<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to __________________________
Commission File Number 0-21163
CBES BANCORP, INC.
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(Name of small business issuer in its charter)
Delaware 43-1753244
- ------------------------------ -----------------------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1001 North Jesse James Road, Excelsior Springs, Missouri 64024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 630-6711
-----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
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. [_]
The Registrant's revenues for the fiscal year ended June 30, 1999 were
$13.5 million.
As of September 17, 1999, there were 1,031,851 shares issued and 921,127
shares outstanding 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 17, 1999, was $14.3 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.)
<PAGE>
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, 1999.
Part III of Form 10-KSB - Portions of Proxy Statement for 1999 Annual
Meeting of Stockholders.
2
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PART I
Item 1. Description of Business
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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 which we expect to
continue for the next few years. At June 30, 1999, Community Bank had total
assets of $150.4 million, deposits of $101.4 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, 1999, the Bank's total loan
portfolio was $163.1 million, of which 43.7% were one- to four-family
residential mortgage loans, 42.8% were construction and land loans (the vast
majority of which related to single-family residential properties), and 8.9%
were consumer loans. During the fiscal year ended June 30, 1999, the Bank
originated $51.0 million of fixed-rate one- to four-family residential mortgage
loans, of which $40.4 million, or 79.2%, 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.
3
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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 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 2.9% and the
twelve-month average unemployment rate in Ray County was 9.7%.
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 and ARM
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, 1999, the maximum amount which the Bank could have lent under this
limit to any one borrower and the borrower's related entities was approximately
$4.6 million. At June 30, 1999, 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, 1999 was approximately $3.2
million in loans to a residential builder primarily for the construction of
single-family residences and was secured by real estate located in Clay County,
Missouri. At June 30, 1999, all of these loans were performing in accordance
with their terms.
Loan Portfolio Composition. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
4
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<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1999 1998 1997
----------------- ---------------------- ----------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- ------------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential..... $ 71,353 43.74% $ 65,502 48.65% $ 57,260 54.98%
Multi-family........................ 1,951 1.20 1,602 1.19 748 0.72
Commercial.......................... 5,496 3.37 2,768 2.06 1,520 1.46
Land................................ 6,485 3.98 4,243 3.15 3,393 3.26
Construction........................ 63,319 38.81 48,641 36.12 30,332 29.12
-------- ------ -------- ------ -------- ------
Total real estate loans.............. 148,604 91.10 122,756 91.17 93,253 89.54
-------- ------ -------- ------ -------- ------
Consumer loans:
Direct automobile loans............. 9,174 5.62 7,166 5.32 6,585 6.32
Indirect automobile loans........... 2,460 1.51 2,348 1.75 2,034 1.95
Deposit accounts.................... 448 0.27 616 0.46 548 0.53
Home improvement.................... 6 -- 19 0.01 69 0.07
Commercial loans.................... 257 0.16 286 0.21 213 0.20
Other............................... 2,194 1.34 1,455 1.08 1,451 1.39
-------- ------ -------- ------ -------- ------
Total consumer loans............. 14,539 8.90 11,890 8.83 10,900 10.46
-------- ------ -------- ------ -------- ------
Total loan portfolio............. 163,143 100.00% 134,646 100.00% 104,153 100.00%
====== ====== ======
Less:
Loans in process.................... 27,153 18,661 12,350
Deferred loan origination fees and
discounts on loans, net........... 604 494 350
Allowance for loan losses........... 927 669 436
-------- -------- --------
Total loans receivable, net....... 134,459 $114,822 $ 91,017
======== ======== ========
</TABLE>
5
<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,
---------------------------------------------------------------
1999 1998 1997
------------------- ---------------------- ------------------
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............. $ 21,614 13.25% $ 15,634 11.61% $ 10,263 9.85%
Multi-family.................... -- -- -- -- -- --
Commercial...................... 2,834 1.74 1,630 1.21 509 0.49
Land............................ 2,839 1.74 800 0.59 180 0.17
Construction.................... 63,319 38.81 48,641 36.13 27,898 26.79
-------- -------- -------- ------ -------- ------
Total real estate loans.......... 90,606 55.54 66,705 49.54 38,850 37.30
-------- -------- -------- ------ -------- ------
Consumer loans.................... 14,232 8.72 11,609 8.62 10,670 10.25
-------- -------- -------- ------ -------- ------
Total fixed-rate loans....... 104,838 64.26 78,314 58.16 49,520 47.55
-------- -------- -------- ------ -------- ------
Adjustable Rate Loans:
Real estate:
One- to four-family............. 49,739 30.49 $ 49,868 37.04% $ 46,997 45.12%
Multi-family.................... 1,951 1.20 1,602 1.19 748 0.72
Commercial...................... 2,662 1.63 1,138 0.84 1,011 0.97
Land............................ 3,646 2.23 3,443 2.56 3,213 3.08
Construction.................... -- -- -- -- 2,434 2.34
-------- -------- -------- ------ -------- ------
Total real estate loans.......... 57,998 35.55 56,051 41.63 54,403 52.23
-------- -------- -------- ------ -------- ------
Consumer loans.................... 307 0.19 281 0.21 230 0.22
-------- -------- -------- ------ -------- ------
Total adjustable-rate loans.. 58,305 35.74 56,332 41.84 54,633 52.45
-------- -------- -------- ------ -------- ------
Total loan portfolio......... 163,143 100.00% 134,646 100.00% 104,153 100.00%
======== ====== ======
Less:
Loans in process................ 27,153 18,661 12,350
Deferred fees and discounts..... 604 494 350
Allowance for losses............ 927 669 436
-------- -------- --------
Total loans receivable, net... $134,459 $114,822 $ 91,017
======== ======== ========
</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, 1999, the Bank had $71.4 million, or 43.7% 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 and 1999, 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,
1999, $21.6 million, or 13.2% of the Bank's loan portfolio, consisted of fixed-
rate residential one- to four-family loans. The Bank's fixed-rate mortgage
loans amortize monthly with principal and interest due each month. Residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers may refinance or prepay loans at
their option.
6
<PAGE>
Fixed-rate residential one- to four-family loans originated for sale in the
secondary mortgage market are underwritten in conformity with the criteria
established by the Federal Home Loan Mortgage Corporation ("FHLMC") for sale
primarily to FHLMC. Such loans are sold on a non-recourse basis. The Bank
retains servicing rights on a portion of such loans, depending upon customer
preferences and competitive conditions. For the fiscal year ended June 30,
1999, of the $51.0 million in fixed-rate residential one- to four-family loans
originated by the Bank, $40.4 million of such loans, or 79.2%, 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 $49.7
million, or 30.5% of the Bank's total loan portfolio at June 30, 1999. 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, 1999, the Bank originated $51.0 million in
fixed-rate residential mortgage loans and $33.3 million of ARM loans. Normally,
the Bank's policy is to originate ARM loans for portfolio. However, during
fiscal 1999, the Bank sold three pools of ARM loans totaling $17.5 million as a
part of the Bank's asset/liability and capital strategies.
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. The Bank's lending policies
generally limit the maximum LTV ratio on fixed-rate and ARM loans to 80% of the
lesser of the appraised value or the purchase price of the property securing the
loan in the case of loans secured by one- to four-family owner-occupied
properties. On conventional one- to four-family loans, the Bank will lend up to
a 95% LTV ratio; however, any loans with LTV ratios in excess of 80% require
private mortgage insurance. The maximum LTV ratio on other types of real estate
loans is generally the lesser of 80% of the appraisal value or the purchase
price of the property.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's employment, income and credit history. The Bank's
policy is to obtain credit reports and financial statements on all borrowers and
guarantors, and to verify references. Properties securing real estate loans are
appraised by Bank-approved independent appraisers. Appraisals are subsequently
reviewed by the Bank's Loan Committee, as applicable. Management believes that
stability of income, past credit history and adequacy of the proposed security
are integral parts in the underwriting process. Generally, the applicant's
total monthly mortgage payment, including all escrow amounts, is limited to 28%
of the applicant's total monthly income. In addition, total monthly obligations
of the 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.
7
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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
strong, 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 development and acquisition" loans ("land loans") are made by the
Bank to individuals and builders for the acquisition of land upon which
the borrower can then build.
The table below presents information on the Bank's construction and land
loans at June 30, 1999 and 1998:
At June 30, 1999 At June 30, 1998
------------------------ ------------------------
Outstanding Percent Outstanding Percent
Loan of Loan of
Balance/(1)/ Total Balance/(1)/ Total
------------- --------- ------------- ---------
(Dollars in Thousands)
Speculative - 1-4
family............... $51,461 66.6% $37,039 70.1%
Speculative -
Multifamily.......... 2,261 2.9 1,600 3.0
Contract.............. 1,718 2.2 2,275 4.3
Construction -
commercial........... 4,129 5.3 704 1.3
Construction - 1-4
family............... 3,750 4.9 4,526 8.6
------- ----- ------- -----
Total construction.. 63,319 81.9 46,144 87.3
Land development and
acquisition.......... 7,503 9.7 2,496 4.7
Land.................. 6,485 8.4 4,243 8.0
------- ----- ------- -----
Total construction
and land......... $77,307 100.0% $52,883 100.0%
======= ===== ======= =====
----------------------
(1)Includes loans in process.
At June 30, 1999, the Bank's $63.3 million of construction loans and $14.0
million of land and land development loans represented 47.1% and 10.4%,
respectively, of total loans receivable. At the same time, the Bank's $53.7
million of speculative construction loans represented 40.0% of total loans
receivable. Speculative 1-4 family loans increased $14.4 million from $37.0
million at June 30, 1998 to $51.5 million at June 30, 1999.
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.
8
<PAGE>
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, 1999, the Bank had 19 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, 1999, the Bank had speculative construction loans secured by
properties in 129 subdivisions of which 18 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.
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, 1999, the Bank had $2.3 million of speculative construction loans
secured by multi-family properties.
Land Loans. At June 30, 1999, the Bank had total land loans of $6.5
million and land development loans of $7.5 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.
9
<PAGE>
Multi-Family and Commercial Real Estate Lending. The Bank also originates
loans secured by multi-family and commercial real estate. At June 30, 1999,
$7.4 million, or 4.6%, of the Bank's loan portfolio consisted of multi-family
loans and commercial real estate loans.
Multi-family and commercial real estate loans originated by the Bank may be
either fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 30 years. Rates on such ARM loans generally adjust annually
to specified spreads over the one-year U.S. Treasury securities index adjusted
to a constant maturity of one year, subject to annual and life-of-loan interest
rate caps. Multi-family and commercial real estate loans are written in amounts
of up to 80% of the lesser of the appraised value of the property or the sales
price.
The Bank's commercial real estate portfolio consists primarily of loans on
small office buildings located in the Bank's primary market area. Multi-family
loans generally are secured by duplexes. Appraisals on properties which secure
multi-family and commercial real estate loans are performed by an independent
appraiser designated by the Bank before the loan is made. All appraisals on
multi-family and commercial real estate loans are reviewed by the Bank's
management. In underwriting such loans, the Bank primarily considers the cash
flows generated by the real estate to support the debt service, the financial
resources and income level of the borrower and the Bank's experience with the
borrower. In addition, the Bank's underwriting procedures require verification
of the borrower's credit history, an analysis of the borrower's income,
financial statements and banking relationships, a review of the borrower's
property management experience and references, and a review of the property,
including cash flow projections and historical operating results. The Bank
seeks to ensure that the property securing the loans will generate sufficient
cash flow to adequately cover operating expenses and debt service payments.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger, more difficult to evaluate and monitor
and, therefore generally, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan might be impaired. The Bank has attempted to minimize these risks by
lending primarily to the ultimate user of the property or on existing income-
producing properties.
Consumer Lending. Community Bank offers a variety of consumer loans,
including automobile and home improvement loans, second mortgage home equity
loans, lines of credit secured by first or second mortgage loans, and loans
secured by deposits. The Bank currently originates substantially all of its
consumer loans in its primary market area generally to its existing customers.
At June 30, 1999, the Bank's consumer loan portfolio totaled $14.5 million, or
8.9% of its loan portfolio.
The primary component of the Bank's consumer loan portfolio consists of
automobile loans secured by both new and used cars and light trucks. The Bank
originates automobile loans on a direct basis, where the Bank extends credit
directly to the borrower, and on an indirect basis through automobile
dealerships. Although applications for indirect automobile loans are taken by
employees of the dealer, the loans are made pursuant to the Bank's underwriting
standards using the Bank's documentation. All such indirect automobile loans
must be approved by a Bank loan officer before disbursement of loan proceeds.
The Bank seeks to limit the credit risk of indirect automobile lending by doing
business with local dealers with which it has had a satisfactory prior
relationship, and through strict adherence to its underwriting standards.
The Bank's automobile loans generally have terms that do not exceed five
years and carry a fixed-rate of interest. Generally, loans on new vehicles are
made in amounts up to 80% of dealer cost and loans on used vehicles are made in
amounts up to 80% of the vehicle's published NADA value. Collision and
comprehensive insurance and vendor single-interest coverage is required on all
automobile loans. At June 30, 1999, the Bank's indirect automobile loans
totaled $2.5 million, or 1.5% of the Bank's loan portfolio and direct automobile
loans totaled $9.2 million, or 5.6% of the Bank's loan portfolio.
10
<PAGE>
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, 1999, the Bank's FHA Title I home improvement loans totaled
$52,000, or 0.03% 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, 1999, the Bank's second
mortgage/home equity loans totaled $2.2 million, or 1.3% 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, 1999, the Bank's lines of credit secured by
first or second mortgages totaled $2.9 million, or 1.8% 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, 1999, $45,000 in consumer loans were non-performing.
See "Asset Quality--Delinquent Loans and Non-performing Assets." There can be
no assurances, however, that delinquencies will not increase in the future.
