The Bank also offers ARM loans for terms ranging up to 30 years. The Bank
currently offers ARM loans that adjust every year, with interest rate
adjustment limitations up to two percentage points per year and with a cap of
up to six percentage points on total interest rate increases over the life of
the loan, although a majority of the ARM loans in the Bank's portfolio have
adjustment limitations of one percentage point and five percentage point
interest rate caps. In a rising interest rate environment, such rate
limitations may prevent ARM loans from repricing to market interest rates,
which would have an adverse effect on net interest income. The Bank has used
different interest indices for ARM loans in the past, and currently uses the
one year U.S. Treasury Index adjusted to a constant maturity, with margins of
275 basis points for agency-conforming ARM loans and 300 basis points for non-
conforming ARM loans. ARM loans secured by residential one- to four-family real
estate totaled $49.9 million, or 37.0% of the Bank's total loan portfolio at
June 30, 1998. 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, 1998, the Bank originated
$31.2 million in fixed-rate residential mortgage loans and $16.4 million of ARM
loans. During fiscal 1997, the Bank originated $15.4 million of fixed-rate
residential mortgage loans and $11.1 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.
6
<PAGE>
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 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. Construction lending has been
very , particularly since the opening of the branch office in Liberty,
Missouri in March 1998. Through the Liberty office, the Bank has received
construction loan requests from several new builders active in the Liberty
area. 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 and "land development" loans ("land loans")
are made by the Bank to individuals and builders for the acquisition and/or
development 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, 1998:
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF
LOAN BALANCE(1) TOTAL
--------------- ----------
(MILLIONS)
<S> <C> <C>
Speculative--1-4 Family.............................. $37,039 70.1%
Speculative--Multifamily............................. 1,600 3.0
Contract............................................. 2,275 4.3
Construction--Commercial............................. 704 1.3
Construction--1-4 Family............................. 4,526 8.6
------- -----
Total construction................................. 46,144 87.3
Land Development..................................... 2,496 4.7
Land................................................. 4,243 8.0
------- -----
Total construction and land........................ $52,883 100.0%
======= =====
</TABLE>
- --------
(1) Includes loans in process.
At June 30, 1998, the Bank's $46.1 million of construction loans and $6.8
million of land and land development loans represented 34.3% and 5.0%,
respectively, of total loans receivable. At the same time, the Bank's $38.6
million of speculative construction loans represented 28.7% of total loans
receivable.
7
<PAGE>
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. 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. The Bank's process when
reviewing a loan request from a new builder is to evaluate the builder's
financial strength, verify the number of years he has been building, analyze
the subdivision that the houses will be built in, review the appraisal value
against the loan amount, verify that the building cost estimates are
reasonable, determine the reputation of the builder and verify that the
builder pays its subcontractors promptly for the work they have performed. At
June 30, 1998, the Bank had 12 borrowers for which speculative construction
loans outstanding totaled more than $1.0 million.
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, 1998, the Bank had speculative construction loans secured by
properties in 115 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. The Bank
monitors each subdivision where the Bank has speculative loans each month to
see that houses are selling promptly and to assure that the Bank does not get
too much of a loan concentration in any one subdivision. The Bank also adheres
to a very strict policy of inspecting each construction site prior to payment
of construction bills to reduce the Bank's risk during the construction
process.
8
<PAGE>
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.
At June 30, 1998, the Bank had $1.6 million of speculative construction loans
secured by multi-family properties.
Land Loans. At June 30, 1998, the Bank had total land loans of $4.2 million
and land development loans of $2.5 million. In making land loans and land
development loans, the Bank follows similar underwriting policies as for
construction loans. The Bank originates land loans and land development 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, 1998,
$4.4 million, or 3.2%, of the Bank's loan portfolio consisted of multi-family
loans and commercial real estate loans.
Multi-family and commercial real estate loans originated by the Bank may be
either fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 30 years. Rates on such ARM loans generally adjust annually
to specified spreads over the one-year U.S. Treasury securities index adjusted
to a constant maturity of one year, subject to annual and life-of-loan interest
rate caps. Multi-family and commercial real estate loans are written in amounts
of up to 80% of the lesser of the appraised value of the property or the sales
price.
The Bank's commercial real estate portfolio consists primarily of loans on
small office buildings located in the Bank's primary market area. Multi-family
loans generally are secured by duplexes. Appraisals on properties which secure
multi-family and commercial real estate loans are performed by an independent
appraiser designated by the Bank before the loan is made. All appraisals on
multi-family and commercial real estate loans are reviewed by the Bank's
management. In underwriting such loans, the Bank primarily considers the cash
flows generated by the real estate to support the debt service, the financial
resources and income level of the borrower and the Bank's experience with the
borrower. In addition, the Bank's underwriting procedures require verification
of the borrower's credit history, an analysis of the borrower's income,
financial statements and banking relationships, a review of the borrower's
property management experience and references, and a review of the property,
including cash flow projections and historical operating results. The Bank
seeks to ensure that the property securing the loans will generate sufficient
cash flow to adequately cover operating expenses and debt service payments.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger, more difficult to evaluate and monitor
and, therefore generally, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan might be impaired. The Bank has attempted to minimize these risks by
lending primarily to the ultimate user of the property or on existing income-
producing properties.
CONSUMER LENDING. Community Bank offers a variety of consumer loans,
including automobile and home improvement loans, second mortgage home equity
loans, lines of credit secured by first or second mortgage loans, and loans
secured by deposits. The Bank currently originates substantially all of its
consumer loans in its primary market area generally to its existing customers.
At June 30, 1998, the Bank's consumer loan portfolio totaled $11.9 million, or
8.8% 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
9
<PAGE>
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, 1998, the Bank's indirect automobile loans
totaled $2.3 million, or 1.7% of the Bank's loan portfolio and direct
automobile loans totaled $7.2 million, or 5.3% 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, 1998, the Bank's FHA Title I home
improvement loans totaled $122,000, or 0.1% of the Bank's loan portfolio.
The Bank also originates for portfolio second mortgage/home equity loans.
These loans are generally limited to 80% or less of the appraised value of the
property securing the loan. These loans are originated as fixed-rate loans and
generally have maximum terms of 15 years. At June 30, 1998, the Bank's second
mortgage/home equity loans totaled $2,331,000, or 1.7% of the Bank's loan
portfolio.
The Bank also originates for portfolio lines of credit secured by first or
second mortgages. These loans are primarily 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, 1998, the Bank's lines of credit
secured by first or second mortgages totaled $1.7 million, or 1.2% 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, 1998, $93,000 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.
10
<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, 1998. 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, 1998 that have
predetermined interest rates is $25.4 million, and that have floating or
adjustable rates is $56.1 million.
<TABLE>
<CAPTION>
REAL ESTATE
-----------------------------------------------------------------
ONE- TO MULTI-FAMILY
FOUR-FAMILY AND COMMERCIAL LAND CONSTRUCTION CONSUMER TOTAL
---------------- --------------- --------------- ---------------- ---------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- -------- ------ -------- ------ -------- ------- -------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DUE DURING YEARS
ENDING JUNE 30,
- ----------------
1999............ $ 1,774 8.43% $ -- -- % $ 646 8.49% $48,383 8.00% $ 2,328 9.38% $ 53,131 8.08%
2000............ 144 8.75 2 7.75 -- -- 258 8.00 1,167 10.64 1,571 10.03
2001............ 478 9.28 179 9.29 478 8.76 -- -- 2,382 10.31 3,517 9.91
2002 and 2003... 3,534 9.15 1,170 8.86 16 8.35 -- -- 5,911 9.90 10,631 9.53
2004 to 2008.... 3,898 8.60 627 8.24 273 8.52 -- -- 99 9.18 4,897 8.56
2009 to 2023.... 14,951 8.31 885 8.51 721 8.51 -- -- 3 9.00 16,560 8.33
2024 and
following....... 40,723 8.08 1,507 8.55 2,109 8.46 -- -- -- -- 44,339 8.12
------- ---- ------ ---- ------ ---- ------- ---- ------- ----- -------- -----
$65,502 8.24% $4,370 8.61% $4,243 8.51% $48,641 8.00% $11,890 9.94% $134,646 8.33%
======= ==== ====== ==== ====== ==== ======= ==== ======= ===== ======== =====
</TABLE>
11
<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,
1998, the Bank originated $87.8 million in fixed-rate loans and $19.5 million
in adjustable-rate loans. For the year ended June 30, 1997, the Bank
originated $56.1 million in fixed-rate loans and $13.8 million in adjustable-
rate loans.
In recent years, the Bank has not purchased loans. For the fiscal years
ended June 30, 1998, 1997, and 1996, the Bank purchased no loans. The Bank has
expanded its mortgage banking operations during the past year. As currently
structured, longer term, fixed rate loans which don't meet the Bank's asset
and liability requirements are sold to investors on either a servicing
released or servicing retained basis. Such loans are preapproved by investors
with interest rates locked prior to loan funding. The Bank originates both
conforming and non-conforming (subprime) loans for sale to investors. The
expansion of the mortgage banking operations has contributed significantly to
the growth of the bank's non-interest income, and it is expected that this
growth will continue in 1999. For the year ended June 30, 1998, the Bank sold
$22.8 million in conforming residential one- to four-family loans, compared to
$11.2 million and $16.1 million for the years ended June 30, 1997 and 1996,
respectively. Virtually all of the residential loans sold by the Bank are
fixed-rate residential loans with maturities of 15 and 30 years.
12
<PAGE>
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,
--------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate--
One- to four-family residential.................. $ 16,390 $11,103 $ 6,253
Multi-family..................................... 765 488 52
Commercial....................................... 202 243 399
Land............................................. 1,491 1,257 2,592
Consumer......................................... 626 751 232
-------- ------- -------
Total adjustable rate.......................... 19,474 13,842 9,528
-------- ------- -------
Fixed rate:
Real estate--
One- to four-family residential.................. 31,195 15,370 19,083
Commercial....................................... 1,148 366 67
Land............................................. 655 244 452
Construction..................................... 44,627 30,596 27,460
Consumer......................................... 10,186 9,329 8,680
-------- ------- -------
Commercial Business.............................. -- 213 --
Total fixed rate............................... 87,811 56,118 55,742
-------- ------- -------
Total loans originated......................... 107,285 69,960 65,270
Sales and Repayments:
Real Estate--
One- to four-family residential.................. 22,758 11,201 16,091
-------- ------- -------
Total loans sold............................... 22,758 11,201 16,091
Principal repayments............................. 67,410 48,407 53,692
-------- ------- -------
Total sales and repayments..................... 90,168 59,608 69,783
Decrease (increase) in other items, net............ (6,688) (1,449) (4,849)
-------- ------- -------
Net (decrease) increase............................ $ 10,429 $ 8,903 $(9,362)
======== ======= =======
</TABLE>
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, 1998, 1997 and 1996, the percentage of total loans
delinquent 90 days or more to net loans receivable were 0.33%, 0.54% and
0.47%, 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.
13
<PAGE>
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, 1998, the Bank has $49,000 in property classified as real estate owned.
The following table sets forth information with respect to the Bank's
delinquent loans at June 30, 1998.