11
<PAGE>
Loan Maturity Schedule
The following schedule illustrates the contractual maturity and weighted
average rates of the Bank's total loan portfolio at June 30, 1999. 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, 1999 that have
predetermined interest rates is $104.8 million, and that have floating or
adjustable rates is $58.3 million.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------------
Multi-Family
and
One- to Four-Family Commercial Land Construction Consumer
--------------------------- ---------- ------- ------------ ---------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Amount Rate Amount
------ ---- ------ ---- ------ ---- ------- ------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending
June 30,
- ---------------------------
2000....................... $ 3,223 8.14% $ 1 7.13% $1,430 8.18% $58,909 7.93% $ 4,038 8.78%
2001....................... 378 8.60 179 -- 791 8.42 4,410 7.92 1,706 9.74
2002....................... 823 9.29 312 8.40 945 7.50 -- -- 2,642 10.15
2003 and 2004.............. 3,395 9.12 869 7.89 18 8.50 -- -- 1,789 9.84
2005 to 2009............... 2,255 8.40 575 8.12 187 7.89 -- -- 4,242 9.26
2010 to 2024............... 9,915 8.12 1,488 8.47 829 8.15 -- -- 122 8.55
2025 and following......... 51,364 7.57 4,023 8.23 2,285 8.14 -- -- -- --
------- ---- ------ ---- ------ ---- -------- ------ ------- -----
$71,353 7.80% $7,447 8.35% $6,485 8.04% $63,319 7.93% $14,539 9.41%
</TABLE>
Total
----------------------
Weighted
Average
Amount Rate
-------- --------
Due During Years Ending
June 30,
- ---------------------------
2000.......................$ 67,601 8.00%
2001....................... 7,464 8.44
2002....................... 4,722 9.35
2003 and 2004.............. 6,071 9.28
2005 to 2009............... 7,259 8.87
2010 to 2024............... 12,354 8.17
2025 and following......... 57,672 8.12
-------- ----
$163,143 8.20%
12
<PAGE>
Origination of Loans
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, builders, walk-in customers and third-party
sources. The Bank also employs its Chairman of the Board as a full-time loan
originator to solicit loans. The Board of Directors of the Bank has authorized
certain officers to originate loans within specified underwriting limits. Two
senior Mortgage Lending Officers have authority to make secured real estate
loans up to $227,400 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, 1999 the
Bank originated $128.8 million in fixed-rate loans and $37.5 million in
adjustable-rate loans. For the year ended June 30, 1998 the Bank originated
$87.8 million in fixed-rate loans and $19.5 million in adjustable-rate loans.
In recent years, the Bank has not purchased loans. For the fiscal years
ended June 30, 1999, 1998 and 1997, 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 2000 For the year ended June 30, 1999, the Bank sold
$57.9 million in conforming residential one- to four-family loans (including
$40.4 million of fixed rate loans and three pools of ARM loans totaling $17.5
million), compared to $22.8 million and $1.2 million for the years ended June
30, 1998 and 1997, respectively. Primarily all of the residential loans sold by
the Bank are fixed-rate residential loans with maturities of 15 and 30 years,
though the Bank sold some one- to four family ARM loans.
13
<PAGE>
Set forth below is a table showing the Bank's loan originations, sales and
repayments for the periods indicated.
Year Ended June 30,
-----------------------------
1999 1998 1997
-------- --------- --------
Originations by type: (In Thousands)
Adjustable rate:
Real estate -
One- to four-family residential....... $ 33,341 $ 16,390 $11,103
Multi-family.......................... 443 765 488
Commercial............................ 1,222 202 243
Land.................................. 1,914 1,491 1,257
Consumer............................... 546 626 751
-------- -------- -------
Total adjustable rate................... 37,466 19,474 13,842
-------- -------- -------
Fixed rate:
Real estate -
One- to four-family residential....... 51,038 31,195 15,370
Multifamily........................... 120 -- --
Commercial............................ 2,126 1,148 366
Land.................................. 2,765 655 244
Construction.......................... 59,564 44,627 30,596
Consumer............................... 13,208 10,186 9,329
-------- -------- -------
Commercial Business..................... -- -- 213
Total fixed rate........................ 128,821 87,811 56,118
-------- -------- -------
Total loans originated.................. 166,827 107,285 69,960
Sales and Repayments:
Real Estate -
One- to four-family residential........ 57,949 22,758 11,201
-------- -------- -------
Total loans sold....................... 57,949 22,758 11,201
Principal repayments.................... 97,631 67,410 48,407
-------- -------- -------
Total sales and repayments............. 155,580 90,168 59,608
Decrease (increase) in other items, net.. 8,895 (6,688) (1,449)
-------- -------- -------
Net (decrease) increase................ $ 19,602 $ 10,429 $ 8,903
======== ======== =======
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, 1999, 1998 and 1997, the percentage of total loans delinquent 90 days
or more to net loans receivable were 0.41%, 0.33% and 0.54%, respectively.
Delinquent Loans and Non-performing Assets. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Mortgage loans
are placed on non-accrual status when principal or interest 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
14
<PAGE>
owned is charged against earnings. At June 30, 1999, the Bank has $153,000 in
property classified as real estate owned.
The following table sets forth information with respect to the Bank's
delinquent loans at June 30, 1999.
<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
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family....... 1 $ 36 0.05% 6 $173 0.25% 7 $209 0.30%
Multi-family -- -- -- -- -- -- -- -- --
Consumer.................. 7 174 0.98 10 45 0.25 17 219 1.24
Construction or
Development............ -- -- -- 3 336 0.53 3 336 --
----- ---- ---- -- ---- ---- -- ---- ----
Total.................. 8 $210 0.16% 19 $554 0.41% 27 $764 0.57%
==== ==== ==== ==== ==== ====
</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. Non-accruing loans include loans with principal or interest
currently delinquent 90 days or more, plus loans previously delinquent for 90
days or more which have not been brought current.
At June 30,
-------------------------
1999 1998 1997
------- ------ --------
(Dollars In Thousands)
Non-accruing loans:
One- to four-family............................ $ 173 $ 465 $ 806
Construction or development.................... 336 -- --
Consumer....................................... 45 120 110
----- ----- ------
Total....................................... 554 678 916
----- ----- ------
Accruing loans delinquent more than 90 days:/(1)/
One- to four-family............................ -- -- --
Consumer....................................... -- -- --
----- ----- ------
Total....................................... -- -- --
----- ----- ------
Foreclosed assets:
One- to four-family............................ 95 10 168
Commercial real estate......................... 58 39
Land........................................... -- -- --
Consumer....................................... 7 5 73
----- ----- ------
Total....................................... 160 54 241
----- ----- ------
Total non-performing assets........................ $ 714 $ 732 $1,157
===== ===== ======
Total loans delinquent 90 days or more
to net loans receivable.......................... 0.41% 0.33% 0.54%
===== ===== ======
- -----------------
/(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.
15
<PAGE>
For the fiscal year ended June 30, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $36,000. The amount that was included in
interest income on such loans was $22,000 for the fiscal year ended June 30,
1999.
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, 1999, the Bank had classified a total of $902,975 of its
assets as substandard. At June 30, 1999, the Bank had $1,000 of its assets
classified as doubtful and had no assets classified as loss. At June 30, 1999,
total classified assets comprised $903,975, or 5.33% of the Bank's capital and
0.60% 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, 1999, 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, 1999, the Bank had $153,000 in properties
which were acquired through foreclosure.
16
<PAGE>
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At June 30, 1999, the Bank had a total allowance for loan losses
of $927,000, representing 123.6% of total non-performing loans and 0.7% 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,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ---------------------------------
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.......... $ 69 $ 71,353 43.74% $ 63 $ 65,502 48.65% $ 41 $ 57,260 54.98%
Multi-family................. 10 1,951 1.20 8 1,602 1.19 3 748 0.72
Commercial real estate....... 31 5,496 3.37 16 2,768 2.06 9 1,520 1.46
Land......................... 42 6,485 3.98 42 4,243 3.15 30 3,393 3.26
Construction or development.. 547 63,319 38.81 372 48,641 36.12 208 30,332 29.12
Consumer..................... 228 14,539 8.90 168 11,890 8.83 145 10,900 10.46
----- -------- ------ ---- -------- ------ ---- -------- ------
Total................... $ 927 $163,143 100.00% $669 $134,646 100.00% $436 $104,153 100.00%
===== ======== ====== ==== ======== ====== ==== ======== ======
</TABLE>
17
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated.
Years Ended June 30,
--------------------------
1999 1998 1997
-------- ------- -------
(In thousands)
Balance at beginning of period.......... $ 669 $ 436 $ 388
------- ------ ------
Charge-offs:
One- to four-family................... 8 -- --
Consumer.............................. 74 83 53
------- ------ ------
82 83 53
Recoveries:
Consumer.............................. 42 50 41
------- ------ ------
42 50 41
------- ------ ------
Net charge-offs......................... 40 33 12
Provision for loan losses............... 298 266 60
------- ------ ------
Balance at end of period................ $ 927 $ 669 $ 436
======= ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period...................... 0.00% 0.03% 0.01%
======= ====== ======
Ratio of allowance for loan loss to
ending loans receivable, net........... 0.69% 0.58% 0.48%
======= ====== ======
Ratio of allowance for loan loss to non-
performing assets at end of period.... 129.83% 91.39% 37.68%
======= ====== ======
18
<PAGE>
Investment Activities
General. Community Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flows projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At June 30, 1999, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 7.69%. 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 Freddie Mac and
Government National Mortgage Association ("GNMA") obligations. At June 30,
1999, the Bank's investment in mortgage-backed securities totaled $57,275, or
0.04% of its total assets. At June 30, 1999 and 1998, all of the Bank's
mortgage-backed securities were classified as held-to-maturity.
The Freddie Mac 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. Freddie Mac 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.
Year Ended June 30,
----------------------
1999 1998 1997
------ ------ ------
(In Thousands)
Purchases................ $ -- $ -- $ --
Sales.................... -- -- --
Repayments............... (24) (73) (246)
----- ----- -----
Net increase (decrease).. $ (24) $ (73) $(246)
===== ===== =====
19
<PAGE>
Other Investments. At June 30, 1999, the Bank's investment securities
other than mortgage-backed securities consisted of municipal bonds, 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, 1999, 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.
June 30,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------ ------- ------ ------- ------ --------
(Dollars in Thousands)
Investment securities
available-for-sale:
Federal agency
obligations............. $ -- --% $ -- --% $ 996 18.27%
------ ------ ------ ------ ------ ------
Subtotal................... -- -- -- -- 996 18.27
Investment securities
held-to-maturity.......... $ 93 1.08% $ 98 2.77% $ 100 1.83%
------ ------ ------ ------ ------ ------
Subtotal................... 93 1.08% $ 98 2.77% $ 100 1.83%
FHLB stock................. 2,173 25.22 1,025 28.94 811 14.88
------ ------ ------ ------ ------ ------
Total investment securities
and FHLB stock........... 2,266 26.30 1,123 31.71 1,907 34.98
------ ------ ------ ------ ------ ------
Other interest-earning
assets:
FHLB checking............ 3,351 38.89 2,419 68.29 3,544 65.02
FHLB Daily Time......... 3,000 34.81 -- -- -- --
------ ------ ------ ------ ------ ------
Total other
interest-earnings
assets................. 6,351 73.70 2.419 68.29 3,544 65.02
------ ------ ------ ------ ------ ------
Total investment portfolio. $8,617 100.00% $3,542 100.00% $5,451 100.00%
====== ====== ====== ====== ====== ======
Average remaining life of
investment securities
available for sale........ -- -- 0.50 years
20
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities excluding FHLB stock at June 30, 1999.
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------- ------- -------- --------- ----------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
---------- ------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Investment Securities........ $ -- $ 12 $ 19 $ 62 $ 93 $ 93
--------- ----- ----- ----- ----- -----
Federal agency obligations... $ -- $ -- $ -- $ -- $ -- $ --
--------- ----- ----- ----- ----- -----
Total investment securities.. $ -- $ 12 $ 19 $ 62 $ 93 $ 93
========= ===== ===== ===== ===== =====
Weighted average yield....... --% 6.50% 6.50% 6.50% 6.50% 6.50%
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, FHLB advances, and other funds
provided from operations.
FHLB advances are used to support lending activities and to assist in the
Bank's asset/liability management strategy. Typically, the Bank does not use
other forms of borrowings. At June 30, 1999, the Bank had $29.5 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, 1999, $56.5 million, or 72.0%
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 $85.8 million at June 30, 1998, to
$101.4 million at June 30, 1999. 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.
21
<PAGE>
Savings Portfolio
The following table sets forth the dollar amount of savings deposits with
various types of deposit programs offered by the Bank at the periods indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1999 1998 1997
------------------ ----------------- ---------------------
Balance Percent Balance Percent Balance Percent
-------- -------- ------- -------- ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings
Deposits:
Passbook savings..................... $ 4,079 4.02% $ 3,680 4.29% $ 3,726 5.27%
NOW accounts......................... 8,988 8.86 8,853 10.32 8,328 11.78
Money market accounts................ 5,776 5.69 5,709 6.66 5,394 7.63
Noninterest-bearing demand accounts.. 3,953 3.90 2,392 2.79 1,658 2.35
-------- ------ ------- ------ ------- ------
Total non-certificates............. 22,796 22.48 20,634 24.06% 19,106 27.03%
-------- ------ ------- ------ ------- ------
Certificates:
2.00 - 3.99%......................... 1 -- 1 0.00 2 0.00
4.00 - 5.99%......................... 60,954 60.10 36,237 42.25 34,331 48.56
6.00 - 7.99%......................... 17,673 17.42 28,905 33.70 17,254 24.41
8.00 - 9.99%......................... -- -- -- -- -- --
10.00% & over........................ -- -- -- -- -- --
-------- ------ ------- ------ ------- ------
Total certificates................. 78,628 77.52% 65,143 75.94% 51,587 72.97%
-------- ------ ------- ------ ------- ------
Total......................... $101,424 100.00% $85,777 100.00% $70,693 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
Deposit Activity
The following table sets forth the deposit activities of the Bank for the
periods indicated:
Years Ended June 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Opening balance.............. $ 85,777 $ 70,693 $ 68,170
Deposits(1).................. 250,886 221,802 225,732
Withdrawals.................. 238,780 210,450 225,691
Interest credited............ 3,541 3,732 2,482
-------- -------- --------
Ending balance............... $101,424 $ 85,777 $ 70,693
======== ======== ========
Net (decrease) increase...... $ 15,647 $ 15,084 $ 2,523
======== ======== ========
Percent (decrease) increase.. 18.24% 21.34% 3.70%
======== ======== ========
- ------------------
(1) Does not reflect the rollover of certificates of deposit.
22
<PAGE>
Time Deposit Maturity Schedule
The following table shows weighted average rate and maturity information for
the Bank's certificates of deposit as of June 30, 1999.
Certificate accounts maturing in Weighted
- -------------------------------- Total Average Percent of
quarter ending: Balance Rate Total
- --------------- ------- --------- -----------
(Dollars in Thousands)
September 30, 1999................ $23,942 5.51% 30.45%
December 31, 1999................. 11,720 5.35 14.91
March 31, 2000.................... 13,620 5.29 17.32
June 30, 2000..................... 7,169 5.27 9.12
September 30, 2000................ 4,096 5.47 5.21
December 31, 2000................. 1,548 5.49 1.97
March 31, 2001.................... 3,791 5.15 4.82
June 30, 2001..................... 1,794 5.71 2.28
September 30, 2001................ 1,005 5.86 1.28
December 31, 2001................. 1,158 6.07 1.47
March 31, 2002.................... 848 6.19 1.08
June 30, 2002..................... 947 6.18 1.20
Thereafter........................ 6,990 5.84 8.89
------- ------
Total......................... 78,628 100.00%
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, 1999.
Maturity
------------------------------------------
3 Months Over 3 to Over 6 to Over
or Less 6 Months 12 Months 12 Months Total
-------- ---------- --------- --------- -------
(Dollars in Thousands)
Certificates of deposit
less than $100,000........ $20,415 $11,186 $19,741 $20,414 $71,756
Certificates of deposit of
$100,000 or more.......... 3,527 534 1,048 1,763 6,872
------- ------- ------- ------- -------
Total certificates of
deposit................. $23,942 $11,720 $20,789 $22,177 $78,628
======= ======= ======= ======= =======
23
<PAGE>
Borrowings. Community Bank's borrowings historically have consisted of
advances from the FHLB of Des Moines. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At June 30, 1999, the Bank had $29.5 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 6 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.
Years Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Maximum Balance:
- ----------------
FHLB advances................... $43,450 $19,500 $10,750
Average Balance:
- ----------------
FHLB advances................... $33,837 $12,672 $ 9,154
At June 30,
---------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
FHLB advances................... $29,450 $19,500 $10,750
======= ======= =======
Weighted average interest rate.. 5.43% 5.65% 5.75%
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 $3.0
million at June 30, 1999, in the stock of, or loans to, service corporation
subsidiaries. Community may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes and up to 50% of its total capital in conforming loans to
service corporations in which it owns more than 10% of the capital stock. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal association may engage. At June 30, 1999,
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, 1999, the Bank's investment in
CBES was $1,000. Also, for the fiscal year ended June 30, 1999, 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
24
<PAGE>
also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings and loan associations. The Bank is a member of the SAIF. The deposits of
the Bank are insured by the SAIF of the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings and loan
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of 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, 1999, was approximately $37,991.
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, 1999, the
Bank's lending limit under this restriction was approximately $4.6 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 Accounts and Regulation by the FDIC
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.
25
<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 Bank's assessment rate for deposit
insurance 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; legislation combining such charters has not
yet been enacted. Until the charters are combined, savings associations with
SAIF deposits may not 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.
While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions may continue in the future.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. Generally, these capital requirements must be generally
as stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards
on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the unrealized
loss on investments and mortgage-backed securities is excluded from the
regulatory capital calculation. At June 30, 1999, the Bank had no intangible
assets and no valuation allowance.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For
26
<PAGE>
excludable subsidiaries the debt and equity investments in such subsidiaries are
deducted from assets and capital. The Bank has one service corporation
subsidiary.
At June 30, 1999, the Bank had tangible capital of $13.5 million, or 8.9%
of adjusted total assets, which is approximately $11.2 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships and purchased mortgage servicing
rights. As a result of the prompt corrective action provisions of FDICIA,
however, a savings association must maintain a core capital ratio of at least 4%
to be considered adequately capitalized unless its supervisory condition is such
to allow it to maintain a 3% ratio. At June 30, 1999, the Bank had no
intangibles which were subject to these tests.
At June 30, 1999, the Bank had core capital equal to $13.5 million, or 8.9%
of adjusted total assets, which is $7.5 million above the minimum leverage ratio
requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1999, the Bank had
$927,000 of general loan valuation allowances, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had $46,000
excluded from capital and assets at June 30, 1999.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless the
loan amount in excess of such ratio is insured by an insurer approved by the
Fannie Mae or Freddie Mac.
On June 30, 1999, the Bank had total risk based capital of $14.4 million
(including approximately $13.5 million in core capital and $927,000 in
qualifying supplementary capital) and risk-weighted assets of $110.4 million
(with no converted off-balance sheet assets); or total capital of 13.0% of risk-
weighted assets. This amount was $5.6 million above the 8% requirement in
effect on that date.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% is exempt from this requirement unless the OTS
determines otherwise.
27
<PAGE>
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.
At June 30, 1999, 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.
Limitations on Dividends and Other Capital Distributions
OTS regulations applicable to the Bank governed capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulations create a safe harbor for
specified levels of capital distributions for institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Institutions and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Pursuant to a recent revision to these regulations, effective April 1,
1999, a "well capitalized" savings association, such as the Bank, will be
permitted to make capital distributions during a calendar year in an amount up
to the savings association's net income for the year plus the savings
association's retained net income for the preceding two years, without filing an
application for approval of the capital distribution with the OTS. However, a
"well capitalized" savings association must provide 30 days written notice to
the OTS prior to making the distribution as long as the savings association is a
subsidiary of a savings and loan holding company.
28
<PAGE>
Liquidity
All savings and loan associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings and loan associations. At the present time,
the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term U.S. Treasury obligations) currently
must constitute at least 1% of the Bank's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of either liquid assets ratio requirement. At
June 30, 1999, the Bank was in compliance with both requirements, with an
overall liquid assets ratio of 7.69% and a short-term liquid assets ratio of
7.69%.
Accounting
An OTS policy statement applicable to all savings and loan associations
clarifies and re-emphasizes that the investment activities of a savings and loan
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with generally
accepted accounting principles. Under the policy statement, management must
support its classification of and accounting for loans and securities (i.e.,
whether held for investment, sale or trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles by the OTS,
to require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
The Bank is in compliance with these amended rules.
Qualified Thrift Lender Test
All savings and loan associations, including the Bank, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings and loan association to have at least
65% of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At June 30, 1999, the Bank met the test and has always met the
test since its effectiveness.
Any savings and loan association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a QTL and
thereafter remains a QTL. If an association does not requalify and converts to
a national bank charter, it must remain SAIF-insured until the FDIC permits it
to transfer to the BIF. If such an association has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings and loan association and a national bank,
and it is limited to national bank branching rights in its home state. In
addition, the Bank is immediately ineligible to receive any new FHLB borrowings
and is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending 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
29
<PAGE>
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
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.
30
<PAGE>
Federal Securities Law
The stock of the Company will be registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
1999, 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, 1999, the Bank had $2.2 million (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 7.0% and were 6.2% for fiscal 1999.
For the fiscal year ended June 30, 1999, dividends paid by the FHLB of Des
Moines to the Bank totaled approximately $116,000, which constitutes a $60,371
increase over the amount of dividends received in fiscal year 1998. 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.
31
<PAGE>
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. For tax years beginning before December 31, 1995, the amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally, loans secured by improved real estate) may be computed under either
the experience method or the percentage of taxable income method (based on an
annual election). If a savings association elected the latter method, it could
claim, each year, a deduction based on a percentage of taxable income, without
regard to actual bad debt experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
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, 1999, the Bank's bad debt reserve subject to
recapture over a six-year period totaled approximately $81,000.
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, 1999, the Bank's excess for tax purposes totaled
approximately $1,700,000.
32
<PAGE>
The Company and its subsidiary file consolidated federal income tax returns
on a fiscal year basis using the accrual method of accounting. Savings and loan
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings and loan association
members of the consolidated group that are functionally related to the
activities of the savings association member.
The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
State Taxation. The Missouri Corporation Income Tax Act provides for an
exemption from the Missouri Corporation Income Tax for mutual savings banks and
for banking corporations, which includes stock associations (e.g., the Bank).
However, this exemption does not extend to non-banking entities such as the
Company. The non-banking subsidiaries of the Bank (as well as the Company) are
subject to the Missouri Corporate Income Tax based on their Missouri taxable
income, as well as franchise taxes. The Missouri Corporation Income Tax applies
at graduated rates from 4% upon the first $25,000 of Missouri taxable income to
8% on all Missouri taxable income in excess of $200,000. For these purposes,
"Missouri taxable income" means net income which is earned within or derived
from sources within the State of Missouri, after adjustments permitted under
Missouri law including a federal income tax deduction and an allowance for net
operating losses, if any. In addition, the Bank became subject to the Missouri
Shares Tax after the Conversion, which will be imposed on the assessed value of
the Bank's stock. The formula for deriving the assessed value is to calculate
15% of the sum of (i) 20% of a corporation's capitalized earnings, plus (ii) 80%
of a corporation's taxable stockholders' equity, and to subtract from that
amount 50% of a corporation's real and personal property assessment. Other
various items may also be subtracted in calculating a corporation's capitalized
earnings.
Delaware Taxation. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
Employees
- ---------
At June 30, 1999, the Bank had a total of 69 full-time and 15 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
- --------------------------------------------------------------------
Dennis D. Hartman. Mr. Hartman, age 45, has served as the Bank's Chief
Executive Officer since July 1, 1999. In that capacity, he is responsible for
overseeing the day to day operations of the Bank. Previously, Mr. Hartman was
the Chief Financial Officer and Manager of the Bank's Accounting Department. In
that position, he was responsible for the supervision of the Accounting
Department and reporting to the regulatory authorities, and for overseeing the
Bank's asset/liability management program. Mr. Hartman joined the Bank in 1978.
Deryl R. Goettling. Mr. Goettling, age 50, has served as the Bank's Chief
Lending Officer since July 1, 1999. Previously, Mr. Goettling served as the
Manager of the Bank's Mortgage Loan Department. In that capacity he was
responsible for the supervision of all mortgage lending operations of the Bank.
Mr. Goettling joined the Bank in 1986.
Margaret E. Teegarden. Ms. Teegarden, age 50, is the Manager of the Bank's
Savings Department, responsible for managing the Bank's savings department. Ms.
Teegarden joined the Bank in 1978.
James V. Alderson. Mr. Alderson, age 53, 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.
33
<PAGE>
Larry E. Hermreck. Mr. Hermreck, age 59, served as the Bank's Chief
Executive Officer until June 30, 1999. Mr. Hermreck is currently serving in an
advisory capacity. Mr. Hermreck has been with the Bank for the past 26 years,
and served as Chief Executive Officer for 21 years.
Robert F. Kirk. Mr. Kirk, age 52, has served as the Chief Financial
Officer and Manager of the Bank's Accounting Department since July 1, 1999. He
is responsible for the supervision of the Accounting Department and reporting to
regulatory authorities. He is also responsible for overseeing the Bank's
asset/liability management program. Previously Mr. Kirk served as the
Controller of the Bank. Mr. Kirk joined the Bank in 1996.
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 Liberty branch office
is leased. The following table sets forth information relating to the Bank's
offices as of June 30, 1999. 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, 1999 was approximately $2.6
million.
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1999
- ------------------------------ -------- ----------- ------------------
(In thousands)
Main Office: 1983 10,000 $1,137
1001 North Jesse James Road
Excelsior Springs, Missouri 64024
Branch Offices: 1998 2,725 $1,104
601 N. Country
Kearney, Missouri 64020
913 Liberty Drive Leased 7,150 358
Liberty, Missouri 64020 (Expires March
2003)
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, 1999.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
- --------
Page 41 of the attached 1999 Annual Report to Shareholders is herein
incorporated by reference.
34
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
Pages 5 to 14 of the attached 1999 Annual Report to Shareholders are herein
incorporated by reference.
Item 7. Financial Statements
- -----------------------------
Pages 15 to 40 of the attached 1999 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.
PART III
--------
Item 9. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information concerning Directors of the Registrant is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on October 28, 1999.
Item 10. Executive Compensation
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on October 28, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
October 28, 1999.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on October 28, 1999.
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, 1999, is incorporated by reference in
this Form 10-KSB Annual Report as Exhibit 13.
<TABLE>
<CAPTION>
Page in
Annual
Annual Report Section Report
--------------------- -------
<S> <C>
Report of Independent Auditors........................................ 15
Consolidated Balance Sheets at June 30, 1999 and 1998................. 16
Consolidated Statements of Earnings for the Years ended June 30, 1999,
1998 and 1997........................................................ 17
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Stockholders' Equity for the Years ended
June 30, 1999, 1998 and 1997........................................... 18
Consolidated Statements of Cash Flows for the Years ended June 30,
1999, 1998 and 1997...................................................... 19
Notes to Consolidated Financial Statements................................ 21
</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.
(a)(3) Exhibits - The following exhibits are either filed or attached as
--------
part of this report or are incorporated herein by reference.
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- ----------------------------------------------- ---------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3.1 Certificate of Incorporation *
3.2 Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Proposed Stock Option and Incentive Plan *
10.2 Proposed Recognition and Retention Plan *
10.3 Employment Agreement with Larry E. Hermreck, *
Daryl R. Goettling, Margaret E. Teegarden and
Dennis D. Hartman.
10.4 Employee Stock Ownership Plan *
10.5 Director Emeritus Agreements *
10.6 Salary Continuation Agreement *
10.7 Severance Agreements with Larry Hermreck, 10.7
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
36
<PAGE>
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- ----------------------------------------------- ---------------
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 None
submitted to vote of security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
___________________
*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.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CBES BANCORP, INC.
Date: September 24, 1999 By: \s\ Dennis D. Hartman
----------------------
Dennis D. Hartman, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: \s\ Dennis D. Hartman By: \s\ Cecil E. Lamb
----------------------------------- -------------------------------
Dennis D. Hartman, Chief Executive Cecil E. Lamb, Director
Officer
(Principal Executive Officer)
Date: September 24, 1999 Date: September 24, 1999
By: \s\ Robert F. Kirk By: \s\ Robert McCrorey
----------------------------------- --------------------------------
Robert F. Kirk, Chief Financial Robert McCrorey, Director
Officer
(Principal Accounting and
Financial Officer)
Date: September 24, 1999 Date: September 24, 1999
By: \s\ Richard Cox By: \s\ Rodney Rounkles
----------------------------------- --------------------------------
Richard Cox, Director Rodney Rounkles, Director
Date: September 24, 1999 Date: September 24, 1999
By: \s\ Robert L. Lalumondier
-----------------------------------
Robert L. Lalumondier, Director
Date: September 24, 1999
38
<PAGE>
SEVERANCE AGREEMENT
-------------------
This AGREEMENT is made as of this 24 day of March, 1998 by and between
Community Bank of Excelsior Springs, A Savings Bank (the "Bank"), and Larry E.
Hermreck ("Executive"). Any reference to "Company" herein shall mean CBES
Bancorp, Inc., or any successor thereto.