<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..... 6 $304 0.46% 5 $182 0.28% 11 $486 0.74%
Multi-family............ 0 0 0 1 120 7.49 1 120 7.49
Consumer................ 6 43 0.36 11 73 0.62 17 116 0.98
--- ---- ---- --- ---- ---- --- ---- ----
Total.................. 12 $347 0.30% 17 $375 0.33% 29 $722 0.63%
=== ==== ==== === ==== ==== === ==== ====
</TABLE>
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,
-------------------------
1998 1997 1996
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................... $ 465 $ 806 $ 324
Consumer.......................................... 120 110 88
------ -------- ------
Total........................................... 678 916 412
------ -------- ------
Accruing loans delinquent more than 90 days:(1)
One- to four-family............................... -- -- 232
Consumer.......................................... -- -- --
------ -------- ------
Total........................................... -- -- 232
------ -------- ------
Foreclosed assets:
One- to four-family............................... 10 168 --
Commercial real estate............................ 39 -- --
Land.............................................. -- -- --
Consumer.......................................... 5 73 11
------ -------- ------
Total........................................... 54 241 11
------ -------- ------
Total non-performing assets......................... $ 732 $ 1,157 $ 655
====== ======== ======
Total loans delinquent 90 days or more to net loans
receivable......................................... 0.33% 0.54% 0.47%
====== ======== ======
</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, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $34,000. The amount that was included in
interest income on such loans was $39,000 for the fiscal year ended June 30,
1998.
14
<PAGE>
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.
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, 1998, the Bank had classified a total of $406,977 of
its assets as substandard. At June 30, 1998, the Bank had $20,560 of its assets
classified as doubtful and had $1,386 of its assets classified as loss. At June
30, 1998, total classified assets comprised $428,923, or 2.54% of the Bank's
capital and 0.35% 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, 1998, 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, 1998, the Bank had $49,000 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
15
<PAGE>
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, 1998, the Bank had a total
allowance for loan losses of $669,000, representing 91.4% of total non-
performing loans and .61% of the Bank's loans receivable, net.
The following table sets forth the allocation for loan losses by category
for the periods indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
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..... $ 63 $ 65,502 48.65% $ 41 $ 57,260 54.98% $ 44 $ 52,661 57.81%
Multi-family............ 8 1,602 1.19 3 748 0.72 2 315 0.34
Commercial real estate.. 16 2,768 2.06 9 1,520 1.46 6 1,082 1.19
Land.................... 42 4,243 3.15 30 3,393 3.26 23 4,006 4.40
Construction or
development............ 372 48,641 36.12 208 30,332 29.12 172 22,461 24.66
Consumer................ 168 11,890 8.83 145 10,900 10.46 141 10,572 11.60
---- --------- ------ ----- --------- ------ ----- -------- ------
Total.................. $669 $ 134,646 100.00% $ 436 $ 104,153 100.00% $ 388 $ 91,097 100.00%
==== ========= ====== ===== ========= ====== ===== ======== ======
</TABLE>
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,
--------------------
1998 1997 1996
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period........................... $ 436 $ 388 $ 226
----- ----- -----
Charge-offs:
One- to four-family.................................... -- -- --
Consumer............................................... 83 53 107
----- ----- -----
83 53 107
Recoveries:
Consumer............................................... 50 41 33
----- ----- -----
50 41 33
----- ----- -----
Net charge-offs.......................................... 33 12 74
Provision for loan losses................................ 266 60 236
----- ----- -----
Balance at end of period................................. $ 669 $ 436 $ 388
===== ===== =====
Ratio of net charge-offs during the period to average
loans outstanding during the period..................... 0.03% 0.01% 0.09%
===== ===== =====
Ratio of allowance for loan loss to ending loans
receivable, net......................................... 0.58% 0.48% 0.49%
===== ===== =====
Ratio of allowance for loan loss to non-performing assets
at end of period........................................ 91.39% 37.68% 59.24%
===== ===== =====
</TABLE>
16
<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, 1998, the
Bank's average liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 4.01%.
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,
1998, the Bank's investment in mortgage-backed securities totaled $81,066, or
0.07% of its total assets. At June 30, 1998 and 1997, all of the Bank's
mortgage-backed securities were classified as held-to-maturity.
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,
---------------------
1998 1997 1996
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchases............................................... $ -- $ -- $ --
Sales................................................... -- -- (2,914)
Repayments.............................................. (73) (246) (554)
----- ----- -------
Net increase (decrease)................................. $ (73) $(246) $(3,468)
===== ===== =======
</TABLE>
17
<PAGE>
OTHER INVESTMENTS. At June 30, 1998, the Bank's investment securities other
than mortgage-backed securities consisted of federal agency obligations, FHLB
stock and other FHLB interest-earning assets.
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, 1998, 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.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------
1998 1997 1996
------------- ----------------- -----------------
BOOK % OF % OF % OF
VALUE TOTAL BOOK VALUE TOTAL BOOK VALUE TOTAL
------ ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities
available-for-sale:
Federal agency obliga-
tions................. $ -- -- $ 996 18.27% $ 1,974 34.87%
------ ------ ---------- ------ ---------- ------
Subtotal............... -- -- 996 18.27 1,974 34.87
Investment securities
held-to-maturity........ $ 98 2.77% $ 100 1.83% $ 100 1.77%
------ ------ ---------- ------ ---------- ------
Subtotal............... $ 98 2.77% $ 100 1.83% $ 100 1.77%
FHLB stock............. 1,025 28.94 811 14.88 811 14.32
------ ------ ---------- ------ ---------- ------
Total investment
securities and FHLB
stock............... 1,123 31.71 1,907 34.98 2,885 50.96
------ ------ ---------- ------ ---------- ------
Other interest-earning
assets:
FHLB checking.......... 2,419 68.29 3,544 65.02 2,776 49.04
------ ------ ---------- ------ ---------- ------
Total other interest-
earnings assets..... 2,419 68.29 3,544 65.02 2,776 49.04
------ ------ ---------- ------ ---------- ------
Total investment
portfolio........... $3,542 100.00% $ 5,451 100.00% $ 5,661 100.00%
====== ====== ========== ====== ========== ======
Average remaining life of
investment securities
available for sale...... -- 0.50 years 0.91 years
</TABLE>
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, 1998.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER TOTAL INVESTMENT
1 YEAR YEARS YEARS 10 YEARS 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... $ 3 $ 12 $ 19 $ 64 $ 98 $ 98
----- ----- ----- ----- -------- --------
Federal agency
obligations............ $ -- $ -- $ -- $ -- $ -- $ --
----- ----- ----- ----- -------- --------
Total investment
securities............. $ 3 $ 12 $ 19 $ 64 $ 98 $ 98
===== ===== ===== ===== ======== ========
Weighted average yield.. 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
</TABLE>
18
<PAGE>
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, 1998, the Bank had $19.5 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, 1998, $38.8
million, or 59.6% 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.
The Bank's total deposits increased from $70.7 million at June 30, 1997 to
$85.8 million at June 30, 1998. This increase resulted from the Bank's
concerted efforts during the year to market selected term certificates of
deposit to fund the Bank's lending programs.
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,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings
Deposits:
Passbook savings............. $ 3,680 4.29% $ 3,726 5.27% $ 3,978 5.84%
NOW accounts................. 8,853 10.32 8,328 11.78 7,968 11.68
Money market accounts........ 5,709 6.66 5,394 7.63 6,235 9.15
Noninterest-bearing demand
accounts.................... 2,392 2.79 1,658 2.35 1,380 2.02
------- ------ ------- ------ ------- ------
Total non-certificates..... 20,634 24.06% 19,106 27.03% 19,561 28.69%
------- ------ ------- ------ ------- ------
Certificates:
2.00 -- 3.99%............... 1 0.00 2 0.00 13 0.02
4.00 -- 5.99%............... 36,237 42.25 34,331 48.56 44,704 65.58
6.00 -- 7.99%............... 28,905 33.70 17,254 24.41 3,606 5.29
8.00 -- 9.99%............... -- -- -- -- 287 0.42
10.00% & over................ -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total certificates......... 65,143 75.94% 51,587 72.97% 48,610 71.31%
------- ------ ------- ------ ------- ------
Total...................... $85,777 100.00% $70,693 100.00% $68,171 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
19
<PAGE>
DEPOSIT ACTIVITY
The following table sets forth the deposit activities of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Opening balance.................................. $ 70,693 $ 68,170 $ 68,274
Deposits(1)...................................... 221,802 225,732 164,947
Withdrawals...................................... 210,450 225,691 167,702
Interest credited................................ 3,732 2,482 2,651
-------- -------- --------
Ending balance................................... $ 85,777 $ 70,693 $ 68,170
======== ======== ========
Net (decrease) increase.......................... $ 15,084 $ 2,523 $ (104)
======== ======== ========
Percent (decrease) increase...................... 21.34% 3.70% (0.15)%
======== ======== ========
</TABLE>
- --------
(1) Does not reflect the rollover of certificates of deposit.
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, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PERCENT OF
TOTAL BALANCE RATE TOTAL
---------------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CERTIFICATE ACCOUNTS MATURING IN
QUARTER ENDING:
September 30, 1998................. $ 6,748 5.25% 10.36%
December 31, 1998.................. 7,357 5.40 11.29
March 31, 1999..................... 17,426 5.92 26.75
June 30, 1999...................... 7,318 5.57 11.23
September 30, 1999................. 6,635 5.91 10.19
December 31, 1999.................. 4,043 5.90 6.21
March 31, 2000..................... 2,700 6.11 4.14
June 30, 2000...................... 1,263 5.90 1.94
September 30, 2000................. 1,456 5.95 2.24
December 31, 2000.................. 730 5.79 1.12
March 31, 2001..................... 263 5.76 0.40
June 30, 2001...................... 685 6.22 1.05
Thereafter......................... 8,519 6.26 13.08
------- ------
Total............................ $65,143 100.00%
======= ======
</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,
1998.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------
3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
-------- ----------- ------------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000....... $6,592 $6,491 $21,565 $23,672 $58,320
Certificates of deposit of
$100,000 or more......... 156 866 3,179 2,622 6,823
------ ------ ------- ------- -------
Total certificates of
deposit.................. $6,748 $7,357 $24,744 $26,294 $65,143
====== ====== ======= ======= =======
</TABLE>
20
<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, 1998, the Bank had $19.5 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,
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
MAXIMUM BALANCE:
FHLB advances...................................... $19,500 $10,750 $14,360
AVERAGE BALANCE:
FHLB advances...................................... $12,672 $ 9,154 $12,039
<CAPTION>
AT JUNE 30,
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances........................................ $19,500 $12,000 $15,877
======= ======= =======
Weighted average interest rate....................... 5.65% 5.75% 5.80%
</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 $2.5
million at June 30, 1998, in the stock of, or loans to, service corporation
subsidiaries. Community Bank 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, 1998, 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, 1998, the Bank's investment in CBES was $1,000. Also, for the fiscal year
ended June 30, 1998, CBES had no pre-tax income.
REGULATION
GENERAL
Community Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Des Moines and is subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Bank, the 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.
21
<PAGE>
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings and loan
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of March
1998 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, 1998, was approximately $35,695.
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, 1998,
the Bank's lending limit under this restriction was approximately $4.1 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.
INSURANCE OF DEPOSITS
Deposit Insurance. The FDIC is an independent federal agency that insures
deposits of banks and thrift institutions up to certain specified limits and
regulates such institutions for safety and soundness. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and state savings banks, and the SAIF for savings associations such as the Bank
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
22
<PAGE>
Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF.
The FDIC may increase assessment rates for either fund if necessary to restore
the fund's ratio of reserves to insured deposits to the target level within a
reasonable time, and may decrease these rates if the target level has been
met. The FDIC has established a risk-based assessment system for both SAIF and
BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level
is determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF.