WHEREAS, Executive is currently serving as Chief Executive Officer of the
Bank, a position of substantial responsibility;
WHEREAS, the Executive entered into an Employment Agreement with the Bank
on September 27, 1996 in anticipation of the conversion of the Bank to capital
stock form and as the subsidiary of the Company in order to assure continuity of
management of the Bank; and
WHEREAS, the board of directors of the Bank (the "Board") recognizes that
the possibility of a change in control of the Company and/or Bank may exist and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of key executives
to the detriment of the Bank, the Company and their respective stockholders; and
WHEREAS, the Board intends that this Agreement shall not create any right
of continued employment on behalf of the Executive, nor shall the Executive be
entitled to any payments or other rights hereunder unless a Change in Control
(as defined herein) shall occur, and the Board further intends that this
Agreement shall be interpreted and construed to effectuate the foregoing; and
WHEREAS, the Board believes it is in the best interests of the Bank to
enter into this Agreement with the Executive in order to reinforce and encourage
the continued attention and dedication of the Executive to the Executive's
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the Company
or the Bank, although no such change is now contemplated; and
NOW, THEREFORE, in consideration of the contribution of Executive, and upon
the other terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
of termination of the Employment Agreement referenced above and shall continue
for a period of thirty-six (36 ) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement and continuing at each anniversary
date thereafter, the term of this Agreement shall be extended for a period of
one year in addition to the then-remaining term, provided that (1) the Bank has
not given notice to the Executive in writing at least 90 days prior to such
anniversary that the term of this Agreement shall not be extended further; and
(2) prior to such anniversary, the Board explicitly reviews and approves the
extension. Reference herein to the term of this Agreement shall refer to both
such initial term and such extended terms.
<PAGE>
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) In the event of the Involuntary Termination of Executive's employment
in connection with, or within 12 months after, a Change in Control of the Bank
or Company (as herein defined), other than for Cause, as defined in Section 2(c)
hereof, the provisions of Section 3 shall apply. The term "Involuntary
Termination" means termination of the employment of Executive without the
Executive's express written consent, and shall include a material diminution of
or interference with the Executive's duties, responsibilities and benefits as
Chief Executive Officer of the Bank, including (without limitation) any of the
following actions unless consented to in writing by the Executive: (1) a change
in the principal workplace of the Executive to a location outside of a 30 mile
radius from the Bank's headquarters office as of the date hereof; (2) a material
demotion of the Executive; (3) a material reduction in the number or seniority
of other Bank personnel reporting to the Executive or a material reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Executive, other than as part of a Bank- or
Company-wide reduction in staff; (4) a material adverse change in the
Executive's salary, perquisites, benefits, contingent benefits or vacation,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Bank or the Company; and
(5) a material permanent increase in the required hours of work or the workload
of the Executive. The term "Involuntary Termination" does not include
Termination for Cause or termination of employment due to retirement, death,
disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(b) A "Change in Control" of the Bank or the Company shall mean (1) an
event of a nature that (i) results in a change in control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Company representing 20% or more of the Bank's or
the Company's outstanding securities; (3) individuals who are members of the
board of directors of the Bank or the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Company or a similar transaction in which the Bank or
the Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of the Bank or
the Company.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless
2
<PAGE>
and until there shall have been delivered to him a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause.
3. TERMINATION
(a) In the event of the Involuntary Termination of the Executive's
employment in connection with, or within 12 months after, a Change in Control,
other than for Termination for Cause, the Bank shall be obligated to pay the
Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay, in a lump
sum in cash within 25 business days after the Date of Termination, a sum equal
to 2.99 times the Executive's "base amount" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"). Such payment shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(b) In the event of the Executive's Involuntary Termination of employment
in connection with, or within 12 months after, a Change in Control, other than
for Termination for Cause, the Bank shall cause to be continued for the
remaining term of this Agreement, substantially the same health benefits
maintained by the Bank for the Executive prior to the Change in Control.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by the Executive.
(d) Notwithstanding anything herein to the contrary, the Bank may terminate
Executive's employment at any time for any reason or for no reason. Executive
shall not have the right to receive compensation or benefits under this
Agreement for any period after termination of employment, except after a Change
in Control pursuant to the provisions of Section 2 and Section 3 hereof.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
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employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall be
immediate). Except as set forth below in paragraph (c), in no event shall the
Date of Termination exceed 30 days from the date Notice of Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement. Notwithstanding the foregoing, no compensation or benefits shall be
paid to the Executive in the event the Executive is Terminated for Cause. In
the event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive under the Employment Agreement referenced above, or
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that Executive is subject to receiving fewer benefits than those available to
him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
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8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC (S)1818(e)(3)) or 8(g) (12 USC (S)1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC (S)1818(e)) or 8(g) (12 USC (S)1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
(S)1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank, (i) by the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC (S)1823(c)) of the Federal Deposit Insurance Act, as amended by
the Financial Institutions Reform, Recovery and Enforcement Act of 1989; or (ii)
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
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10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Missouri, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnifications shall be paid that would violate 12 U.S.C.
1828(k) or any regulations promulgated thereunder.
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15. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
16. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by
its duly authorized officer, and Executive has signed this Agreement, on the day
and date first above written.
ATTEST: COMMUNITY BANK OF EXCELSIOR SPRINGS, A
SAVINGS BANK
/s/ Dennis Hartman By: /s/ Robert E. McCrorey
- ------------------ ----------------------
President
WITNESS:
/s/ Dennis Hartman By: /s/ Larry E. Hermreck
- ------------------ ---------------------
Executive
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SEVERANCE AGREEMENT
-------------------
This AGREEMENT is made as of this 24 day of March, 1998 by and between
Community Bank of Excelsior Springs, A Savings Bank (the "Bank"), and Deryl R.
Goettling ("Executive"). Any reference to "Company" herein shall mean CBES
Bancorp, Inc., or any successor thereto.
WHEREAS, Executive is currently serving as Manager of the Bank's Mortgage
Loan Department, a position of substantial responsibility;
WHEREAS, the Executive entered into an Employment Agreement with the Bank
on September 27, 1996 in anticipation of the conversion of the Bank to capital
stock form and as the subsidiary of the Company in order to assure continuity of
management of the Bank; and
WHEREAS, the board of directors of the Bank (the "Board") recognizes that
the possibility of a change in control of the Company and/or Bank may exist and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of key executives
to the detriment of the Bank, the Company and their respective stockholders; and
WHEREAS, the Board intends that this Agreement shall not create any right
of continued employment on behalf of the Executive, nor shall the Executive be
entitled to any payments or other rights hereunder unless a Change in Control
(as defined herein) shall occur, and the Board further intends that this
Agreement shall be interpreted and construed to effectuate the foregoing; and
WHEREAS, the Board believes it is in the best interests of the Bank to
enter into this Agreement with the Executive in order to reinforce and encourage
the continued attention and dedication of the Executive to the Executive's
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the Company
or the Bank, although no such change is now contemplated; and
NOW, THEREFORE, in consideration of the contribution of Executive, and upon
the other terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
of the termination of the Employment Agreement referenced above and shall
continue for a period of twenty-four (24 ) full calendar months thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that
(1) the Bank has not given notice to the Executive in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further; and (2) prior to such anniversary, the Board explicitly reviews and
approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
<PAGE>
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) In the event of the Involuntary Termination of Executive's employment
in connection with, or within 12 months after, a Change in Control of the Bank
or the Company (as herein defined), other than for Cause, as defined in Section
2(c) hereof, the provisions of Section 3 shall apply. The term "Involuntary
Termination" means termination of the employment of Executive without the
Executive's express written consent, and shall include a material diminution of
or interference with the Executive's duties, responsibilities and benefits as
Manager of the Bank's Mortgage Loan Department, including (without limitation)
any of the following actions unless consented to in writing by the Executive:
(1) a change in the principal workplace of the Executive to a location outside
of a 30 mile radius from the Bank's headquarters office as of the date hereof;
(2) a material demotion of the Executive; (3) a material reduction in the number
or seniority of other Bank personnel reporting to the Executive or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Executive, other than as
part of a Bank- or Company-wide reduction in staff; (4) a material adverse
change in the Executive's salary, perquisites, benefits, contingent benefits or
vacation, other than as part of an overall program applied uniformly and with
equitable effect to all members of the senior management of the Bank or the
Company; and (5) a material permanent increase in the required hours of work or
the workload of the Executive. The term "Involuntary Termination" does not
include Termination for Cause or termination of employment due to retirement,
death, disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(b) A "Change in Control" of the Bank or the Company shall mean (1) an
event of a nature that (i) results in a change in control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Company representing 20% or more of the Bank's or
the Company's outstanding securities; (3) individuals who are members of the
board of directors of the Bank or the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Company or a similar transaction in which the Bank or
the Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of the Bank or
the Company.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless
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and until there shall have been delivered to him a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause.
3. TERMINATION
(a) In the event of the Involuntary Termination of the Executive's
employment in connection with, or within 12 months after, a Change in Control,
other than for Termination for Cause, the Bank shall be obligated to pay the
Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay, in a lump
sum in cash within 25 business days after the Date of Termination, a sum equal
to 150% of the Executive's salary during the preceding calendar year, including
bonuses and any other cash compensation paid to the Executive during that year.
Such payment shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(b) In the event of the Executive's Involuntary Termination of employment
in connection with, or within 12 months after, a Change in Control, other than
for Termination for Cause, the Bank shall cause to be continued for the
remaining term of this Agreement, substantially the same health benefits
maintained by the Bank for the Executive prior to the Change in Control.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by the Executive.
(d) Notwithstanding anything herein to the contrary, the Bank may terminate
Executive's employment at any time for any reason or for no reason. Executive
shall not have the right to receive compensation or benefits under this
Agreement for any period after termination of employment, except after a Change
in Control pursuant to the provisions of Section 2 and Section 3 hereof.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned
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<PAGE>
to the performance of his duties on a full-time basis during such thirty (30)
day period), and (B) if his employment is terminated for any other reason, the
date specified in the Notice of Termination (which, in the case of a Termination
for Cause, shall be immediate). Except as set forth below in paragraph (c), in
no event shall the Date of Termination exceed 30 days from the date Notice of
Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement. Notwithstanding the foregoing, no compensation or benefits shall be
paid to the Executive in the event the Executive is Terminated for Cause. In
the event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive under the Employment Agreement referenced above, or
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that Executive is subject to receiving fewer benefits than those available to
him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
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<PAGE>
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC (S)1818(e)(3)) or 8(g) (12 USC (S)1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC (S)1818(e)) or 8(g) (12 USC (S)1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
(S)1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank, (i) by the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC (S)1823(c)) of the Federal Deposit Insurance Act, as amended by
the Financial Institutions Reform, Recovery and Enforcement Act of 1989; or (ii)
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
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10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Missouri, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnifications shall be paid that would violate 12 U.S.C.
1828(k) or any regulations promulgated thereunder.
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<PAGE>
15. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
16. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by
its duly authorized officer, and Executive has signed this Agreement, on the day
and date first above written.
ATTEST: COMMUNITY BANK OF EXCELSIOR SPRINGS, A
SAVINGS BANK
/s/ Dennis Hartman By: /s/ Robert E. McCrorey
- ------------------ ----------------------
President
WITNESS:
/s/ Dennis Hartman By: /s/ Deryl R. Goettling
- ------------------ ----------------------
Executive
7
<PAGE>
SEVERANCE AGREEMENT
-------------------
This AGREEMENT is made as of this 24 day of March, 1998 by and between
Community Bank of Excelsior Springs, A Savings Bank (the "Bank"), and Dennis D.
Hartman ("Executive"). Any reference to "Company" herein shall mean CBES
Bancorp, Inc., or any successor thereto.
WHEREAS, Executive is currently serving as Controller, Chief Financial
Officer and Manager of the Bank's Accounting Department, positions of
substantial responsibility;
WHEREAS, the Executive entered into an Employment Agreement with the Bank
on September 27, 1996 in anticipation of the conversion of the Bank to capital
stock form and as the subsidiary of the Company in order to assure continuity of
management of the Bank; and
WHEREAS, the board of directors of the Bank (the "Board") recognizes that
the possibility of a change in control of the Company and/or Bank may exist and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of key executives
to the detriment of the Bank, the Company and their respective stockholders; and
WHEREAS, the Board intends that this Agreement shall not create any right
of continued employment on behalf of the Executive, nor shall the Executive be
entitled to any payments or other rights hereunder unless a Change in Control
(as defined herein) shall occur, and the Board further intends that this
Agreement shall be interpreted and construed to effectuate the foregoing; and
WHEREAS, the Board believes it is in the best interests of the Bank to
enter into this Agreement with the Executive in order to reinforce and encourage
the continued attention and dedication of the Executive to the Executive's
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the Company
or the Bank, although no such change is now contemplated; and
NOW, THEREFORE, in consideration of the contribution of Executive, and upon
the other terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
of the termination of the Employment Agreement referenced above and shall
continue for a period of twenty-four (24 ) full calendar months thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that
(1) the Bank has not given notice to the Executive in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further; and (2) prior to such anniversary, the Board explicitly reviews and
approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
<PAGE>
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) In the event of the Involuntary Termination of Executive's employment
in connection with, or within 12 months after, a Change in Control, other than
for Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall
apply. The term "Involuntary Termination" means termination of the employment of
Executive without the Executive's express written consent, and shall include a
material diminution of or interference with the Executive's duties,
responsibilities and benefits as Controller, Chief Financial Officer or Manager
of the Bank's Accounting Department, including (without limitation) any of the
following actions unless consented to in writing by the Executive: (1) a change
in the principal workplace of the Executive to a location outside of a 30 mile
radius from the Bank's headquarters office as of the date hereof; (2) a material
demotion of the Executive; (3) a material reduction in the number or seniority
of other Bank personnel reporting to the Executive or a material reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Executive, other than as part of a Bank- or
Company-wide reduction in staff; (4) a material adverse change in the
Executive's salary, perquisites, benefits, contingent benefits or vacation,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Bank or the Company; and
(5) a material permanent increase in the required hours of work or the workload
of the Executive. The term "Involuntary Termination" does not include
Termination for Cause or termination of employment due to retirement, death,
disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(b) A "Change in Control" of the Bank or the Company shall mean (1) an
event of a nature that (i) results in a change in control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Company representing 20% or more of the Bank's or
the Company's outstanding securities; (3) individuals who are members of the
board of directors of the Bank or the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Company or a similar transaction in which the Bank or
the Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of the Bank or
the Company.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless
2
<PAGE>
and until there shall have been delivered to him a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause.
3. TERMINATION
(a) In the event of the Involuntary Termination of the Executive's
employment in connection with, or within 12 months after, a Change in Control,
other than for Termination for Cause, the Bank shall be obligated to pay the
Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay, in a lump
sum in cash within 25 business days after the Date of Termination, a sum equal
to 150% of the Executive's salary during the preceding calendar year, including
bonuses and any other cash compensation paid to the Executive during that year.
Such payment shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(b) In the event of the Executive's Involuntary Termination of employment
in connection with, or within 12 months after, a Change in Control, other than
for Termination for Cause, the Bank shall cause to be continued for the
remaining term of this Agreement, substantially the same health benefits
maintained by the Bank for the Executive prior to the Change in Control.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by the Executive.
(d) Notwithstanding anything herein to the contrary, the Bank may terminate
Executive's employment at any time for any reason or for no reason. Executive
shall not have the right to receive compensation or benefits under this
Agreement for any period after termination of employment, except after a Change
in Control pursuant to the provisions of Section 2 and Section 3 hereof.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned
3
<PAGE>
to the performance of his duties on a full-time basis during such thirty (30)
day period), and (B) if his employment is terminated for any other reason, the
date specified in the Notice of Termination (which, in the case of a Termination
for Cause, shall be immediate). Except as set forth below in paragraph (c), in
no event shall the Date of Termination exceed 30 days from the date Notice of
Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement. Notwithstanding the foregoing, no compensation or benefits shall be
paid to the Executive in the event the Executive is Terminated for Cause. In
the event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive under the Employment Agreement referenced above, or
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that Executive is subject to receiving fewer benefits than those available to
him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
4
<PAGE>
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC (S)1818(e)(3)) or 8(g) (12 USC (S)1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC (S)1818(e)) or 8(g) (12 USC (S)1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
(S)1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank, (i) by the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC (S)1823(c)) of the Federal Deposit Insurance Act, as amended by
the Financial Institutions Reform, Recovery and Enforcement Act of 1989; or (ii)
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
5
<PAGE>
10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Missouri, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnifications shall be paid that would violate 12 U.S.C.
1828(k) or any regulations promulgated thereunder.
6
<PAGE>
15. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
16. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by
its duly authorized officer, and Executive has signed this Agreement, on the day
and date first above written.
ATTEST: COMMUNITY BANK OF EXCELSIOR SPRINGS, A
SAVINGS BANK
/s/ Larry E. Hermreck By: /s/ Robert E. McCrorey
- --------------------- ----------------------
President
WITNESS:
/s/ Larry E. Hermreck By: /s/ Dennis Hartman
- --------------------- ------------------
Executive
7
<PAGE>
SEVERANCE AGREEMENT
-------------------
This AGREEMENT is made as of this 24 day of March, 1998 by and between
Community Bank of Excelsior Springs, A Savings Bank (the "Bank"), and Margaret
E. Teegarden ("Executive"). Any reference to "Company" herein shall mean CBES
Bancorp, Inc., or any successor thereto.
WHEREAS, Executive is currently serving as Manager of the Bank's Savings
Department, a position of substantial responsibility;
WHEREAS, the Executive entered into an Employment Agreement with the Bank
on September 27, 1996 in anticipation of the conversion of the Bank to capital
stock form and as the subsidiary of the Company in order to assure continuity of
management of the Bank; and
WHEREAS, the board of directors of the Bank (the "Board") recognizes that
the possibility of a change in control of the Company and/or Bank may exist and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of key executives
to the detriment of the Bank, the Company and their respective stockholders; and
WHEREAS, the Board intends that this Agreement shall not create any right
of continued employment on behalf of the Executive, nor shall the Executive be
entitled to any payments or other rights hereunder unless a Change in Control
(as defined herein) shall occur, and the Board further intends that this
Agreement shall be interpreted and construed to effectuate the foregoing; and
WHEREAS, the Board believes it is in the best interests of the Bank to
enter into this Agreement with the Executive in order to reinforce and encourage
the continued attention and dedication of the Executive to the Executive's
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the Company
or the Bank, although no such change is now contemplated; and
NOW, THEREFORE, in consideration of the contribution of Executive, and upon
the other terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
of the termination of the Employment Agreement referenced above and shall
continue for a period of twenty-four (24 ) full calendar months thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that
(1) the Bank has not given notice to the Executive in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further; and (2) prior to such anniversary, the Board explicitly reviews and
approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
<PAGE>
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) In the event of the Involuntary Termination of Executive's employment
in connection with, or within 12 months after, a Change in Control of the Bank
or the Company (as herein defined), other than for Cause, as defined in Section
2(c) hereof, the provisions of Section 3 shall apply. The term "Involuntary
Termination" means termination of the employment of Executive without the
Executive's express written consent, and shall include a material diminution of
or interference with the Executive's duties, responsibilities and benefits as
Manager of the Bank's Savings Department, including (without limitation) any of
the following actions unless consented to in writing by the Executive: (1) a
change in the principal workplace of the Executive to a location outside of a 30
mile radius from the Bank's headquarters office as of the date hereof; (2) a
material demotion of the Executive; (3) a material reduction in the number or
seniority of other Bank personnel reporting to the Executive or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Executive, other than as
part of a Bank- or Company-wide reduction in staff; (4) a material adverse
change in the Executive's salary, perquisites, benefits, contingent benefits or
vacation, other than as part of an overall program applied uniformly and with
equitable effect to all members of the senior management of the Bank or the
Company; and (5) a material permanent increase in the required hours of work or
the workload of the Executive. The term "Involuntary Termination" does not
include Termination for Cause or termination of employment due to retirement,
death, disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(b) A "Change in Control" of the Bank or the Company shall mean (1) an
event of a nature that (i) results in a change in control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Company representing 20% or more of the Bank's or
the Company's outstanding securities; (3) individuals who are members of the
board of directors of the Bank or the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Company or a similar transaction in which the Bank or
the Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of the Bank or
the Company.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless
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<PAGE>
and until there shall have been delivered to him a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause.
3. TERMINATION
(a) In the event of the Involuntary Termination of the Executive's
employment in connection with, or within 12 months after, a Change in Control,
other than for Termination for Cause, the Bank shall be obligated to pay the
Executive, or in the event of her subsequent death, her beneficiary or
beneficiaries, or her estate, as the case may be, as severance pay, in a lump
sum in cash within 25 business days after the Date of Termination, a sum equal
to 150% of the Executive's salary during the preceding calendar year, including
bonuses and any other cash compensation paid to the Executive during that year.
Such payment shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(b) In the event of the Executive's Involuntary Termination of employment
in connection with, or within 12 months after, a Change in Control, other than
for Termination for Cause, the Bank shall cause to be continued for the
remaining term of this Agreement, substantially the same health benefits
maintained by the Bank for the Executive prior to the Change in Control.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by the Executive.
(d) Notwithstanding anything herein to the contrary, the Bank may terminate
Executive's employment at any time for any reason or for no reason. Executive
shall not have the right to receive compensation or benefits under this
Agreement for any period after termination of employment, except after a Change
in Control pursuant to the provisions of Section 2 and Section 3 hereof.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned
3
<PAGE>
to the performance of his duties on a full-time basis during such thirty (30)
day period), and (B) if his employment is terminated for any other reason, the
date specified in the Notice of Termination (which, in the case of a Termination
for Cause, shall be immediate). Except as set forth below in paragraph (c), in
no event shall the Date of Termination exceed 30 days from the date Notice of
Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement. Notwithstanding the foregoing, no compensation or benefits shall be
paid to the Executive in the event the Executive is Terminated for Cause. In
the event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive under the Employment Agreement referenced above, or
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that Executive is subject to receiving fewer benefits than those available to
him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
4
<PAGE>
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC (S)1818(e)(3)) or 8(g) (12 USC (S)1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC (S)1818(e)) or 8(g) (12 USC (S)1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
(S)1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank, (i) by the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC (S)1823(c)) of the Federal Deposit Insurance Act, as amended by
the Financial Institutions Reform, Recovery and Enforcement Act of 1989; or (ii)
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
5
<PAGE>
10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Missouri, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnifications shall be paid that would violate 12 U.S.C.
1828(k) or any regulations promulgated thereunder.
6
<PAGE>
15. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
16. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by
its duly authorized officer, and Executive has signed this Agreement, on the day
and date first above written.
ATTEST: COMMUNITY BANK OF EXCELSIOR SPRINGS, A
SAVINGS BANK
/s/ Dennis Hartman By: /s/ Robert E. McCrorey
- ------------------ ----------------------
President
WITNESS:
/s/ Dennis Hartman By: /s/ Margaret E. Teegarden
- ------------------ -------------------------
Executive
7
<PAGE>
CBES Bancorp, Inc.
1999 Annual Report
<PAGE>
Table of Contents
Page
President's Message 1
General Information 2
Selected Consolidated Financial and Other Data 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Independent Auditors' Report 15
Consolidated Balance Sheets 16
Consolidated Statements of Earnings 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 21
Stockholder Information 41
Corporate Information 42
<PAGE>
September 26, 1999
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 third annual report.
Fiscal 1999 was our third year as a stock company after serving area communities
for more than sixty-five years as a mutual savings institution. Net earnings for
the fiscal year were $1,110,000, up from $1,054,000 for fiscal year 1998. The
increase was primarily due to an increase in net interest income of $687,000 and
an increase in gain on sale of loans, net of $719,000, offset by an increase in
noninterest expense of $1,199,000.
Loans receivable, net, increased to $134,459,000 at June 30, 1999 from
$114,822,000 at June 30, 1998, an increase of $19,637,000 due to increases in
one-to-four family loans of $5,851,000, commercial loans of $2,728,000, land
loans of $2,242,000, construction loans of $6,186,000, and consumer loans of
$2,648,000. Assets increased $26,550,000 to $150,406,000 and stockholders'
equity increased $90,000. The increase in stockholders' equity was the result of
the Company's net earnings offset by the Company's stock repurchase program
under which the Company purchased 48,480 shares of its stock during fiscal 1999.
The year-end results reflect the implementation of the Company's controlled
growth strategies. During fiscal 1999, the Company's assets increased 21.4%,
loan receivable, net increased 17.1%, and deposits increased 18.2%. The branch
office in Liberty, Missouri, which opened in March 1998, is contributing
significantly to the Bank's growth.
While fiscal 1999 was a very successful year for the Company, we look forward to
continuing our long record of achievement in 2000. We reaffirm our commitment to
creating enhanced shareholder value while fulfilling our mission as a community-
oriented financial institution committed to our customers and the communities we
serve. Our goals in 2000 include 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,
/s/ Dennis Hartman
Dennis Hartman
Chief Executive Officer
<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
(the "ESOP"), and the Company's loan to the Bank. 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,
1999, the Company had total assets of $150.4 million, deposits of $101.4
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,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------- ------------
(Dollars in thousands, except for share data)
<S> <C> <C> <C> <C> <C>
Selected financial condition data:
Total assets $ 150,406 123,856 101,076 89,830 93,100
Loans receivable, net 134,459 114,822 91,017 79,410 78,880
Mortgage-backed securities 57 81 154 400 3,870
Investment securities 93 98 1,096 2,074 3,041
FHLB stock 2,173 1,025 811 811 795
Other interest-bearing deposits 6,673 2,424 3,544 2,776 2,469
Deposits 101,424 85,777 70,693 68,170 68,274
FHLB advances 29,450 19,500 10,750 12,000 15,877
Total equity 16,947 16,857 17,774 8,066 7,481
============ ============ ============ ============= ============
Selected operations data:
Total interest income $ 11,918 9,266 7,474 6,824 5,818
Total interest expense 6,485 4,520 3,534 4,006 3,146
------------ ------------ ------------ ------------- ------------
Net interest income 5,433 4,746 3,940 2,818 2,672
Provision for loan losses 298 266 60 236 171
------------ ------------ ------------ ------------- ------------
Net interest income after
provision for loan losses 5,135 4,480 3,880 2,582 2,501
------------ ------------ ------------ ------------- ------------
Loan fees and service charges 237 279 312 290 267
Gain (loss) on sale of loans, investments,
and mortgage-backed securities 1,178 460 157 239 (272)
Other noninterest income 158 128 127 127 102
------------ ------------ ------------ ------------- ------------
Total noninterest income 1,573 867 596 656 97
------------ ------------ ------------ ------------- ------------
Total noninterest expense 4,948 3,749 3,106 2,338 2,133
------------ ------------ ------------ ------------- ------------
Earnings before income taxes 1,760 1,598 1,370 900 465
Income tax expense 650 544 485 323 301
------------ ------------ ------------ ------------- ------------
Net earnings $ 1,110 1,054 885 577 164
============ ============ ============ ============= ============
Earnings per share:
Basic $ 1.26 1.12 0.94 -- --
============ ============ ============ ============= ============
Diluted $ 1.26 1.11 0.94 -- --
============ ============ ============ ============= ============
Average common shares outstanding 883,976 940,742 945,907 -- --
============ ============ ============ ============= ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At or for the years ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- ---------- --------- ---------
<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) 0.74 % 0.95 0.94 0.65 0.21
Return on equity (ratio of net
earnings to average equity) 6.60 6.04 5.79 7.42 2.27
Interest rate spread:
Average during period 3.38 3.80 3.66 2.90 3.11
End of period 2.92 3.04 3.17 4.12 2.19
Net interest margin 3.85 4.46 4.39 3.31 3.52
Ratio of noninterest expense to
average total assets 3.34 3.37 3.30 (1) 2.61 2.70
Ratio of average interest earning
assets to average interest-
bearing liabilities 110.31 115.56 118.71 108.57 109.79
Quality ratios:
Nonperforming assets to total
assets at end of period 0.47 0.59 1.14 0.73 0.17
Allowance for loan losses to
nonperforming loans 129.83 91.39 37.68 60.34 150.67
Allowance for loan losses to
loans receivable, net 0.69 0.58 0.48 0.49 0.29
Capital ratios:
Equity to total assets at end
of year 11.27 13.61 17.59 8.99 8.04
Average equity to average assets 11.38 15.66 16.24 8.69 9.13
Number of full service offices 3 3 2 2 1
========== ========= ========== ========= =========
</TABLE>
(1) The ratio of noninterest expense to average total assets would have been
2.79% for the year ended June 30, 1997 if the $441,000 SAIF assessment had
not been incurred.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed in June 1996 by the Bank to become the holding company of
the Bank. The acquisition of the Bank by the Company was consummated on
September 27, 1996, in connection with the Bank's Conversion. All references to
the Company 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 Federal Home Loan Bank of Des Moines ("FHLB") advances. Net
interest income is a function of the Company's "interest rate spread," which is
the difference between the average yield earned on interest-earning assets and
the average rate paid on interest-bearing liabilities, as well as a function of
the average balance of interest-earning assets as compared to interest-bearing
liabilities. The interest rate spread is affected by regulatory, economic, and
competitive factors that influence interest rates, loan demand, and deposit
flows. The Company, like other financial institutions, is subject to interest
rate risk to the degree that its interest-earning assets mature or reprice at
different times, or on different bases, than its interest-bearing liabilities.