Under that law, the Bank and other institutions with SAIF-insured deposits
were charged a one-time special assessment equal to $0.657 per $100 of
assessable deposits at March 31, 1995. The Bank recognized this special
assessment as a charge to noninterest expense of $441,000 (or $282,240 when
adjusted for taxes) during the three-month period ended September 30, 1996.
The assessment was fully deductible for both federal and state income tax
purposes. Assessment rates for regular ongoing, deposit insurance premiums
currently range from 0.0% of deposits for an institution in the highest
category (i.e., well-capitalized and financially sound, with no more than a
few minor weaknesses) to 0.27% of deposits for an institution in the lowest
category (i.e., undercapitalized and substantial supervisory consent). The
Association's assessment rate for deposit insurance was 0.23% of deposits for
1996, and it was reduced to 0.0% of deposits beginning on January 1, 1997. The
FDIC is authorized to raise the assessment rates as necessary to maintain the
required reserve ratio of 1.25%, and both the BIF and the SAIF currently
satisfy the reserve ratio requirement. The annual rate of assessments on SAIF-
assessable deposits for the payments on the FICO bonds was 0.0648% for the
semi-annual period beginning on January 1, 1997; 0.0630% for the semi-annual
period beginning on July 1, 1997; and 0.0622% currently. The 1996 law also
provides for the merger of the SAIF and the BIF by 1999, but not until such
time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may no transfer deposits to
the BIF without paying various exit and entrance fees, and SAIF institutions
will continue to pay higher FICO assessments. Such exit and entrance fees need
not be paid if a SAIF institution converts to a bank charter or merges with a
bank, as long as the resulting bank continues to pay applicable insurance
assessments to the SAIF, and as long as certain other conditions are met.
CAPITAL REQUIREMENTS
The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5% tangible capital standard, a 3.0% leverage (core
capital) standard, and an 8.0% risk-based capital standard. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles
other than certain mortgage servicing rights ("MSRs") and purchased credit
card relationships. The OTS regulations require that, in meeting the tangible,
core and risk-based capital standards, institutions generally must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. In addition, the OTS prompt corrective action regulation
provides that a savings institution that has a leverage capital ratio of less
than 4.0% (3.0% for institutions receiving the highest CAMELS examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8.0%. In determining the
amount of risk-weighted assets, assets and certain off-balance sheet assets
items are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed
earlier under the 3.0% leverage standard. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and, within specified limits, the allowance for
loan losses. Overall, the amount of supplementary capital included as part of
total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-
weighting for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject
to a deduction from total capital
23
<PAGE>
for purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's
measured interest rate risk and 2%, multiplied by the estimated economic value
of the association's assets. That dollar amount is deducted from an
association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for
the new capital requirement based on that data. The rule also provides that the
Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. The OTS has postponed the effective date of
the capital component in order to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies.
At June 30, 1998, the Bank had tangible capital of $13.0 million, or 10.5% of
adjusted total assets, which is approximately $11.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date; core
capital equal to $13.0 million, or 10.5% of adjusted total assets, which is
$9.3 million above the minimum leverage ratio requirement of 3% as in effect on
that date; total capital of $13.5 million (including approximately $13.0
million in core capital, $669,000 in qualifying supplementary capital and
reduced by $161,000 for exclusions from capital) and risk-weighted assets of
$111.8 million (with no converted off-balance sheet assets); or total capital
of 12.1% of risk-weighted assets. This amount was $4.6 million above the 8%
requirement in effect on that date.
Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Legislation enacted in 1996 required the
Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings associations and commercial
banks; and provided for the merger of the BIF and the SAIF into a single
deposit insurance fund on January 1, 1999 provided the thrift charter was
eliminated. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and the
Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
24
<PAGE>
At June 30, 1998, the Bank was categorized as "well capitalized," meaning
that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I risk-
based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%, and
the Bank was not subject to a regulatory order, agreement or directive to meet
and maintain a specific capital level for any capital measure.
DIVIDEND LIMITATIONS
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility given to well-capitalized
associations. A savings association which has total capital (immediately prior
to and after giving effect to the capital distribution) that is at least equal
to its fully phased-in capital requirements would be a Tier 1 institution
("Tier 1 Institution"). An association that has total capital at least equal
to its minimum capital requirements, but less than its capital requirements,
would be a Tier 2 institution ("Tier 2 Institution"). An institution having
total capital that is less than its minimum capital requirements would be a
Tier 3 institution ("Tier 3 Institution"). However, an institution which
otherwise qualifies as a Tier 1 Institution may be designated by the OTS as a
Tier 2 or Tier 3 Institution if the OTS determines that the institution is "in
need of more than normal supervision." The Bank is currently a Tier 1
Institution.
A Tier 1 Institution may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and
which are not in troubled condition would need to file a prior notice with the
OTS concerning such dividend declaration.
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 4%.
Penalties may be imposed upon associations for violations of the liquid
assets ratio requirement. At June 30, 1998, the Bank was in compliance with
the requirement, with an overall average liquid assets ratio of 4.01%.
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.
25
<PAGE>
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
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate and
certain other assets). A savings association that fails the qualified thrift
lender test is subject to substantial restrictions on activities and to other
significant penalties.
Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and education loans may now be made by savings associations without
regard to any percentage-of-assets limit, and commercial loans may be made in
an amount up to 10% of total assets, plus an additional 10% for small business
loans. Loans for personal, family and household purposes (other than credit
card, small business and educational loans) are now included without limit with
other assets that, in the aggregate, may account for up to 20% of total assets.
The Bank exceeded the applicable requirements at June 30, 1998.
A savings association that fails to meet the QTL test must either convert to
a bank (but its deposit insurance assessments and payments will be those of and
paid to the SAIF) or be subject to the following penalties : (i) it may not
enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities will be limited to
those of a national bank; (iii) it will not be eligible for any new FHLB
advances; and (iv) it will be bound by regulations applicable to national banks
regarding the payment of dividends. Three years after failing the QTL test, the
association must (i) dispose of any investment or activity not permissible for
a national bank and a savings association, and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does
it limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with the
examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 1998 and received a rating of "outstanding."
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
26
<PAGE>
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.
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.
27
<PAGE>
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, 1998, 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, 1998, the Bank had $1,025,000 (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 7.3% and were 6.8% for fiscal 1998.
For the fiscal year ended June 30, 1998, dividends paid by the FHLB of Des
Moines to the Bank totaled approximately $56,000, which constitutes a $1,435
decrease over the amount of dividends received in fiscal year 1997. 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.
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.
28
<PAGE>
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, 1998, 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, 1998, the Bank's excess for tax purposes totaled
approximately $1,700,000.
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.
29
<PAGE>
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, 1998, the Bank had a total of 55 full-time and 11 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 58, has been with the Bank for the past
25 years and has served as Chief Executive Officer for 20 years. In that
capacity, he is responsible for overseeing the day to day operations of the
Bank.
DERYL R. GOETTLING. Mr. Goettling, age 49, is the Manager of the Bank's
Mortgage Loan Department and is responsible for the supervision of all
mortgage lending operations of the Bank. Mr. Goettling joined the Bank in 1986
and served in various capacities prior to being promoted to his current
position in 1992.
MARGARET E. TEEGARDEN. Ms. Teegarden, age 49, 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 44, 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 52, 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank conducts its business through its main office, located in Excelsior
Springs, Missouri and two branch offices , one located in Kearney, Missouri,
and the other in Liberty, Missouri. The Bank's Kearney branch and Liberty
branch office space is leased. The following table sets forth information
relating to the Bank's offices as of June 30, 1998. 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, 1998 was
approximately $1.7 million.
30
<PAGE>
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE
SQUARE NET BOOK VALUE AT
LOCATION DATE ACQUIRED FOOTAGE JUNE 30, 1998
-------- --------------------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Main Office:
1001 North Jesse James
Road................... 1983 10,000 $1,205
Excelsior Springs,
Missouri 64024
Branch Offices:
178 West 6th Street..... Leased 2,725 $ 121
Kearney, Missouri 64020 (Expires January 2000)
913 Liberty Drive....... Leased 7,150 $ 418
Liberty, Missouri 64068 (Expires March 2003)
</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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Page 40 of the attached 1998 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 15 of the attached 1998 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 16 to 39 of the attached 1998 Annual Report to Shareholders are herein
incorporated by reference.
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.
31
<PAGE>
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 22, 1998.
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 22, 1998.
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 22, 1998.
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 22,
1998.
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, 1998, 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........................................ 16
Consolidated Balance Sheets at June 30, 1998 and 1997................. 17
Consolidated Statements of Earnings for the Years ended June 30, 1998,
1997 and 1996........................................................ 18
Consolidated Statements of Stockholders' Equity for the Years ended
June 30, 1998, 1997 and 1996......................................... 19
Consolidated Statements of Cash Flows for the Years ended June 30,
1998, 1997 and 1996.................................................. 20
Notes to Consolidated Financial Statements............................ 22
</TABLE>
(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.
32
<PAGE>
(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
------------ -------- ---------------
<C> <S> <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, *
Deryl R. Goettling, Margaret E. Teegarden and
Dennis D. Hartman
10.4 Employee Stock Ownership Plan *
10.5 Director Emeritus Agreements *
10.6 Salary Continuation Agreement *
10.7 Severance Agreements with Larry E. Hermreck, *
Deryl R. Goettling, Margaret E. Teegarden and
Dennis D. Hartman
11 Statement re: computation of per share earnings None
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
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 State None
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.
33
<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.
/s/ Larry E. Hermreck
Date: September 25, 1998 By: _________________________________
LARRY E. HERMRECK
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Larry E. Hermreck Chief Executive Officer September 25, 1998
- -------------------------------------- (Principal Executive
LARRY E. HERMRECK Officer)
/s/ Dennis Hartman Controller (Principal September 25, 1998
- -------------------------------------- Accounting and Financial
DENNIS HARTMAN Officer)
/s/ Richard Cox Director September 25, 1998
- --------------------------------------
RICHARD COX
/s/ Robert L. Lalumondier Director September 25, 1998
- --------------------------------------
ROBERT L. LALUMONDIER
/s/ Cecil E. Lamb Director September 25, 1998
- --------------------------------------
CECIL E. LAMB
/s/ Robert McCrorey Director September 25, 1998
- --------------------------------------
ROBERT MCCROREY
/s/ Edgar Radley Director September 25, 1998
- --------------------------------------
EDGAR RADLEY
/s/ Rodney Rounkles Director September 25, 1998
- --------------------------------------
RODNEY ROUNKLES
</TABLE>
34
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
Exhibit 13 1998 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 27 Financial Data Schedule
</TABLE>
35
<PAGE>
CBES BANCORP, INC.
1998 ANNUAL REPORT
TO STOCKHOLDERS
<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........................................................... 4
Independent Auditors' Report............................................. 13
Consolidated Balance Sheets.............................................. 14
Consolidated Statements of Earnings...................................... 15
Consolidated Statements of Stockholders' Equity.......................... 16
Consolidated Statements of Cash Flows.................................... 17
Notes to Consolidated Financial Statements............................... 18
Stockholder Information.................................................. 33
Corporate Information.................................................... 34
</TABLE>
<PAGE>
September 28, 1998
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 second annual report.