Net interest income is reduced by all loans with principal or interest that is
currently delinquent ninety days or more, plus loans previously delinquent
ninety days or more which have not been brought current. 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 $26.6 million, or 21.5%, to $150.4 million
at June 30, 1999 from $123.9 million at June 30, 1998. 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 $19.6 million, or 17.1%, to $134.4 million at June 30, 1999 from
$114.8 million at June 30, 1998. The increase is primarily due to increases in
one-to-four family loans of $5.9 million, commercial loans of $2.7 million, land
loans of $2.2 million, construction loans of $6.2 million, and consumer loans of
$2.6 million.
Mortgage-backed Securities. Mortgage-backed securities decreased by $24,000, or
29.3%, to $57,000 at June 30, 1999 from $ 81,000 at June 30, 1998. The decrease
was due to prepayments on loans which secure the Bank's mortgage-backed
securities.
Investment Securities. Investment securities decreased $5,000, or 5.1%, to
$93,000 at June 30, 1999 from $98,000 at June 30, 1998. The decrease was due to
the maturity of $5,000 municipal bonds.
Deposits. Deposits increased $15.6 million, or 18.2%, to $101.4 million at June
30, 1999 from $85.8 million at June 30, 1998. The increase in deposits is
primarily due to $13.5 million in new certificates of deposit. Due to a large
demand for construction and other loans, we offered a very competitive interest
rate on selected term certificates to fund that lending. Those certificates will
begin repricing in mid-2000.
Federal Home Loan Bank Advances. FHLB advances increased $10.0 million from
$19.5 million at June 30, 1998 to $29.5 million at June 30, 1999. Increased
construction loan demand has required additional FHLB advances.
Equity. Total stockholders' equity increased by $90,000 to $16.9 million at June
30, 1999 from $16.9 million at June 30, 1998, primarily due to the Company's net
earnings, offset by the costs of the Company's stock repurchase program.
5
<PAGE>
Net Interest Income Analysis
The schedule below 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. Nonaccruing loans have been included as loans carrying a
zero yield.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999
At June 30, 1999 -------------------------------------------
---------------------------- Average Interest
Outstanding Yield/ outstanding earned/ Yield/
balance rate balance paid rate
----------------- --------- ---------------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 134,459 8.10 % $ 133,856 11,560 8.64 %
Mortgage-backed securities 57 8.06 69 6 8.70
Investment securities 93 6.50 95 6 6.32
FHLB stock 2,173 7.00 1,805 116 6.43
Other interest-bearing deposits 6,351 1.75 5,495 236 4.29
----------------- ---------------- -----------
Total interest-earnings
assets (1) $ 143,133 7.84 % $ 141,320 11,924 8.44 %
================= ========= ================ =========== =========
Interest-bearing liabilities:
Passbook accounts $ 4,079 2.25 % $ 3,782 87 2.30 %
Demand and NOW deposits 18,717 2.23 14,508 316 2.18
Certificate accounts 78,628 5.49 76,653 4,196 5.47
FHLB advances 29,450 5.65 33,165 1,885 5.68
----------------- ---------------- -----------
Total interest-bearing
liabilities $ 130,874 4.92 % $ 128,108 6,484 5.06 %
================= ========= ================ =========== =========
Net interest income $ 5,440
===========
Net interest rate spread (2) 2.92 % 3.38 %
========= =========
Net interest-earnings assets $ 12,259 $ 13,212
================= ================
Net interest margin (3) 3.85 %
===========
Average interest-earning assets to
average interest-bearing liabilities 110.31 %
===========
<CAPTION>
Year ended June 30,
----------------------------------------------
1998
-------------------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
---------------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 100,867 9,047 8.97 %
Mortgage-backed securities 100 7 7.00
Investment securities 560 20 3.57
FHLB stock 821 56 6.82
Other interest-bearing deposits 4,036 136 3.37
---------------- ------------
Total interest-earnings
assets (1) $ 106,384 9,266 8.71 %
================ ============ ========
Interest-bearing liabilities:
Passbook accounts $ 3,736 84 2.25 %
Demand and NOW deposits 14,001 311 2.22
Certificate accounts 61,650 3,419 5.55
FHLB advances 12,672 706 5.57
---------------- ------------
Total interest-bearing
liabilities $ 92,059 4,520 4.91 %
================ ============ ========
Net interest income $ 4,746
============
Net interest rate spread (2) 3.80 %
========
Net interest-earnings assets $ 14,325
================
Net interest margin (3) 4.46 %
============
Average interest-earning assets to
average interest-bearing liabilities 115.56 %
============
<CAPTION>
Year ended June 30,
----------------------------------------------
1997
-------------------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
---------------- ------------ --------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 84,115 7,297 8.68 %
Mortgage-backed securities 307 18 5.86
Investment securities 1,402 61 4.35
FHLB stock 811 57 7.03
Other interest-bearing deposits 3,116 41 1.32
---------------- ------------
Total interest-earnings
assets (1) $ 89,751 7,474 8.33 %
================ ============ ========
Interest-bearing liabilities:
Passbook accounts $ 4,065 91 2.24 %
Demand and NOW deposits 13,655 290 2.12
Certificate accounts 48,733 2,664 5.47
FHLB advances 9,153 489 5.34
---------------- ------------
Total interest-bearing
liabilities $ 75,606 3,534 4.67 %
================ ============ ========
Net interest income $ 3,940
============
Net interest rate spread (2) 3.65 %
========
Net interest-earnings assets $ 14,145
================
Net interest margin (3) 4.39 %
============
Average interest-earning assets to
average interest-bearing liabilities 118.71 %
============
</TABLE>
(1) Calculated net of deferred loan fees and discounts, loans in process,
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.
6
<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,
---------------------------------------------------------------------------------------
1999 vs 1998 1998 vs 1997
------------------------------------------ -------------------------------------------
Increase (decrease) Increase (decrease)
due to Total due to Total
----------------------------- increase ------------------------------ increase
Volume Rate (decrease) Volume Rate (decrease)
---------- -------------- ------------- ----------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable $ 2,650 (138) 2,512 1,499 251 1,750
Mortgage-backed securities (2) 1 (1) (14) 3 (11)
Investment securities (14) (12) (26) (78) 43 (35)
FHLB stock 63 (3) 60 1 (2) (1)
Other interest-earning assets 56 51 107 15 74 89
---------- -------------- ------------- ----------- -------------- -------------
Total interest-earning
assets 2,753 (101) 2,652 1,423 369 1,792
---------- -------------- ------------- ----------- -------------- -------------
Interest-bearing liabilities:
Savings deposits 3 -- 3 (7) -- (7)
Demand and NOW 11 (6) 5 7 14 21
Certificate accounts 819 (42) 777 716 39 755
Borrowings 1,180 -- 1,180 195 22 217
---------- -------------- ------------- ----------- -------------- -------------
Total interest-bearing
liabilities 2,013 (48) 1,965 911 75 986
---------- -------------- ------------- ----------- -------------- -------------
Net interest income $ 740 (53) 687 512 294 806
========== ============== ============= =========== ============== =============
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
Performance Summary. Net earnings for the year ended June 30, 1999 increased by
$56,000, or 5.3%, to $1,110,000 from $1,054,000 for the year ended June 30,
1998. The results were impacted by an increase of $687,000 in net interest
income and a $706,000 increase in noninterest income, offset by a $32,000
increase in provision for loan loss, a $1,199,000 increase in noninterest
expense, and a $107,000 increase in income taxes.
For the years ended June 30, 1999 and 1998, the returns on average assets were
.75% and .95%, respectively, while the returns on average equity were 6.60% and
6.04%, respectively.
7
<PAGE>
Net Interest Income. Net interest income increased from $4.7 million for the
fiscal year ended June 30, 1998 to $5.4 million for the current fiscal year, an
increase of $0.7 million. This reflects an increase of $2.7 million in interest
income to $11.9 million from $9.3 million, and an increase in interest expense
of $2.0 million to $6.5 million from $4.5 million. The net increase was
primarily due to an increase in net loans receivable of $19.6 million to $134.4
million in 1999 from $114.8 million in fiscal 1998.
For the year ended June 30, 1999, the average yield on interest-earning assets
was 8.44% compared to 8.71% for fiscal 1998. The average cost of
interest-bearing liabilities was 5.06% for the year ended June 30, 1999, an
increase from 4.91% for fiscal 1998. The average balance of interest-earning
assets increased $34.9 million to $141.3 million for the year ended June 30,
1999, compared to $106.4 million for fiscal 1998. During the same period, the
average balance of interest-bearing liabilities increased by $36.0 million to
$128.1 million for the year ended June 30, 1999 from $92.1 million in fiscal
1998.
The average interest rate spread was 3.37% for the year ended June 30, 1999,
compared to 3.80% for fiscal 1998. The average net interest margin decreased to
3.84% for the year ended June 30, 1999, compared to 4.46% for the year ended
June 30, 1998. This was primarily due to a decrease in the yield of
interest-earning assets to 8.44% at June 30, 1999 from 8.71% at June 30, 1998,
and an increase in the cost of interest-bearing liabilities to 5.06% at June 30,
1999 from 4.91% at June 30, 1998.
Provision for Loan Losses. During the year ended June 30, 1999, the Company
recorded a $298,000 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 $82,000 and $83,000 in 1999 and 1998,
respectively. The fiscal 1999 provision exceeds the fiscal 1998 provision of
$266,000 primarily because of an overall increase in loans and, in particular,
an increase in gross construction loans from $48.6 million at June 30, 1998 to
$63.3 million at June 30, 1999. The allowance for loan losses of $927,000, or
.69%, of loans receivable, net at June 30, 1999, compares to $669,000, or .58%
,of loans receivable, net at June 30, 1998. The allowance for loan losses as a
percentage of nonperforming assets was 129.83% at June 30, 1999 compared to
91.39% at June 30, 1998, due to a decrease in the Company's nonperforming assets
during fiscal 1999. Nonperforming assets aggregated $714,000 at June 30, 1999,
including nonaccruing one-to-four family residential loans of $209,000.
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, 1999, noninterest income
increased by $706,000, or 81.4%, compared to the year ended June 30, 1998 due
primarily to an increase in the gain on sale of mortgage loans of $719,000. The
gain on sale of loans increased during the year as a result of an increase in
loan sales from $22.8 million during the year ended June 30, 1998 to $57.9
million during the year ended June 30, 1999, as a part of the Company's strategy
to manage asset size and maintain capital levels.
Noninterest Expense. Noninterest expense increased $1,199,000 to $4.9 million
for the year ended June 30, 1999 from $3.7 million for the year ended June 30,
1998. Of this increase, $584,000 was attributable to compensation due to an
increase in the number of employees and general wage increases, offset by a
decrease in the ESOP plan expense of $56,000 and a decrease in the Recognition
and Retention plan expense of $107,000; $423,000 was due to office property and
equipment expense, of which $269,000 was due to Year 2000 expenses, including
capitalized computer equipment of $101,000, and $283,000 was due to an increase
in other noninterest expense, primarily consisting of mortgage loan expense,
professional fees, and telephone expense. The increase in noninterest expense 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 $107,000 to $650,000 for the year ended
June 30, 1999 from $543,000 for the year ended June 30, 1998. The increase is
due to the increase in pretax income. The Company's effective tax rate was 37%
for fiscal year 1999 and 34% for fiscal 1998.
8
<PAGE>
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 1998 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.
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 $83,000 and $53,000 in the past two years.
The allowance for loan losses of $669,000, or .58%, of loans receivable, net at
June 30, 1998 compares 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.
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 1997.
9
<PAGE>
Asset Liability Management
Savings institutions such as the Company are subject to interest rate risk to
the extent their interest-bearing liabilities (consisting primarily of deposit
accounts, FHLB advances, and other borrowings) mature or reprice more rapidly,
or on a different basis, than their interest-earning assets (consisting
predominantly of intermediate and long-term real estate loans and investments
held for investment and liquidity purposes). Having interest-bearing liabilities
that mature or reprice more frequently on average than assets may be beneficial
in times of declining interest rates, although such an asset liability structure
may result in declining net interest earnings during periods of rising interest
rates. Conversely, having interest-earning assets that mature or reprice more
frequently on average than liabilities may be beneficial in times of rising
interest rates, although this asset liability structure may result in declining
net interest earnings during periods of falling interest rates.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999, which are expected to
reprice or mature in each of the future time periods shown, assuming a 22%
annual prepayment rate for fixed-rate real estate loans, a 22% 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
1 year 1-3 years 3-5 years 5-10 years
------------ --------------- -------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable, net (1) $ 87,042 28,817 13,951 3,712
Mortgage-backed securities 13 20 14 10
Investment securities 3 6 6 21
Interest-bearing deposits
in other financial institutions 6,351 -- -- --
FHLB stock 2,173 -- -- --
------------ --------------- -------------- ----------------
Total interest-earning
assets (1) 95,582 28,843 13,971 3,743
------------ --------------- -------------- ----------------
Interest-earning liabilities:
Savings deposits 4,079 -- -- --
Demand and NOW deposits 18,717 -- -- --
Certificate accounts 57,630 14,028 5,440 1,530
FHLB advances 17,000 12,450 -- --
------------ --------------- -------------- ----------------
Total interest-bearing
liabilities 97,426 26,478 5,440 1,530
------------ --------------- -------------- ----------------
Interest sensitivity gap $ (1,844) 2,365 8,531 2,213
============ =============== ============== ================
Cumulative interest sensitivity gap $ (1,844) 521 9,052 11,265
============ =============== ============== ================
Ratio of interest-earning assets to
interest-bearing liabilities 98.11 % 108.93 % 256.82 % 244.64 %
============ =============== ============== ================
Ratio of cumulative gap to total
assets (1.23)% 0.35 % 6.02 % 7.49 %
============ =============== ============== ================
</TABLE>
Maturing or repricing
-----------------------------
Over
10 years Total
------------- ------------
(Dollars in Thousands)
Interest-earnings assets:
Loans receivable, net (1) 937 134,459
Mortgage-backed securities -- 57
Investment securities 57 93
Interest-bearing deposits
in other financial institutions -- 6,351
FHLB stock -- 2,173
------------- ------------
Total interest-earning
assets (1) 994 143,133
------------- ------------
Interest-earning liabilities:
Savings deposits -- 4,079
Demand and NOW deposits -- 18,717
Certificate accounts -- 78,628
FHLB advances -- 29,450
------------- ------------
Total interest-bearing
liabilities -- 130,874
------------- ------------
Interest sensitivity gap 994 12,259
============= ============
Cumulative interest sensitivity gap 12,259 12,259
============= ============
Ratio of interest-earning assets to
interest-bearing liabilities -- % 109.37 %
============= ============
Ratio of cumulative gap to total
assets 8.15 % 8.15 %
============= ============
(1) Calculated net of deferred loans fees, loan discounts, loans in process,
and loan loss reserves.
10
<PAGE>
Net Portfolio Value
In order to encourage institutions to reduce their interest rate risk, the
Office of Thrift Supervision (OTS) adopted a rule incorporating an interest rate
risk ("IRR") component into the risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ("NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated market value of its assets will
require the institution to deduct from its capital 50% of that excess change.
The rules provide that the OTS will calculate the IRR component quarterly for
each institution. The Bank, based on asset size and risk-based capital, has been
informed by the OTS that it is exempt from this rule. Nevertheless, the
following table presents the Bank's NPV at June 30, 1999, as calculated by the
OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Interest Rate Sensitivity of Net Portfolio Value (NPV)
NPV as percent
Net portfolio value of PV assets
--------------------------------------------------------- ------------------------
Change Dollar Dollar Percent NPV
in rates amount change change ratio Change
------------ --------- ----------- ----------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 bp $ 15,022 (1,617) (10)% 10.02 % (78)bp
200 15,888 (750) (5) 10.48 (32)
100 16,418 (220) (1) 10.73 (7)
-- 16,638 10.80 --
(100) 16,604 (34) -- 10.71 (8)
(200) 16,454 (185) (1) 10.56 (24)
(300) 16,447 (191) (1) 10.49 (31)
============ ========== =========== =========== ======== ===========
</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.
11
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, FHLB advances, repayments
and prepayments of loans and mortgage-backed securities, the maturity of
investment securities, and interest income. Although maturity and scheduled
amortization of loans are relatively predictable sources of funds, deposit flows
and prepayments on loans are influenced significantly by general interest rates,
economic conditions, and competition.
The primary investing activity of the Company is originating adjustable-rate
mortgages, construction loans, and consumer loans. For the fiscal years ended
June 30, 1999 and 1998, the Bank originated loans for its portfolio in the
amount of $108 million and $85 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 7.69% and
4.01%, respectively, at June 30, 1999 and 1998.
The Company's most liquid assets are cash and cash equivalents, which include
short-term investments. At June 30, 1999 and 1998, cash and cash equivalents
were $7.5 million and $3.1 million, respectively.
Liquidity management for the Company is both an ongoing and long-term component
of the Company's asset liability management strategy. Excess funds generally are
invested in overnight deposits at the FHLB. Should the Company require funds
beyond its ability to generate them internally, additional sources of funds are
available through advances from the FHLB. The Company would pledge its FHLB
stock or certain other assets as collateral for such advances.
At June 30, 1999, the Bank had outstanding loan commitments of $1,970,000 and
undisbursed loans in process of $27.2 million.
Certificates of deposit which are scheduled to mature in one year or less at
June 30, 1999 were $57.0 million. Management believes that a significant portion
of such deposits will remain with the Bank.
At June 30, 1999, the Bank had tangible capital of $13.5 million, or 8.9% of
total adjusted assets, which is approximately $11.2 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. The Bank
had core capital of $13.5 million, or 8.9% of adjusted total assets, which is
$7.5 million above the minimum leverage ratio requirement of 4.0% in effect on
that date. The Bank had total risk-based capital of $14.4 million and total
risk-weighted assets of $110.4 million, or total capital of 13.0% of risk-
weighted assets. This was $5.6 million above the 8.0% requirement in effect on
that date.
12
<PAGE>
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 requires the Company to classify items of other
comprehensive income by their nature in the consolidated financial statements.
The Company has adopted the provisions of SFAS No. 130 for the year ended June
30, 1999 and has displayed 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 public enterprises to 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. The Company adopted the provisions of SFAS
No. 131 for the year ended June 30, 1999. The Company has one reportable
operating segment.
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.
SFAS No. 137 was issued in June 1999 and delayed the effective date of SFAS No.
133 until July 1, 2001. Management believes adoption of SFAS No. 133, as amended
by SFAS No. 137, will not have a material effect on the Company's financial
position or results of operations, and adoption will not 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 "99" representing 1999. 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. Since the
Company does not develop any of the software programs that are utilized, the
process is focused on follow-up and testing of software provided by third-party
vendors and data centers to ensure their renovation. Also, the process attended
to pre-packaged computer software, personal computer and server hardware, and
other electronic equipment. The Company has established and tested a contingency
plan for the year 2000 and will be implemented if necessary.
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 software and data center hardware are year 2000 compliant. In the
year 2000 process, the Company has also evaluated the hardware and software on
its wide-area network ("WAN"). Management estimates that the year 2000
implementation process cost $269,000, 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.
13
<PAGE>
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.
14
<PAGE>
Independent Auditors' Report
The Board of Directors
CBES Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of CBES Bancorp,
Inc. and subsidiary as of June 30, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
August 13, 1999
15
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Balance Sheets
June 30, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
---------------- ----------------
<S> <C> <C>
Cash and cash equivalents $ 1,111,855 675,906
Interest-bearing deposits in other financial institutions 6,350,923 2,424,192
---------------- ----------------
Total cash and cash equivalents 7,462,778 3,100,098
Investment and mortgage-backed securities - held-to-maturity (estimated fair
value of $150,000 and $180,000 in 1999 and 1998, respectively) 150,275 179,066
Loans held for sale, net 2,393,421 1,579,569
Loans receivable, net (note 3) 132,065,730 113,242,706
Accrued interest receivable:
Loans receivable 1,052,903 908,793
Investment and mortgage-backed securities 3,167 3,207
Real estate owned 152,859 48,741
Stock in Federal Home Loan Bank (FHLB), at cost 2,172,500 1,025,000
Office property and equipment, net (note 4) 2,598,443 1,743,503
Deferred income tax benefit (note 7) 133,000 146,000
Cash surrender value of life insurance and other assets 2,220,827 1,878,936
---------------- ----------------
Total assets $ 150,405,903 123,855,619
================ ================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 5) $ 101,423,598 85,776,785
FHLB advances (note 6) 29,450,000 19,500,000
Accrued expenses and other liabilities 1,481,920 679,789
Accrued interest payable on deposits 138,404 107,761
Advance payments by borrowers for property taxes and insurance 916,215 751,199
Current income taxes payable 48,704 182,978
---------------- ----------------
Total liabilities 133,458,841 106,998,512
---------------- ----------------
Stockholders' equity:
Common stock, $.01 par; 3,500,000 authorized; 1,031,851 shares issued 10,319 10,319
Additional paid-in capital 9,989,075 9,912,731
Retained earnings, substantially restricted (notes 8, 9, and 11) 10,033,284 9,447,698
Treasury stock, 110,724 and 92,244 shares, at cost (2,267,740) (1,433,157)
Unearned employee benefits (note 8) (817,876) (1,080,484)
---------------- ----------------
Total stockholders' equity 16,947,062 16,857,107
Commitments (note 3)
---------------- ----------------
Total liabilities and stockholders' equity $ 150,405,903 123,855,619
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Earnings
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 11,559,524 9,046,683 7,296,558
Investment and mortgage-backed securities 5,922 27,308 79,380
Interest-bearing deposits and other 352,341 192,008 98,075
-------------- ------------- -------------
Total interest income 11,917,787 9,265,999 7,474,013
-------------- ------------- -------------
Interest expense:
Deposits (note 5) 4,598,959 3,813,986 3,045,250
FHLB advances 1,885,508 705,884 488,766
-------------- ------------- -------------
Total interest expense 6,484,467 4,519,870 3,534,016
-------------- ------------- -------------
Net interest income 5,433,320 4,746,129 3,939,997
Provision for loan losses (note 3) 298,020 266,514 59,693
-------------- ------------- -------------
Net interest income after provision for loan losses 5,135,300 4,479,615 3,880,304
-------------- ------------- -------------
Noninterest income:
Gain on sales of loans, net 1,178,325 459,813 156,708
Customer service charges 227,805 224,101 214,863
Loan servicing fees 8,743 54,712 97,623
Other 157,549 128,273 127,051
-------------- ------------- -------------
Total noninterest income 1,572,422 866,899 596,245
-------------- ------------- -------------
Noninterest expense:
Compensation, payroll taxes, and fringe benefits (note 8) 2,614,448 2,192,707 1,443,398
Office property and equipment 835,311 412,640 297,454
Data processing 242,137 166,401 165,612
Federal insurance premiums (note 5) 54,517 48,149 532,794
Advertising 118,751 124,414 73,036
Real estate owned and repossessed assets 60,482 65,018 34,542
Other 1,022,291 739,357 559,666
-------------- ------------- -------------
Total noninterest expense 4,947,937 3,748,686 3,106,502
-------------- ------------- -------------
Earnings before income taxes 1,759,785 1,597,828 1,370,047
Income taxes (note 7) 650,204 543,586 485,487
-------------- ------------- -------------
Net earnings $ 1,109,581 1,054,242 884,560
============== ============= =============
Earnings per share:
Basic $ 1.26 1.12 .94
Diluted 1.26 1.11 .94
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in Retained comprehensive
stock capital earnings income
------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1996 $ -- -- 8,082,540 (16,650)
Comprehensive income:
Net earnings -- -- 884,560 --
Other comprehensive income -
unrealized holding losses on
debt and equity securities available-
for sale, net of tax -- -- -- 13,992
------------- -------------- -------------- -------------------
Total comprehensive income -- -- 884,560 13,992
------------- -------------- -------------- -------------------
Sale of common stock, net of offering costs 10,250 9,685,124 -- --
Unearned employee stock ownership plan
(ESOP) shares -- -- -- --
Allocation of ESOP shares -- 43,233 -- --
Dividends declared ($.20 per share) -- -- (189,120) --
Balance, June 30, 1997 10,250 9,728,357 8,777,980 (2,658)
Comprehensive income:
Net earnings -- -- 1,054,242 --
Other comprehensive income -
unrealized holding losses on
debt and equity securities available-
for sale, net of tax -- -- -- 2,658
------------- -------------- -------------- -------------------
Total comprehensive income -- -- 1,054,242 2,658
------------- -------------- -------------- -------------------
Allocation of ESOP shares -- 132,003 -- --
Purchase of 92,244 shares of treasury stock -- -- -- --
Adoption of Recognition and Retention
Plan (RRP) (note 9) 69 52,371 -- --
Amortization of recognition and retention plan -- -- -- --
Dividends declared ($.42 per share) -- -- (384,524) --
Balance, June 30, 1998 10,319 9,912,731 9,447,698 --
Comprehensive income:
Net earnings -- -- 1,109,581 --
Other comprehensive income -
unrealized holding losses on
debt and equity securities available-
for sale, net of tax -- -- -- --
------------- -------------- -------------- -------------------
Total comprehensive income -- -- 1,109,581 --
------------- -------------- -------------- -------------------
Allocation of ESOP shares -- 76,344 -- --
Purchase of 48,480 shares of treasury stock -- -- -- --
Amortization of recognition and retention plan -- -- -- --
Dividends declared ($.60 per share) -- -- (523,995) --
------------- -------------- -------------- -------------------
Balance, June 30, 1999 $ 10,319 9,989,075 10,033,284 --
============= ============== ============== ===================
<CAPTION>
Unearned
employee Treasury
benefits stock Total
--------------- -------------- --------------
<S> <C> <C> <C>
Balance, June 30, 1996 -- -- 8,065,890
Comprehensive income:
Net earnings -- -- 884,560
Other comprehensive income -
unrealized holding losses on
debt and equity securities available-
for sale, net of tax -- -- 13,992
--------------- -------------- --------------
Total comprehensive income -- -- 898,552
--------------- -------------- --------------
Sale of common stock, net of offering costs -- -- 9,695,374
Unearned employee stock ownership plan
(ESOP) shares (819,960) -- (819,960)
Allocation of ESOP shares 80,520 -- 123,753
Dividends declared ($.20 per share) -- -- (189,120)
Balance, June 30, 1997 (739,440) -- 17,774,489
Comprehensive income:
Net earnings -- -- 1,054,242
Other comprehensive income -
unrealized holding losses on
debt and equity securities available-
for sale, net of tax -- -- 2,658
--------------- -------------- --------------
Total comprehensive income -- -- 1,056,900
--------------- -------------- --------------
Allocation of ESOP shares 120,580 -- 252,583
Purchase of 92,244 shares of treasury stock -- (2,090,907) (2,090,907)
Adoption of Recognition and Retention
Plan (RRP) (note 9) (710,190) 657,750 --
Amortization of recognition and retention plan 248,566 -- 248,566
Dividends declared ($.42 per share) -- -- (384,524)
Balance, June 30, 1998 (1,080,484) (1,433,157) 16,857,107
Comprehensive income:
Net earnings -- -- 1,109,581
Other comprehensive income -
unrealized holding losses on
debt and equity securities available-
for sale, net of tax -- -- --
--------------- -------------- --------------
Total comprehensive income -- -- 1,109,581
--------------- -------------- --------------
Allocation of ESOP shares 120,570 -- 196,914
Purchase of 48,480 shares of treasury stock -- (834,583) (834,583)
Amortization of recognition and retention plan 142,038 -- 142,038
Dividends declared ($.60 per share) -- -- (523,995)
--------------- -------------- --------------
Balance, June 30, 1999 (817,876) (2,267,740) 16,947,062
=============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,109,581 1,054,242 884,560
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for loan losses 298,020 266,514 59,693
Depreciation 346,478 209,897 147,587
Amortization of RRP and allocation of ESOP shares 338,952 501,149 123,753
(Gain) loss on disposition of real estate owned, net 48,292 (3,227) 14,930
Proceeds from sale of loans held for sale 41,653,136 23,217,640 11,444,211
Origination of loans held for sale (41,288,663) (23,640,779) (11,618,120)
Gain on sale of loans, net (1,178,325) (459,813) (156,708)
Premium amortization and accretion of discounts
and deferred loan fees, net (558,416) (466,442) (330,292)
Provision for deferred income taxes 13,000 (140,772) 6,672
Changes in assets and liabilities:
Accrued interest receivable (144,070) (201,867) (84,296)
Other assets (341,890) (136,379) 10,947
Accrued expenses and other liabilities 754,507 (75,077) 121,272
Accrued interest payable on deposits 30,643 9,795 (13,261)
Current income taxes payable (134,274) (111,626) 28,295
--------------- --------------- ---------------
Net cash provided by operating activities 946,971 23,255 639,243
--------------- --------------- ---------------
Cash flows from investing activities:
Net increase in loans receivable (19,815,885) (23,047,384) (11,194,574)
Purchase of FHLB stock (1,147,500) (214,300) --
Maturity of investment securities available-for-sale -- 1,000,000 1,000,000
Maturity of investment securities held-to-maturity 5,000 2,000 --
Mortgage-backed securities principal repayments 23,791 73,108 243,910
Purchase of office property and equipment (1,201,418) (715,577) (112,503)
Proceeds from sale of real estate owned 1,100,847 448,654 9,000
--------------- --------------- ---------------
Net cash used in investing activities $ (21,035,165) (22,453,499) (10,054,167)
--------------- --------------- ---------------
</TABLE>
(Continued)
19
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Cash Flows, Continued
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock,
net of issuance costs $ -- -- 8,875,414
Increase in deposits 15,646,813 15,083,885 2,523,340
Proceeds from FHLB advances 41,450,000 22,750,000 32,250,000
Repayments of FHLB advances (31,500,000) (14,000,000) (33,500,000)
Increase in advance payments by borrowers
for property taxes and insurance 165,016 25,681 33,721
Purchase of treasury stock (834,583) (2,090,907) --
Dividends paid (476,372) (370,667) (94,560)
--------------- --------------- ---------------
Net cash provided by financing activities 24,450,874 21,397,992 10,087,915
--------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents 4,362,680 (1,032,252) 672,991
Cash and cash equivalents at the beginning of the year 3,100,098 4,132,350 3,459,359
--------------- --------------- ---------------
Cash and cash equivalents at the end of the year $ 7,462,778 3,100,098 4,132,350
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 568,000 643,000 360,000
=============== =============== ===============
Cash paid during the year for interest $ 6,453,824 4,510,075 3,547,276
=============== =============== ===============
Supplemental schedule of noncash investing
and financing activities:
Conversion of loans to real estate owned $ 1,253,257 325,964 192,134
=============== =============== ===============
Loans made to finance sales of real estate owned $ -- 476,818 9,000
=============== =============== ===============
Dividends declared and payable $ 155,902 116,353 94,560
=============== =============== ===============
Unearned ESOP shares $ -- -- 819,960
=============== =============== ===============
Allocation of RRP shares $ -- 710,190 --
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 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. 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.