Fiscal 1998 was our second year as a stock company after serving area
communities for more than sixty-five years as a mutual savings institution. As
we mature as a publicly-owned stock company, we continue our tradition of
growth and success. Net earnings for the fiscal year were $1,054,000, up from
$885,000 for fiscal year 1997. The increase was primarily due to an increase
in net interest income of $806,000 and an increase in gain on sale of loans,
net of $303,000, offset by an increase in the provision for loan loss of
$207,000 and an increase in noninterest expense of $642,000.
Loans receivable, net increased to $114,822,000 at June 30, 1998 from
$91,017,000 at June 30, 1997, an increase of $23,805,000, due to increases in
one-to-four family portfolio loans of $8,242,000 and construction loans of
$18,309,000. Assets increased $22,780,000 to $123,856,000 and stockholders'
equity decreased $917,000. The decrease in stockholders' equity was the result
of the Company's stock repurchase program, under which the Company purchased
92,244 shares of its stock during fiscal 1998.
The year-end results reflect the implementation of the Company's controlled
growth strategies. During fiscal 1998, the Company's assets increased 22.4%,
loan receivable, net increased 26.2% and deposits increased 21.4%. The new
branch office in Liberty, Missouri, which opened in March 1998, is
contributing significantly to the Bank's growth. Our monthly loan originations
have doubled since opening the Liberty office.
While fiscal 1998 was a very successful year for the Company, we look
forward to continuing our long record of achievement in 1999. We reaffirm our
commitment to creating enhanced value for our shareholders, employees,
customers and the communities we serve. Our goals in 1999 include continued
growth in assets, expansion of products and services and maximum returns for
our shareholders. We are confident of our success in the next year.
Thank you for your confidence in our company, and we are looking forward to
a prosperous future.
Sincerely,
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 Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Through its main office in Excelsior Springs and its branch offices in Kearney
and Liberty, 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, 1998, the Company had total assets of $123.9 million,
deposits of $85.8 million and total stockholders' equity of $16.9 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,
------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE
AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected financial condition
data:
Total assets................ $ 123,856 101,076 89,830 93,100 68,543
Loans receivable, net....... 114,822 91,017 79,410 78,880 53,453
Mortgage-backed securities.. 81 154 400 3,870 4,834
Investment securities....... 98 1,096 2,074 3,041 3,032
Federal Home Loan Bank
(FHLB) stock............... 1,025 811 811 795 521
Other interest-bearing
deposits................... 2,424 3,544 2,776 2,469 4,194
Deposits.................... 85,777 70,693 68,170 68,274 60,180
FHLB advances............... 19,500 10,750 12,000 15,877 --
Total equity................ 16,857 17,774 8,066 7,481 6,981
Selected operations data:
Total interest income....... $ 9,266 7,474 6,824 5,818 4,655
Total interest expense...... 4,520 3,534 4,006 3,146 2,093
Net interest income.......... 4,746 3,940 2,818 2,672 2,562
Provision for loan losses.... 266 60 236 171 33
Net interest income after
provision for loan losses... 4,480 3,880 2,582 2,501 2,529
Loan fees and service
charges..................... 279 312 290 267 266
(Loss) gain on sale of loans,
investments and mortgage-
backed securities........... 460 157 239 (272) 4
Other noninterest income..... 128 127 127 102 103
Total noninterest income..... 867 596 656 97 373
Total noninterest expense.... 3,749 3,106 2,338 2,133 1,849
Earnings before income
taxes....................... 1,598 1,370 900 465 1,053
Income tax expense........... 544 485 323 301 352
Net earnings................. $ 1,054 885 577 164 701
Basic earnings per common
share....................... $ 1.12 0.94 -- -- --
Average common shares
outstanding................. 940,742 945,907 -- -- --
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- ------- ------- -------
<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).............. 0.95% 0.94% 0.65% 0.21% 1.04%
Return on equity (ratio of
net earnings to average
equity).................... 6.04 5.79 7.42 2.27 10.52
Interest rate spread:
Average during period...... 3.80 3.66 2.90 3.11 3.60
End of period.............. 3.04 3.17 4.12 2.19 3.42
Net interest margin........ 4.46 4.39 3.31 3.52 3.96
Ratio of noninterest
expense to average total
assets.................... 3.37 3.30(1) 2.61 2.70 2.75
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............... 115.56 118.71 108.57 109.79 110.91
Quality ratios:
Nonperforming assets to
total assets at end of
period..................... 0.59 1.14 0.73 0.17 0.55
Allowance for loan losses to
nonperforming loans........ 91.39 37.68 60.34 150.67 57.80
Allowance for loan losses to
loans receivable, net...... 0.58 0.48 0.49 0.29 0.30
Capital ratios:
Equity to total assets at
end of period.............. 13.61 17.59 8.99 8.04 10.18
Average equity to average
assets..................... 15.66 16.24 8.69 9.13 9.92
Number of full service
offices.................... 3 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.
3
<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 at or before September 27, 1996, unless
otherwise indicated, 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 FHLB of Des Moines 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 $22.8 million, or 22.6%, to $123.9
million at June 30, 1998 from $101.1 million at June 30, 1997. This was
primarily due to an increase in loans receivable, net funded by deposits and
FHLB advances.
LOANS RECEIVABLE, NET. Loans receivable, net (including loans held for sale)
increased by $23.8 million, or 26.2%, to $114.8 million at June 30, 1998 from
$91.0 million at June 30, 1997. The increase is primarily due to increases in
one-to-four family portfolio loans of $8.2 million and an increase in
construction loans of $18.3 million. Since opening the branch office in
Liberty, Missouri in March 1998, our monthly loan originations have doubled
and we have received loan requests for construction loans from several new
builders.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased by $73,000,
or 47.4%, to $81,000 at June 30, 1998 from $154,000 at June 30, 1997. 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
90.9%, to $0.1 million at June 30, 1998 from $1.1 million at June 30, 1997.
The decrease was due to the maturity of a $1.0 million government agency
security.
DEPOSITS. Deposits increased $15.1 million, or 21.4%, to $85.8 million at
June 30, 1998 from $70.7 million at June 30, 1997. The increase in deposits is
primarily due to $13.6 million in new certificates of deposit. Due to a large
demand for construction loans, we aggressively marketed certain selected term
certificates to fund that lending. These certificates will begin repricing in
mid-1999.
FHLB ADVANCES. FHLB advances increased $8.75 million from $10.75 million at
June 30, 1997 to $19.5 million at June 30, 1998. Increased construction loan
demand has required these additional FHLB advances.
EQUITY. Total stockholders' equity decreased by $0.9 million to $16.9
million at June 30, 1998 from $17.8 million at June 30, 1997, primarily due to
the implementation of the Company's plan to repurchase stock.
4
<PAGE>
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 (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------
AT JUNE 30, 1998 1998 1997 1996
------------------ --------------------------- --------------------------- ---------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE RATE BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- ------ ----------- -------- ------ ----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans
receivable...... $114,822 8.33% $100,867 9,047 8.97% $84,115 7,297 8.68% $78,047 6,515 8.35%
Mortgage-backed
securities...... 81 8.06 100 7 7.00 307 18 5.86 2,003 135 6.74
Investment
securities...... 98 6.50 560 20 4.63 1,402 61 4.35 2,245 101 4.50
FHLB stock...... 1,025 7.00 821 56 6.82 811 57 7.03 803 58 7.22
Other interest-
bearing
deposits........ 2,424 1.75 4,036 136 3.22 3,116 41 1.32 2,162 15 0.69
-------- ---- -------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
earning assets
(1)............. $118,450 8.18% $106,384 9,266 8.71% $89,751 7,474 8.33% $85,260 6,824 8.00%
======== ==== ======== ====== ==== ======= ====== ==== ======= ====== ====
Interest-bearing
liabilities:
Passbook
accounts........ $ 3,680 2.25% $ 3,736 84 2.25% $ 4,065 91 2.24% $ 3,664 82 2.24%
Demand and NOW
deposits........ 14,644 2.23 14,001 311 2.22 13,655 290 2.12 13,432 290 2.16
Certificate
accounts........ 65,143 5.80 61,650 3,419 5.55 48,733 2,664 5.47 49,398 2,880 5.83
FHLB advances... 19,500 5.65 12,672 706 5.57 9,153 489 5.34 12,039 754 6.26
-------- ---- -------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
bearing
liabilities..... $102,967 5.14% $ 92,059 4,520 4.91% $75,606 3,534 4.67% $78,533 4,006 5.10%
======== ==== ======== ====== ==== ======= ====== ==== ======= ====== ====
Net interest
income........... $4,746 $3,940 $2,818
====== ====== ======
Net interest rate
spread (2)....... 3.04% 3.80% 3.66% 2.90%
==== ==== ==== ====
Net interest-
earning assets... $ 15,483 $ 14,325 $14,145 $ 6,727
======== ======== ======= =======
Net interest
margin (3)....... 4.46% 4.39% 3.31%
====== ====== ======
Average interest-
earning assets to
average interest-
bearing
liabilities...... 115.56% 118.71% 108.57%
====== ====== ======
</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.
5
<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,
------------------------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------ -----------------------
INCREASE INCREASE
(DECREASE) (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-earning assets:
Loans receivable............ $1,499 251 1,750 525 257 782
Mortgage-backed securities.. (14) 3 (11) (101) (16) (117)
Investment securities....... (78) 43 (35) (37) (3) (40)
FHLB stock.................. 1 (2) (1) 1 (2) (1)
Other interest-earning
assets..................... 15 74 89 9 17 26
------ --- ----- ---- ---- -----
Total interest-earning
assets..................... 1,423 369 1,792 397 253 650
====== === ===== ==== ==== =====
Interest-bearing liabilities:
Savings deposits............ (7) -- (7) 9 -- 9
Demand and NOW.............. 7 14 21 -- -- --
Certificate accounts........ 716 39 755 (39) (177) (216)
Borrowings.................. 195 22 217 (164) (101) (265)
------ --- ----- ---- ---- -----
Total interest-bearing
liabilities................ 911 75 986 (194) (278) (472)
====== === ===== ==== ==== =====
Net interest income......... $ 512 294 806 591 531 1,122
====== === ===== ==== ==== =====
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998 AND JUNE
30, 1997
PERFORMANCE SUMMARY. Net earnings for the year ended June 30, 1998 increased
by $170,000, or 19.2%, to $1,054,000 from $885,000 for the year ended June 30,
1997. The results were impacted by an increase of $806,000 in net interest
income and a $271,000 increase in noninterest income, offset by a $207,000
increase in provision for loan loss, a $642,000 increase in noninterest
expense and a $58,000 increase in income taxes.
For the years ended June 30, 1998 and 1997, the returns on average assets
were .95% and .94%, respectively, while the returns on average equity were
6.04% and 5.79%, respectively.
NET INTEREST INCOME. Net interest income increased from $3.9 million for the
fiscal year ended June 30, 1997 to $4.7 million for the current fiscal year,
an increase of $0.8 million. This reflects an increase of $1.8 million in
interest income to $9.3 million from $7.5 million and an increase in interest
expense of $1.0 million to $4.5 million from $3.5 million. The net increase
was primarily due to an increase in the net interest rate spread to 3.80% in
1998 from 3.66% in 1997.
For the year ended June 30, 1998, the average yield on interest-earning
assets was 8.71% compared to 8.33% for 1997. The average cost of interest-
bearing liabilities was 4.91% for the year ended June 30, 1998, an increase
from 4.67% for 1997. The average balance of interest-earning assets increased
$16.6 million to $106.4 million for the year ended June 30, 1998 compared to
$89.8 million for fiscal 1997. During the same period, the average balance of
interest-bearing liabilities increased by $16.5 million to $92.1 million for
the year ended June 30, 1998 from $75.6 million in fiscal 1997.
6
<PAGE>
The average interest rate spread was 3.80% for the year ended June 30, 1998
compared to 3.66% for fiscal 1997. The average net interest margin increased
to 4.46% for the year ended June 30, 1998 compared to 4.39% for the year ended
June 30, 1997.
PROVISION FOR LOAN LOSSES. During the year ended June 30, 1998, the Company
recorded a $267,000 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 $266,000 and $60,000 in the
past two years. The 1998 provision exceeds the 1997 provision of $60,000
primarily because of an overall increase in loans and, in particular, an
increase in construction loans from $30.3 million to $48.6 million at June 30,
1997 and 1998, respectively. The allowance for loan losses of $669,000, or
.58%, of loans receivable, net at June 30, 1998 compared to $436,000, or .48%,
of loans receivable, net at June 30, 1997. The allowance for loan losses as a
percentage of nonperforming assets was 91.39% at June 30, 1998 compared to
37.68% at June 30, 1997, due to a decrease in the Company's nonperforming
assets during fiscal 1998. Nonperforming assets aggregated $732,000 at June
30, 1998, including nonaccruing one-to-four family residential loans of
$465,000.
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, 1998, noninterest income
increased by $271,000, or 45.5%, compared to the year ended June 30, 1997, due
primarily to an increase in the gain on sale of mortgage loans of $303,000.
NONINTEREST EXPENSE. Noninterest expense increased $642,000 to $3.7 million
for the year ended June 30, 1998 from $3.1 million for the year ended June 30,
1997. Of this increase, $749,000 was attributable to compensation, of which
$253,000 was due to the ESOP plan, $249,000 was due to the adoption of the
Recognition and Retention plan and $330,000 was due to an increase in the
number of employees and general wage increases; $115,000 was due to office
property and equipment expense; $51,000 was due to advertising; $30,000 was
due to REO and repossessed asset expense; and $180,000 was due to an increase
in other noninterest expense, offset by a decrease in federal insurance
premiums of $485,000. The increase is primarily due to the Company pursuing
its plan of controlled growth, part of that being the opening of the branch
office in Liberty, Missouri.
INCOME TAXES. Income taxes increased $58,000 to $543,000 for the year ended
June 30, 1998 from $485,000 for the year ended June 30, 1997. The increase is
due to the increase in pretax income. The Company's effective tax rate was 34%
for fiscal year 1998 and 35% for fiscal year 1997.
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 the 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 0.94% and 0.65%, 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
7
<PAGE>
the SAIF assessment, net income would have been $1,166,800, return on average
assets would have been 1.24%, return on equity would have been 7.63% and
earnings per share would have been $1.23 for the fiscal year ended June 30,
1997.
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 1997 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
fiscal 1996.
For the year ended June 30, 1997, the average yield on interest-earning
assets was 8.33% compared to 8.00% for fiscal 1996. The average cost of
interest-bearing liabilities was 4.67% for the year ended June 30, 1997, a
decrease from 5.10% for fiscal 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 0.48%, of loans
receivable, net at June 30, 1997 compared to $388,000, or 0.49%, 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.
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 was due to an increase in
other noninterest expense, primarily due to expenses incurred as a publicly-
owned stock institution.
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 rates were
35% for fiscal 1997 and 36% for fiscal 1996.
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
8
<PAGE>
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, 1998, which are expected
to reprice or mature in each of the future time periods shown, assuming a 23%
annual prepayment rate for fixed-rate real estate loans, an 18% 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-earning as-
sets................... $82,958 18,360 8,123 4,674 707 114,822
Loans receivable,
net(1)................. 21 29 17 14 -- 81
Mortgage-backed securi-
ties................... 3 6 6 19 64 98
Investment securities... 2,424 -- -- -- -- 2,424
Investments in other fi-
nancial institutions... 1,025 -- -- -- -- 1,025
------- ------ ------ ------ ------ -------
Total interest-
earning assets(1).. 86,431 18,395 8,146 4,707 771 118,450
======= ====== ====== ====== ====== =======
Interest-bearing liabil-
ities:
Savings deposits...... 3,680 -- -- -- -- 3,680
Demand and NOW
deposits............. 14,644 -- -- -- -- 14,644
Certificate accounts.. 39,834 16,790 6,539 1,980 -- 65,143
FHLB advances......... 19,500 -- -- -- -- 19,500
------- ------ ------ ------ ------ -------
Total interest-
bearing
liabilities........ 77,658 16,790 6,539 1,980 -- 102,967
======= ====== ====== ====== ====== =======
Interest sensitivity
gap.................... $ 8,773 1,605 1,607 2,727 771 15,483
Cumulative interest sen-
sitivity gap........... $ 8,773 10,378 11,985 14,712 15,483 15,483
Ratio of interest-earn-
ing assets to interest-
bearing liabilities.... 111.30% 109.56% 124.58% 237.73% --% 115.04%
Ratio of cumulative gap
to total assets........ 7.08% 8.38% 9.68% 11.88% 12.50% 12.50%
</TABLE>
- --------
(1) Calculated net of deferred loans fees, loan discounts, loans in process
and loan loss reserves.
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,
1998, as calculated by the OTS, based on information provided to the OTS by
the Bank.
9
<PAGE>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
<TABLE>
<CAPTION>
NPV AS
NPV % OF PV ASSETS
- -------------------------------------------------------------- -----------------
CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- -------- ----------- ----------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 bp..................... $ 14,352 -1,186 -8% 11.83% -47 bp
+300 bp..................... 15,100 -438 -3 12.28 -2 bp
+200 bp..................... 15,598 60 0 12.54 +24 bp
+100 bp..................... 15,755 217 +1 12.56 +25 bp
0 bp........................ 15,538 12.31
- -100 bp..................... 15,137 -401 -3 11.93 -38 bp
- -200 bp..................... 14,648 -890 -6 11.49 -82 bp
- -300 bp..................... 14,477 -1,061 -7 11.27 -104 bp
- -400 bp..................... 14,499 -1,039 -7 11.18 -112 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.
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, 1998 and 1997, the Bank originated loans for its portfolio in the
amount of $83 million and $58 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 4.0% 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 4.01% and
6.37%, respectively, at June 30, 1998 and 1997.
The Company's most liquid assets are cash and cash equivalents, which
include short-term investments. At June 30, 1998 and 1997, cash and cash
equivalents were $3.1 million and $4.0 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
10
<PAGE>
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, 1998, the Bank had outstanding loan commitments of $567,000 and
undisbursed loans in process of $18.7 million.
Certificates of deposit which are scheduled to mature in one year or less at
June 30, 1998 were $38.8 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At June 30, 1998, the Bank had tangible capital of $13.0 million, or 10.5%,
of total adjusted assets, which is approximately $11.1 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The Bank had core capital of $13.0 million, or 10.5%, of adjusted total
assets, which is $9.3 million above the minimum leverage ratio requirement of
3.0% in effect on that date. The Bank had total risk-based capital of $13.7
million and total risk-weighted assets of $111.8 million, or total capital of
12.2% of risk-weighted assets. This was $4.6 million above the 8.0%
requirement in effect on that date.
RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, in June 1997. SFAS No. 130 will require the Company to classify
items of other comprehensive income by their nature in the consolidated
financial statements and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the consolidated statement of stockholders'
equity. SFAS No. 131 requires that public enterprises report financial and
descriptive information about their reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by management. Both SFAS
No. 130 and SFAS No. 131 are effective for the Company's year ending June 30,
1999. The adoption of the standards is not expected to have a significant
impact on the consolidated financial statements of the Company.
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, in June 1998. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management believes adoption of
SFAS No. 133 will not have a material effect on the Company's financial
position or results of operations, nor will adoption require additional
capital resources.
YEAR 2000 ISSUE
The Board of Directors and the management of the Company have established a
formal process for the implementation of a plan to evaluate and correct the
problems that the year 2000 could cause to the Company's critical automated
systems. The year 2000 problem exists because many automated systems use only
two digit fields to represent the year, such as "98" representing 1998.
However, with the two digit format, the year 2000 is indistinguishable from
1900, 2001 from 1901, and so on. Should these critical systems fail in the
year 2000, the Company would have difficulty in processing transactions for
loan and deposit customers, which could cause significant damage to the
Company's important customer relationships.
The Company's year 2000 implementation process was established using a
standard framework set forth by the OTS. The process includes separate phases
for awareness, assessment, renovation, validation and implementation. The
Company's year 2000 plan also includes the development and implementation of a
contingency plan for each of the Company's critical automated systems if they
should fail to become year 2000 compliant by certain target dates. Such
contingency plans should be completed by the end of the fourth calendar
quarter in 1998. Since the Company does not develop any of the software
programs that are utilized, the process
11
<PAGE>
is focused on follow-up and testing of software provided by third-party vendors
and data centers to ensure their renovation. Also, the process attends to pre-
packaged computer software, personal computer and server hardware, and other
electronic equipment.
The data processing of the Bank's core operations is provided by a third-
party service bureau. Management has received assurances from the Bank's
service bureau that it is progressing toward its goal of making their software
and data center hardware year 2000 compliant. The Bank is participating in
testing procedures and it continues to prudently monitor the progress reports
received from the vendor. In the year 2000 process, the Company has also
evaluated the hardware and software on its wide-area network ("WAN"). To date,
the Company has completed the awareness and assessment phases of the year 2000
process. The plan's renovation will occur in the third and fourth calendar
quarters of 1998, with validation and implementation phases to occur by March
31, 1999. Management estimates that the year 2000 implementation process will
cost between $100,000 and $150,000, which includes the cost of capitalized
computer hardware for the WAN and other costs to perform testing and validation
of services provided by the Company's service bureau and other third parties.
The Company has previously had an on-site examination of its year 2000
process, which was performed by the OTS, its primary regulator. Management is
continuing to work closely with vendors, service providers and regulators to
accomplish its goal of a smooth transition to the year 2000.
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.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains forward-
looking statements. The forward-looking statements contained in the following
sections are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers should not place undue reliance on these forward-looking statements, as
they reflect management's analysis as of the date of this report. The Company
has no obligation to update or revise these forward-looking statements to
reflect events or circumstances that occur after the date of this report.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange
Commission, including Quarterly 10-Q reports and reports filed on Form 8-K.
12
<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, 1998 and 1997 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, 1998. 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
August 26, 1998
13
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 675,906 $ 588,056
Interest-bearing deposits in other financial
institutions...................................... 2,424,192 3,544,294
Investment securities:
Available-for-sale (amortized cost of $1,000,750
in 1997) (note 3)............................... -- 996,320
Held-to-maturity................................. 98,000 100,000
Mortgage-backed securities held-to-maturity
(estimated fair value of $82,000 and $156,000 in
1998 and 1997, respectively) (note 4)............. 81,066 154,352
Loans held for sale, net........................... 1,579,569 696,617
Loans receivable, net (note 5)..................... 113,242,706 90,320,430
Accrued interest receivable:
Loans receivable................................. 908,793 688,408
Investment securities............................ 2,123 20,028
Mortgage-backed securities....................... 1,084 1,697
Real estate owned.................................. 48,741 168,204
Stock in Federal Home Loan Bank (FHLB), at cost.... 1,025,000 810,700
Office property and equipment, net (note 6)........ 1,743,503 1,237,823
Deferred income tax benefit (note 9)............... 146,000 7,000
Cash surrender value of life insurance and other
assets............................................ 1,878,936 1,742,557
------------ ------------
Total assets................................... $123,855,619 $101,076,486
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7)................................ $ 85,776,785 $ 70,692,900
FHLB advances (note 8)........................... 19,500,000 10,750,000
Accrued expenses and other liabilities........... 679,789 741,009
Accrued interest payable on deposits............. 107,761 97,966
Advance payments by borrowers for property taxes
and insurance................................... 751,199 725,518
Current income taxes payable..................... 182,978 294,604
------------ ------------
Total liabilities.............................. 106,998,512 83,301,997
------------ ------------
Stockholders' equity:
Common stock, $.01 par; 3,500,000 authorized;
1,031,851 and 1,024,958 shares issued in 1998
and 1997, respectively.......................... 10,319 10,250
Additional paid-in capital....................... 9,912,731 9,728,357
Retained earnings, substantially restricted
(notes 10, 11 and 13)........................... 9,447,698 8,777,980
Treasury stock, 92,244 shares at cost in 1998.... (1,433,157) --
Unearned employee benefits (note 10)............. (1,080,484) (739,440)
Unrealized losses on available-for-sale
securities, net of tax.......................... -- (2,658)
------------ ------------
Total stockholders' equity..................... 16,857,107 17,774,489
Commitments (note 5)...............................
------------ ------------
Total liabilities and stockholders' equity......... $123,855,619 $101,076,486
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable.............................. $9,046,683 7,296,558 6,515,006
Mortgage-backed securities.................... 7,348 18,133 135,461
Investment securities......................... 19,960 61,247 100,448
Other......................................... 192,008 98,075 72,957
---------- --------- ---------
Total interest income....................... 9,265,999 7,474,013 6,823,872
========== ========= =========
Interest expense:
Deposits (note 7)............................. 3,813,986 3,045,250 3,251,677
FHLB advances................................. 705,884 488,766 753,745
---------- --------- ---------
Total interest expense...................... 4,519,870 3,534,016 4,005,422
---------- --------- ---------
Net interest income............................. 4,746,129 3,939,997 2,818,450
Provision for loan losses (note 5).............. 266,514 59,693 235,828
---------- --------- ---------
Net interest income after provision for loan
losses......................................... 4,479,615 3,880,304 2,582,622
---------- --------- ---------
Noninterest income:
Gain on sales of loans, net................... 459,813 156,708 184,899
Customer service charges...................... 224,101 214,863 197,577
Loan servicing fees........................... 54,712 97,623 92,247
Net realized gain on sale of investment and
mortgage-backed securities available-for-
sale......................................... -- -- 54,205
Other......................................... 128,273 127,051 127,161
---------- --------- ---------
Total noninterest income.................... 866,899 596,245 656,089
========== ========= =========
Noninterest expense:
Compensation, payroll taxes and fringe bene-
fits (note 10)............................... 2,192,707 1,443,398 1,203,276
Office property and equipment................. 412,640 297,454 274,213
Data processing............................... 166,401 165,612 171,257
Federal insurance premiums (note 7)........... 48,149 532,794 157,259
Advertising................................... 124,414 73,036 60,253
Real estate owned and repossessed assets...... 65,018 34,542 14,351
Other......................................... 739,357 559,666 457,902
---------- --------- ---------
Total noninterest expense................... 3,748,686 3,106,502 2,338,511
========== ========= =========
Earnings before income taxes.................... 1,597,828 1,370,047 900,200
Income taxes (note 9)........................... 543,586 485,487 323,376
---------- --------- ---------
Net earnings.................................... $1,054,242 884,560 576,824
========== ========= =========
Earnings per share:
Basic......................................... $ 1.12 .94 --
Diluted....................................... 1.11 .94 --
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
NET GAIN
ADDITIONAL UNEARNED (LOSS) ON
COMMON PAID-IN RETAINED TREASURY EMPLOYEE AVAILABLE-FOR-
STOCK CAPITAL EARNINGS STOCK BENEFITS SALE SECURITIES TOTAL
------- ---------- --------- ---------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................... $ -- -- 7,505,716 -- -- (24,858) 7,480,858
Net earnings............ -- -- 576,824 -- -- -- 576,824
Change in unrealized
gain (loss) on
available-for-sale
securities............. -- -- -- -- -- 8,208 8,208
------- --------- --------- ---------- ---------- ------- ----------
Balance at June 30,
1996................... -- -- 8,082,540 -- -- (16,650) 8,065,890
Net earnings............ -- -- 884,560 -- -- -- 884,560
Sale of common stock,
net of offering costs.. 10,250 9,685,124 -- -- -- -- 9,695,374
Change in unrealized
gain (loss) on
available-for-sale
securities............. -- -- -- -- -- 13,992 13,992
Unearned employee stock
ownership plan (ESOP)
shares................. -- -- -- -- (819,960) -- (819,960)
Allocation of ESOP
shares................. -- 43,233 -- -- 80,520 -- 123,753
Dividend declared ($.20
per share)............. -- -- (189,120) -- -- -- (189,120)
------- --------- --------- ---------- ---------- ------- ----------
Balance at June 30,
1997................... 10,250 9,728,357 8,777,980 -- (739,440) (2,658) 17,774,489
Net earnings............ -- -- 1,054,242 -- -- -- 1,054,242
Change in unrealized
gain (loss) on
available-for-sale
securities............. -- -- -- -- -- 2,658 2,658
Allocation of ESOP
shares................. -- 132,003 -- -- 120,580 -- 252,583
Purchase of 92,244
shares of treasury
stock.................. -- -- -- (2,090,907) -- -- (2,090,907)
Adoption of Recognition
and Retention Plan
(RRP) (note 10)........ 69 52,371 -- 657,750 (710,190) -- --
Amortization of RRP, net
of forfeitures......... -- -- -- -- 248,566 -- 248,566
Dividend declared ($.42
per share)............. -- -- (384,524) -- -- -- (384,524)
------- --------- --------- ---------- ---------- ------- ----------
Balance at June 30,
1998................... $10,319 9,912,731 9,447,698 (1,433,157) (1,080,484) -- 16,857,107
======= ========= ========= ========== ========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.......................... $ 1,054,242 884,560 576,824
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provision for loan losses............. 266,514 59,693 235,828
Depreciation.......................... 209,897 147,587 132,335
Amortization of RRP and allocation of
ESOP shares.......................... 501,149 123,753 --
Net realized gain on sale of
securities available-for-sale........ -- -- (54,205)
(Gain) loss on disposition of real
estate owned, net.................... (3,227) 14,930 --
Proceeds from sale of loans held for
sale................................. 23,217,640 11,444,211 16,276,153
Origination of loans held for sale.... (23,640,779) (11,618,120) (14,938,346)
Gain on sale of loans, net............ (459,813) (156,708) (184,899)
Premium amortization and accretion of
discounts and deferred loan fees,
net.................................. (466,442) (330,292) (282,871)
Provision for deferred income taxes... (140,772) 6,672 (55,472)
FHLB stock dividends.................. -- -- (16,000)
Changes in assets and liabilities:
Accrued interest receivable.......... (201,867) (84,296) (53,786)
Other assets......................... (136,379) 10,947 (172,428)
Accrued expenses and other
liabilities......................... (75,077) 121,272 47,989
Accrued interest payable on
deposits............................ 9,795 (13,261) 6,458
Current income taxes payable......... (111,626) 28,295 271,869
------------ ----------- -----------
Net cash provided by operating
activities............................ 23,255 639,243 1,789,449
------------ ----------- -----------
Cash flows from investing activities:
Net increase in loans receivable...... (23,047,384) (11,194,574) (1,632,432)
Purchase of investment securities
held-to-maturity..................... -- -- (100,000)
Purchase of FHLB stock................ (214,300) -- --
Maturity of investment securities
available-for-sale................... 1,000,000 1,000,000 --
Maturity of investment securities
held-to-maturity..................... 2,000 -- --
Sales of investment securities
available-for-sale................... -- -- 4,046,846
Mortgage-backed securities principal
repayments........................... 73,108 243,910 553,490
Purchase of office property and
equipment............................ (715,577) (112,503) (116,890)
Proceeds from sale of real estate
owned................................ 448,654 9,000 --
Purchase of life insurance policies... -- -- (1,420,000)
------------ ----------- -----------
Net cash provided by (used in)
investing activities.................. $(22,453,499) (10,054,167) 2,751,014
============ =========== ===========
Cash flows from financing activities:
Proceeds from sale of common stock,
net of issuance costs................ $ -- 8,875,414 --
Increase (decrease) in deposits....... 15,083,885 2,523,340 (104,916)
Proceeds from FHLB advances........... 22,750,000 32,250,000 23,650,000
Repayments of FHLB advances........... (14,000,000) (33,500,000) (27,526,915)
Increase (decrease) in advance
payments by borrowers for property
taxes and insurance.................. 25,681 33,721 (172,983)
Purchase of treasury stock............ (2,090,907) -- --
Dividends paid........................ (370,667) (94,560) --
------------ ----------- -----------
Net cash provided by (used in)
financing activities.................. 21,397,992 10,087,915 (4,154,814)
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... (1,032,252) 672,991 385,649
Cash and cash equivalents at the
beginning of the year................. 4,132,350 3,459,359 3,073,710
Cash and cash equivalents at the end of
the year.............................. $ 3,100,098 4,132,350 3,459,359
Supplemental disclosure of cash flow
information:
Cash paid during the year for income
taxes................................ $ 643,000 360,000 122,000
Cash paid during the year for
interest............................. $ 4,510,075 3,547,276 3,998,964
Supplemental schedule of noncash
investing and financing activities:
Conversion of loans to real estate
owned................................ $ 325,964 192,134 --
Loans made to finance sales of real
estate owned......................... $ 476,818 9,000 --
Dividends declared and payable........ $ 116,353 94,560 --
Unearned ESOP shares.................. $ -- 819,960 --
Allocation of RRP shares.............. $ 710,190 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(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 (ESOP) 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 Federal Home Loan Bank (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.
(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 are those of the Bank. Significant intercompany
balances and transactions have been eliminated in consolidation.
(B) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements 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
18
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reported as a separate component of stockholders' equity until realized.
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.
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.
(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.
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.
(E) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions 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.
(F) MORTGAGE BANKING ACTIVITIES
The Company accounts for its mortgage servicing rights in accordance with
Statement of Financial Accounting Standards (SFAS) No. 122, Accounting for
Mortgage Servicing Rights, as amended by SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement requires that the value of retained mortgage
servicing rights related to loans originated and sold after January 1, 1996 be
capitalized as an asset, thereby increasing the gain on sale of the loan by
the amount of the asset. Such mortgage servicing rights are amortized in
proportion to and over the period of the estimated net servicing income. Any
remaining unamortized amount is charged to expense if the related loan is
repaid prior to
19
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
maturity. Management monitors the capitalized mortgage servicing rights for
impairment based on the fair value of those rights. Any impairment is
recognized through a valuation allowance.
Included in gains on sales of loans are capitalized mortgage servicing
rights aggregating $87,000 and $30,000 in 1998 and 1997, respectively.
Amortization expense related to the capitalized servicing rights, included as
a reduction of loan servicing fees in the accompanying consolidated statements
of earnings, aggregated $18,000 and $4,000 during 1998 and 1997, respectively.
At June 30, 1998 and 1997, the Bank was servicing loans for others amounting
to $30,442,000 and $29,812,000, 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, 1998 and 1997 amounted to
$259,000 and $264,000, 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 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.
(K) 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.
20
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(L) EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the periods presented. Diluted earnings per share
includes the effects of all dilutive potential common shares outstanding
during each period. Unallocated ESOP shares are excluded from outstanding
shares. 1997 per share information assumes the shares issued in September 1996
had been outstanding for the entire period and further assumes no earnings or
reinvested proceeds from the sale of shares.
The shares used in the calculation of basic and diluted earnings per share
are shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding... 940,742 945,907 --
Stock options................................ 5,154 -- --
---------- ---------- ------
945,896 945,907 --
========== ========== ======
</TABLE>
(M) FUTURE ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, in June 1997. SFAS No. 130 will
require the Company to classify items of other comprehensive income by their
nature in the consolidated financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the statement of
stockholders' equity. SFAS No. 131 requires that public enterprises report
financial and descriptive information about their reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
management. Both SFAS No. 130 and SFAS No. 131 are effective for the Company's
year ending June 30, 1999. The adoption of the standards is not expected to
have a significant impact on the consolidated financial statements of the
Company.
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, in June 1998. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management believes adoption of
SFAS No. 133 will not have a material effect on the Company's financial
position or results of operations, and adoption will not require additional
capital resources.
(3) INVESTMENT SECURITIES
A summary of investment securities available-for-sale 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
obligations maturing within
one year..................... $1,000,750 -- (4,430) 996,320
</TABLE>
There were no sales of investment securities during the years ended June 30,
1998 and 1997. 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.
21
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held-to-maturity consisted of the following at
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1998:
Federal Home Loan Mortgage
Corporation (FHLMC) participation
certificates...................... $ 80,358 720 -- 81,078
Pass-through certificate guaranteed
by Government National Mortgage
Association (GNMA)................ 708 19 -- 727
-------- ----- ---- -------
$81,066 739 -- 81,805
======== ===== ==== =======
June 30, 1997:
FHLMC participation certificates... $152,047 1,977 (198) 153,826
Pass-through certificate guaranteed
by GNMA........................... 2,305 45 -- 2,350
-------- ----- ---- -------
$154,352 2,022 (198) 156,176
======== ===== ==== =======
</TABLE>
There were no sales of mortgage-backed securities during the years ended
June 30, 1998 and 1997. 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.
(5) LOANS RECEIVABLE
Loans receivable consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Real estate:
One-to-four family residential................... $ 63,922,360 56,562,611
Construction..................................... 48,640,551 30,332,097
Land............................................. 4,243,136 3,392,727
Commercial....................................... 2,767,600 1,520,262
Multifamily...................................... 1,602,006 747,921
Consumer loans................................... 11,890,754 10,900,375
------------ -----------
133,066,407 103,455,993
============ ===========
Less:
Loans in process................................. 18,660,635 12,349,562
Deferred loan origination fees and discounts on
loans, net...................................... 494,066 350,001
Allowance for loan losses........................ 669,000 436,000
------------ -----------
$113,242,706 90,320,430
============ ===========
</TABLE>
At June 30, 1998 and 1997, the Bank was committed to originate first
mortgage loans aggregating approximating $567,000 and $791,000, respectively,
of which $196,000 and $31,000 was committed to be sold to a third party. Fixed
rate loan commitments approximated $397,000 at June 30, 1998, with rates
ranging from 6.75% to 8.00% and $791,000 at June 30, 1997, with rates ranging
from 8.00% to 9.00%. There were no commitments to buy loans at June 30, 1998
or 1997.
22
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had loans to directors and officers at June 30, 1998 and 1997
which carry terms similar to those for other loans. A summary of such loans is
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Balance at beginning of year.......................... $1,249,000 1,357,000
New loans............................................. 357,000 176,000
Payments.............................................. (560,000) (284,000)
---------- ---------
Balance at end of year................................ $1,046,000 1,249,000
========== =========
</TABLE>
A summary of activity in the allowance for loan losses for the years ended
June 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year.................... $436,000 388,000 226,000
Provision for loan losses....................... 266,514 59,693 235,828
Charge-offs..................................... (83,388) (52,874) (107,408)
Recoveries...................................... 49,874 41,181 33,580
-------- ------- --------
Balance at end of year.......................... $669,000 436,000 388,000
======== ======= ========
</TABLE>
Nonaccrual loans at June 30, 1998 and 1997 aggregated approximately $678,000
and $916,000, respectively. Gross interest income which would have been
recorded had the nonaccruing loans been in accordance with their original terms
amounted to $34,000 and $36,000 for the years ended June 30, 1998 and 1997,
respectively. The amount that was included in income on such loans was $39,000
and $35,000 for the years ended June 30, 1998 and 1997, 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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Land and land improvements.............................. $ 171,130 171,130
Office buildings........................................ 1,437,721 1,321,053
Furniture and equipment................................. 1,480,919 881,958
---------- ---------
3,089,770 2,374,141
Less accumulated depreciation........................... 1,346,267 1,136,318
---------- ---------
$1,743,503 1,237,823
========== =========
</TABLE>
23
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEPOSITS
Deposit balances at June 30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance by interest rate:
Noninterest bearing demand
accounts.................... -- $ 2,309,696 3% $ 1,658,159 2%
NOW accounts................. 1.75-2.25% 8,852,647 10 8,327,763 12
Money market................. 2.50-2.75 5,791,338 7 5,394,253 8
Passbook accounts............ 2.25-2.75 3,679,644 4 3,726,022 5
----------- ---- ----------- ----
20,633,325 24 19,106,197 27
----------- ---- ----------- ----
Certificate accounts: 2.00-2.99 1,324 -- 1,850 --
4.00-4.99 -- -- 888,761 1
5.00-5.99 36,237,309 42 33,442,412 48
6.00-6.99 28,904,827 34 17,237,712 24
7.00-7.99 -- -- 15,968 --
----------- ---- ----------- ----
65,143,460 76 51,586,703 73
----------- ---- ----------- ----
$85,776,785 100% $70,692,900 100%
=========== ==== =========== ====
Weighted average interest rate
on deposits at period end..... 4.84% 4.62%
==== ====
Contractual maturity of certif-
icate accounts:
Under 12 months.............. $38,849,876 60% $30,789,852 60%
12 to 24 months.............. 14,640,894 22 13,663,487 26
24 to 36 months.............. 3,134,188 5 2,028,949 4
36 to 48 months.............. 3,238,399 5 1,482,116 3
48 to 60 months.............. 3,300,051 5 1,502,400 3
Over 60 months............... 1,980,052 3 2,119,899 4
----------- ---- ----------- ----
$65,143,460 100% $51,586,703 100%
=========== ==== =========== ====
</TABLE>
At June 30, 1998 and 1997, deposits of $100,000 or more totaled $6,823,000
and $3,628,000, respectively.
The components of interest expense on deposits for the years ended June 30,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
NOW, passbook, Super NOW and money market
demand.................................... $ 375,707 380,897 372,422
Certificates of deposit.................... 3,438,279 2,664,353 2,879,255
---------- --------- ---------
$3,813,986 3,045,250 3,251,677
========== ========= =========
</TABLE>
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.
24
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) FHLB ADVANCES
The Company had the following debt outstanding from the FHLB of Des Moines
at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
$500,000 advance, interest at 5.72% due December 1998... $ 500,000 --
$1,000,000 advance, interest at 5.74% due December
1998................................................... 1,000,000 --
$1,000,000 advance, interest at 5.75% due December
1998................................................... 1,000,000 --
$1,000,000 advance, interest at 5.81% due June 1999..... 1,000,000 --
$1,000,000 advance, interest at 5.82% due June 1999..... 1,000,000 --
$1,000,000 advance, interest at 5.86% due June 1998..... -- 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
$3,000,000 advance, interest at 5.46% due November
2000................................................... 3,000,000 --
$2,000,000 advance, interest at 5.08% due June 2008..... 1,000,000 --
Borrowings on an $8,000,000 line of credit, interest at
approximately 50 basis points above the U. S. treasury
bill rate (5.75% at June 30, 1998 and 1997) maturing
May 1999............................................... 8,000,000 3,750,000
----------- ----------
$19,500,000 10,750,000
=========== ==========
</TABLE>
The advances and lines of credit to the FHLB are collateralized by first
mortgage loans.
Scheduled maturities of FHLB advances at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- -------------------- -----------
<S> <C>
1999.............................................................. $12,500,000
2000.............................................................. 3,000,000
2001.............................................................. 3,000,000
2002.............................................................. --
2003.............................................................. --
Thereafter........................................................ 1,000,000
-----------
$19,500,000
===========
</TABLE>
25
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------- ------- --------
<S> <C> <C> <C>
Year ended June 30, 1998:
Current......................................... $ 600,238 84,348 684,586
Deferred........................................ (124,000) (17,000) (141,000)
--------- ------- --------
$ 476,238 67,348 543,586
========= ======= ========
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 34.0%, 35.4% and
35.9% (applied to earnings before taxes) for the years ended June 30, 1998,
1997 and 1996, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate...................................... 34.0% 34.0 34.0
Items affecting federal income tax rate:
ESOP....................................................... 2.2 .6 --
Increase in cash surrender value of life insurance
policies, net of nondeductible premiums................... (1.6) (1.0) (1.6)
State income tax net of federal benefit.................... 2.7 1.3 3.3
Other...................................................... (3.3) .5 .2
---- ---- ----
Effective income tax rate.................................... 34.0% 35.4 35.9
==== ==== ====
</TABLE>
26
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Accrued compensation....................................... $ 136,000 58,000
Allowance for loan losses.................................. 258,000 150,000
Unrealized losses on assets available-for-sale............. -- 2,000
--------- --------
Deferred income tax asset.................................. 394,000 210,000
--------- --------
Loan origination fees...................................... (105,000) (124,000)
Fixed assets............................................... (75,000) (65,000)
Originated servicing rights................................ (39,000) --
Other...................................................... (29,000) (14,000)
--------- --------
Deferred income tax liability.............................. (248,000) (203,000)
--------- --------
Net deferred income tax benefit............................ $ 146,000 7,000
========= ========
</TABLE>
There was no valuation allowance for deferred tax assets required at June
30, 1998 or 1997. Management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to
realize the deferred tax assets.
Prior to 1996, savings institutions that met certain definitional tests and
other conditions prescribed by the Internal Revenue Code were allowed to
deduct, within limitations, a bad debt deduction under either of two
alternative methods: (i) a deduction based on a percentage of taxable income
(most recently 8%), or (ii) a deduction based upon actual loan loss experience
(the Experience Method). The Small Business Job Protection Act (the Act)
repealed the bad debt deduction based on a percentage of taxable income
effective for taxable years beginning after December 31, 1995. The Company,
therefore, is now limited to the use of the bad debt deduction computed under
the Experience Method. The Company's base year tax bad debt reserve balance of
approximately $1.7 million will, in future years, be subject to recapture in
whole or in part upon the occurrence of certain events, such as a distribution
to stockholders in excess of the Company's current and accumulated earnings
and profits, a redemption of shares or upon a partial or complete liquidation
of the Company. The Company does not intend to make distributions to
stockholders that would result in recapture of any portion of its base year
bad debt reserve. Since management intends to use the reserve only for the
purpose for which it was intended, a deferred tax liability of approximately
$578,000 has not been recorded.
(10) BENEFIT PLANS
DEFERRED COMPENSATION PLAN
Effective March 1995, the 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 beneficiaries 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, 1998, 1997
and 1996 was approximately $51,000, $45,000 and $39,000, respectively. The
Directors/Officers and their beneficiaries are general unsecured creditors of
the Bank for all amounts due under these agreements.
27
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN
Qualified employees of the Company and Bank participate in an 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
consolidated balance sheets. As of June 30, 1998 and 1997, 12,062 and 8,052
shares, respectively, had been allocated to participants. Compensation and
benefits expense in 1998 and 1997, representing the fair value of allocated
shares, was $252,583 and $123,753, respectively. The fair value of the
remaining unallocated shares at June 30, 1998 aggregated approximately
$1,242,000.
RECOGNITION AND RETENTION PLAN
During 1998, the Company adopted a RRP. Under the RRP, common stock
aggregating 36,893 shares was awarded to certain officers and directors of the
Company and the Bank. The awards do not require any payment by the recipients.
The shares were 20% vested upon adoption of the RRP with the remaining shares
vesting equally over four years. The fair value of the shares at the date of
award, aggregating $710,190, has been included in unearned compensation in the
accompanying consolidated balance sheet and will be amortized to expense over
the vesting period. The Company recognized RRP expense of $248,566 in 1998.
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 in both 1998 and
1997, respectively.
(11) STOCK OPTIONS
During 1998, the Company adopted a stock option plan. Under the plan,
options to acquire 92,247 shares of the Company's common stock may be granted
to certain officers, directors and employees of the Company or the Bank. The
options enable the recipient to purchase stock at an exercise price equal to
the fair value of the stock at the date of the grant. On October 28, 1997, the
Company granted options to acquire 92,247 shares for $19.25 per share. The
options vest over five years and are exercisable for up to ten years.
SFAS No. 123, Accounting for Stock-Based Compensation, permits entities to
recognize, as expense over the vesting period, the fair value of stock-based
awards. Alternately, SFAS No. 123 allows entities to disclose pro forma net
income and income per share as if the fair value-based method defined in SFAS
No. 123 had been applied, while continuing to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, under which compensation expense is recorded on the date of
grant only if the current fair value of the underlying stock exceeds the
exercise price.
The Company has elected to apply the recognition provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. If
compensation expense for the stock options had been determined based upon the
fair value at the grant date consistent with the methodology prescribed under
SFAS No. 123, the Company's net earnings and diluted earnings per share would
have been reduced by approximately $64,000 or $.06 per diluted share in 1998.
28
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of the fair values of options granted using the
Black-Scholes option-pricing model:
<TABLE>
<S> <C>
Fair value at grant date......................................... $19.25
Assumptions:
Dividend yield................................................. 2.06%
Volatility..................................................... 15.00%
Risk-free interest rate........................................ 5.60%
Expected life.................................................. 10 years
</TABLE>
(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.
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, Missouri 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 Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of risk-based capital, as defined in the regulations, to risk-
weighted assets, as defined, and of tangible and core capital, as defined, to
total assets, as defined. Management believes, as of June 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject. To be
categorized as well capitalized under the regulatory framework for prompt
corrective action, the Bank must maintain minimum total risk-based, leverage
risk-based, tangible and core capital ratios as set forth in the table.
29
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank met all regulatory capital requirements at June 30, 1998 and 1997.
The Bank's actual and required capital amounts and ratios as of June 30, 1998
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)....... $13,000,000 10.51% $ 1,855,000 1.50% $ -- -- %
Tier I leverage (core)
capital
(to adjusted tangible
assets)................ 13,000,000 10.51 3,710,000 3.00 6,184,000 5.00
Risk-based capital
(to risk-weighted as-
sets).................. 13,508,000 12.08 8,945,000 8.00 11,181,000 10.00
Tier I leverage risk-
based capital
(to risk-weighted as-
sets).................. 13,000,000 11.63 -- -- 6,709,000 6.00
</TABLE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of the Company's financial instruments as of June 30,
1998 and 1997, including methods and assumptions utilized, are set forth
below:
<TABLE>
<CAPTION>
1998 1997
------------------------ ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Investment securities.......... $ -- -- 996,320 996,000
------------ ----------- ---------- ----------
Mortgage-backed securities..... $ 81,066 82,000 154,352 156,000
------------ ----------- ---------- ----------
Loans, net of loans in
process....................... $114,822,275 116,048,000 91,106,431 93,208,000
------------ ----------- ---------- ----------
Noninterest bearing demand
deposit....................... $ 2,309,696 2,310,000 1,658,159 1,658,000
Money market and NOW deposits.. 14,643,985 14,644,000 13,722,016 13,722,000
Passbook accounts.............. 3,679,644 3,680,000 3,726,022 3,726,000
Certificate accounts........... 65,143,460 65,279,000 51,586,703 51,239,000
------------ ----------- ---------- ----------
Total deposits................. $ 85,776,785 85,913,000 70,692,900 70,345,000
------------ ----------- ---------- ----------
FHLB advances.................. $ 19,500,000 19,410,000 10,750,000 10,490,000
------------ ----------- ---------- ----------
</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.
30
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The estimated fair value of advances from the FHLB is determined by
discounting the future cash flows of existing advances using rates currently
available on advances from the FHLB with similar characteristics.
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.
31
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Presented below are financial statements of the Company (parent only) as of
and for the years ended June 30, 1998 and 1997:
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Cash and cash equivalents............................ $ 108,404 616,521
Investment in subsidiary............................. 13,000,515 12,538,587
ESOP loan receivable................................. 638,867 750,475
Loan receivable from subsidiary...................... 3,250,000 4,000,000
----------- ----------
Total assets......................................... $16,997,786 17,905,583
=========== ==========
Dividends payable.................................... $ 116,353 102,496
Other liabilities.................................... 24,326 28,598
----------- ----------
Total liabilities.................................... 140,679 131,094
Stockholders' equity................................. 16,857,107 17,774,489
----------- ----------
Total liabilities and stockholders' equity........... $16,997,786 17,905,583
=========== ==========
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 30, 1998 AND 1997
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Interest income...................................... $ 238,270 200,955
Other expense, net................................... (209,118) (141,767)
----------- ----------
Income before equity in undistributed earnings of
Bank................................................ 29,152 59,188
Equity in earnings of Bank........................... 1,025,090 825,372
----------- ----------
Net income........................................... $ 1,054,242 884,560
=========== ==========
</TABLE>
32
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash provided by operating activities:
Net earnings......................................... $1,054,242 884,560
Change in other liabilities.......................... (4,272) 26,284
Undistributed earnings of Bank....................... (1,025,090) (825,372)
---------- ----------
Cash provided by operating activities................. 24,880 85,472
---------- ----------
Cash used by investing activities:
Net decrease (increase) in loans receivable.......... 861,608 (4,750,475)
Investment in Bank................................... -- (4,319,290)
---------- ----------
Cash provided by (used in) investing activities....... 861,608 (9,069,765)
---------- ----------
Cash provided by financing activities:
Dividends from subsidiary............................ 1,066,969 --
Proceeds from stock offering, net of conversion
costs............................................... -- 9,695,374
Dividends paid....................................... (370,667) (94,560)
Purchase of treasury stock........................... (2,090,907) --
---------- ----------
Cash (used in) provided by financing activities....... (1,394,605) 9,600,814
---------- ----------
Net (decrease) increase in cash....................... (508,117) 616,521
Cash and cash equivalents at beginning of year........ 616,521 --
---------- ----------
Cash and cash equivalents at end of year.............. $ 108,404 616,521
========== ==========
Noncash investing and financing activities--dividend
declared and payable................................. $ 116,353 94,560
========== ==========
</TABLE>
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 4:00 p.m., Excelsior
Springs, Missouri time on October 22, 1998, 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."
33
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRICE RANGE OF COMMON STOCK
The per share price range of the common stock and the dividends declared 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 1998 HIGH LOW DIVIDENDS
- ----------- ------- ------ ---------
<S> <C> <C> <C>
First quarter.......................................... $20.500 17.125 .10
Second quarter......................................... 22.500 19.125 .10
Third quarter.......................................... 26.000 21.375 .10
Fourth quarter......................................... 22.875 18.625 .12
<CAPTION>
FISCAL 1997 HIGH LOW DIVIDENDS
- ----------- ------- ------ ---------
<S> <C> <C> <C>
First quarter.......................................... $ 13.00 12.250 --
Second quarter......................................... 14.25 12.375 --
Third quarter.......................................... 17.50 14.000 .10
Fourth quarter......................................... 18.00 15.875 .10
</TABLE>
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, 1998, there were 1,031,851 shares issued and 1,024,958 shares
outstanding of CBES Bancorp, Inc. (CBES) common stock (including unallocated
ESOP shares) and there were approximately 243 registered holders of record.
<TABLE>
<CAPTION>
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
- ---------------------------------- --------------------------
<S> <C>
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
</TABLE>
ANNUAL AND OTHER REPORTS
A copy of CBES Bancorp, Inc.'s Annual Report on Form 10-KSB for the year
ended June 30, 1998, 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.
CORPORATE INFORMATION
<TABLE>
<CAPTION>
COMPANY AND BANK ADDRESS
------------------------
<S> <C>
1001 N. Jesse James Road Telephone: (816) 630-6711
Excelsior Springs, Missouri
64024 Fax: (816) 630-1663
</TABLE>
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.
34
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
<TABLE>
<S> <C>
Robert McCrorey
Chairman of the Board and Larry E. Hermreck
President Chief Executive Officer
Dennis D. Hartman
Chief Financial Officer
</TABLE>
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK EXECUTIVE OFFICERS
<TABLE>
<S> <C>
Robert McCrorey
Chairman of the Board and Larry E. Hermreck
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
</TABLE>
<TABLE>
<CAPTION>
INDEPENDENT ACCOUNTANTS SPECIAL COUNSEL
<S> <C>
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
</TABLE>
35
<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 of Excelsior 100% Federal
Springs, a Savings Bank
Community Bank of
Excelsior Springs, a
Savings Bank........... CBES Service Corporation 100% Missouri
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 675,906
<INT-BEARING-DEPOSITS> 2,424,192
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 179,066
<INVESTMENTS-MARKET> 180,123
<LOANS> 114,822,275
<ALLOWANCE> 669,000
<TOTAL-ASSETS> 123,855,619
<DEPOSITS> 85,776,785
<SHORT-TERM> 19,500,000
<LIABILITIES-OTHER> 679,789
<LONG-TERM> 0
0
0
<COMMON> 10,319
<OTHER-SE> 16,846,788
<TOTAL-LIABILITIES-AND-EQUITY> 123,855,619
<INTEREST-LOAN> 9,046,683
<INTEREST-INVEST> 27,308
<INTEREST-OTHER> 192,008
<INTEREST-TOTAL> 9,265,999
<INTEREST-DEPOSIT> 3,813,986
<INTEREST-EXPENSE> 4,519,870
<INTEREST-INCOME-NET> 4,746,129
<LOAN-LOSSES> 266,514
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 739,357
<INCOME-PRETAX> 1,597,828
<INCOME-PRE-EXTRAORDINARY> 1,054,242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,054,242
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 8.71
<LOANS-NON> 678,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 436,000
<CHARGE-OFFS> 83,000
<RECOVERIES> 50,000
<ALLOWANCE-CLOSE> 669,000
<ALLOWANCE-DOMESTIC> 669,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