(Continued)
21
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(c) Investment and Mortgage-backed Securities
The Company classifies its investment and mortgage-backed securities
portfolios as held-to-maturity, which are recorded at amortized cost, or
available-for-sale, which are recorded at fair value. The Company
classified its investment and mortgage-backed securities as held-to-
maturity if it has the positive intent and ability to hold the securities
to maturity. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity until
realized. 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.
Interest on loans is accrued based on the principal amount outstanding.
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.
(Continued)
22
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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 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 $323,000, $87,000, and $30,000 in 1999, 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 $41,000 and
$18,000 during 1999 and 1998, respectively.
At June 30, 1999 and 1998, the Bank was servicing loans for others
amounting to $44,070,000 and $30,442,000, 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,
1999 and 1998 amounted to $432,000 and $259,000, 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.
(Continued)
23
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(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.
(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 include 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,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding 884,109 940,742 945,907
Stock options -- 5,154 --
----------- ----------- -----------
884,109 945,896 945,907
=========== =========== ===========
</TABLE>
(Continued)
24
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(m) Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in June 1997. SFAS No. 130 requires
the Company to classify items of other comprehensive income by their
nature in the consolidated financial statements. The Company has adopted
the provisions of SFAS No. 130 for the year ended June 30, 1999 and has
displayed 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 public enterprises to 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. The Company adopted the provisions of SFAS No. 131 for the
year ended June 30, 1999. The Company has one reportable operating
segment.
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. SFAS No. 137 was issued in June
1999 and delayed the effective date of SFAS No. 133 until July 1, 2001.
Management believes adoption of SFAS No. 133, as amended by SFAS No. 137,
will not have a material effect on the Company's financial position or
results of operations, and adoption will not require additional capital
resources.
(Continued)
25
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(3) Loans Receivable
Loans receivable consisted of the following at June 30, 1999 and 1998:
1999 1998
-------------- --------------
Real estate:
One-to-four family residential $ 68,959,479 63,922,360
Construction 63,318,769 48,640,551
Land 6,485,472 4,243,136
Commercial 5,495,877 2,767,600
Multifamily 1,950,918 1,602,006
Consumer loans 14,538,690 11,890,754
-------------- --------------
160,749,205 133,066,407
Less:
Loans in process 27,152,578 18,660,635
Deferred loan origination fees
and discounts on loans, net 604,351 494,066
Allowance for loan losses 926,546 669,000
-------------- --------------
$ 132,065,730 113,242,706
============== ==============
At June 30, 1999, the Bank was committed to originate first mortgage loans
aggregating approximating $1,970,000, of which $101,000 was committed to be
sold to a third party. Fixed rate loan commitments approximated $1,451,000
at June 30, 1999, with rates ranging from 6.75% to 8.50%. There were no
commitments to buy loans at June 30, 1999.
The Company had loans to directors and officers at June 30, 1999 and 1998
which carry terms similar to those for other loans. A summary of such loans
is as follows:
1999 1998
-------------- -------------
Balance at beginning of year $ 1,046,000 1,249,000
New loans 1,096,000 357,000
Payments (381,000) (560,000)
-------------- -------------
Balance at end of year $ 1,761,000 1,046,000
============== =============
(Continued)
26
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
A summary of activity in the allowance for loan losses for the years ended
June 30, 1999, 1998, and 1997 is as follows:
1999 1998 1997
----------- ----------- -----------
Balance at beginning of year $ 669,000 436,000 388,000
Provision for loan losses 298,020 266,514 59,693
Charge-offs (82,411) (83,388) (52,874)
Recoveries 41,937 49,874 41,181
----------- ----------- -----------
Balance at end of year $ 926,546 669,000 436,000
=========== =========== ===========
Nonaccrual loans at June 30, 1999 and 1998 aggregated approximately $554,000
and $678,000, respectively. Gross interest income which would have been
recorded had the nonaccruing loans been in accordance with their original
terms amounted to $36,000, $34,000, and $36,000 for the years ended June 30,
1999, 1998, and 1997, respectively. The amount that was included in income
on such loans was $21,000 and $39,000 for the years ended June 30, 1999 and
1998, 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. The Bank's principal lending areas are the
economically diverse communities northeast of Kansas City, Missouri.
(4) Premises and Equipment
Office property and equipment consist of the following at June 30, 1999 and
1998:
1999 1998
------------- -------------
Land and land improvements $ 421,130 171,130
Office buildings 2,144,426 1,437,721
Furniture and equipment 1,725,632 1,480,919
------------- -------------
4,291,188 3,089,770
Less accumulated depreciation 1,692,745 1,346,267
------------- -------------
$ 2,598,443 1,743,503
============= =============
(Continued)
27
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(5) Deposits
Deposit balances at June 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -----------------------
<S> <C> <C> <C>
Balance by interest rate:
Noninterest bearing
demand accounts - $ 3,953,136 4 % $ 2,309,696 3 %
NOW accounts 1.75-2.25% 8,987,936 9 8,852,647 10
Money market 2.50-2.75% 5,775,966 6 5,791,338 7
Passbook accounts 2.25-2.75% 4,078,618 4 3,679,644 4
---------------- -------- -------------- --------
22,795,656 23 20,633,325 24
---------------- -------- -------------- --------
Certificate accounts: 2.00-2.99% 554 -- 1,324 --
4.00-4.99% 9,501,305 9 -- --
5.00-5.99% 51,453,152 51 36,237,309 42
6.00-6.99% 17,672,931 17 28,904,827 34
---------------- -------- -------------- --------
78,627,942 77 65,143,460 76
---------------- -------- -------------- --------
$ 101,423,598 100 % $ 85,776,785 100 %
================ ======== ============== ========
Weighted average
interest rate on deposits
at period-end 4.82 % 4.84 %
======== ========
Contractual maturity of
certificate accounts:
Under 12 months $ 56,450,884 72 % $ 38,849,876 60 %
12 to 24 months 11,229,466 14 14,640,894 22
24 to 36 months 3,957,715 5 3,134,188 5
36 to 48 months 4,307,686 5 3,238,399 5
48 to 60 months 1,184,903 2 3,300,051 5
Over 60 months 1,497,288 2 1,980,052 3
---------------- -------- -------------- --------
$ 78,627,942 100 % $ 65,143,460 100 %
================ ======== ============== ========
</TABLE>
At June 30, 1999 and 1998, deposits of $100,000 or more totaled $6,872,000
and $6,823,000, respectively.
(Continued)
28
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The components of interest expense on deposits for the years ended June 30,
1999, 1998, and 1997 are as follows:
1999 1998 1997
------------- ------------- -------------
NOW, passbook, Super NOW,
and money market demand $ 388,864 375,707 380,897
Certificates of deposit 4,210,095 3,438,279 2,664,353
------------- ------------- -------------
$ 4,598,959 3,813,986 3,045,250
============= ============= =============
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.
(Continued)
29
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(6) FHLB Advances
The Company had the following debt outstanding from the FHLB of Des Moines
at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<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 2000 -- 1,000,000
$1,000,000 advance, interest at 5.76%, due July 1999 1,000,000 --
$1,000,000 advance, interest at 5.80%, due July 1999 1,000,000 --
$3,000,000 advance, interest at 5.04%, due August 1999 3,000,000 --
$1,300,000 advance, interest at 5.00%, due December 1999 1,300,000 --
$3,000,000 advance, interest at 5.60%, due May 2000 3,000,000 3,000,000
$1,000,000 advance, interest at 5.88%, due August 2000 1,000,000 --
$2,000,000 advance, interest at 5.78%, due August 2000 2,000,000 --
$3,000,000 advance, interest at 5.78%, due November 2000 3,000,000 3,000,000
$5,000,000 advance, interest at 5.95%, due July 2001 5,000,000 --
$1,150,000 advance, interest at 5.33%, due December 2001 1,150,000 --
$1,000,000 advance, interest at 5.08%, due June 2008 1,000,000 1,000,000
$4,000,000 advance, interest at 5.01%, due August 2008 4,000,000 --
$3,000,000 advance, interest at 4.99%, due September 2008 3,000,000 --
Borrowings on an $8,000,000 line of credit, interest at
approximately fifty basis points above the U. S. treasury
bill rate (5.75% at June 30, 1998), matured May 1999. -- 8,000,000
-------------- ---------------
$ 29,450,000 19,500,000
============== ===============
</TABLE>
The advances and lines of credit to the FHLB are collateralized by first
mortgage loans.
(Continued)
30
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Scheduled maturities of FHLB advances at June 30, 1999 are as follows:
Amount
--------------
Year ending June 30:
2000 $ 9,300,000
2001 6,000,000
2002 6,150,000
2003 --
2004 --
Thereafter 8,000,000
--------------
$ 29,450,000
==============
(7) Income Taxes
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
Federal State Total
------------ ----------- ------------
<S> <C> <C> <C>
Year ended June 30, 1999:
Current $ 518,642 118,562 637,204
Deferred 10,000 3,000 13,000
------------ ----------- ------------
$ 528,642 121,562 650,204
============ =========== ============
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
============ =========== ============
</TABLE>
(Continued)
31
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Income tax expense has been provided at effective rates of 37.0%, 34.0%, and
35.4% (applied to earnings before taxes) for the years ended June 30, 1999,
1998, and 1997, 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal income tax rate 34.0 % 34.0 34.0
Items affecting federal income tax rate:
ESOP 2.2 2.2 0.6
Increase in cash surrender value of life insurance
policies, net of nondeductible premiums (4.0) (1.6) (1.0)
State income tax net of federal benefit 2.5 2.7 1.3
Other 2.3 (3.3) 0.5
-------- -------- --------
Effective income tax rate 37.0 % 34.0 35.4
======== ======== ========
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to
deferred tax assets and liabilities at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Accrued compensation $ 187,000 136,000
Allowance for loan losses 392,000 258,000
------------ ------------
Deferred income tax asset 579,000 394,000
------------ ------------
Loan origination fees (198,000) (105,000)
Fixed assets (63,000) (75,000)
Originated servicing rights (158,000) (39,000)
Other (27,000) (29,000)
------------ ------------
Deferred income tax liability (446,000) (248,000)
------------ ------------
Net deferred income tax benefit $ 133,000 146,000
============ ============
</TABLE>
There was no valuation allowance for deferred tax assets required at June 30,
1999 or 1998. 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.
(Continued)
32
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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.
(8) 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, 1999,
1998, and 1997 was approximately $54,000, $51,000, and $45,000,
respectively. The Directors/Officers and their beneficiaries are general
unsecured creditors of the Bank for all amounts due under these agreements.
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, 1999, 1998, and
1997, 26,840, 14,700, and 8,052 shares, respectively, had been allocated to
participants. Compensation and benefits expense in 1999, 1998, and 1997,
representing the fair value of allocated shares, was $196,914, $252,583, and
$123,753, respectively. The fair value of the remaining unallocated shares
at June 30, 1999 aggregated approximately $885,943.
(Continued)
33
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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, was included in unearned
compensation in the accompanying consolidated balance sheet and is being
amortized to expense over the vesting period. The Company recognized RRP
expense of $142,038 and $248,556 in 1999 and 1998, respectively.
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 $5,000, $4,000, and
$4,000 in 1999, 1998, and 1997, respectively.
(9) 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 $137,000 or $.12 per diluted
share in 1999 and $244,000 or $.23 per diluted share in 1998.
(Continued)
34
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Following is a summary of the fair values of options granted using the
Black-Scholes option-pricing model:
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
===========
(10) 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.
(11) 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,
1999, 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.
(Continued)
35
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The Bank met all regulatory capital requirements at June 30, 1999 and 1998. The
Bank's actual and required capital amounts and ratios as of June 30, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
To be well-
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
-------------------------- --------------------------- ---------------------------
1999 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------- -------------- ----------- -------------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to tangible assets) $ 13,508,000 8.93 % $ 2,269,000 1.50 % $ -- -- %
Tier 1 leverage (core) capital
(to adjusted tangible assets) 13,508,000 8.93 6,054,000 4.00 7,567,000 5.00
Risk-based capital
(to risk-weighted assets) 14,389,000 13.03 8,834,000 8.00 11,043,000 10.00
Tier 1 leverage risk-based capital
(to risk-weighted assets) 13,508,000 12.23 -- -- 6,626,000 6.00
=============== ========== ============== ======== ============== =========
</TABLE>
<TABLE>
<CAPTION>
To be well-
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
-------------------------- ------------------------ -----------------------------
1998 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 1 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 assets) 13,508,000 12.08 8,945,000 8.00 11,181,000 10.00
Tier 1 leverage risk-based capital
(to risk-weighted assets) 13,000,000 11.63 -- -- 6,709,000 6.00
=============== ========== ============== ======== ============== =========
</TABLE>
(Continued)
36
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(12) Fair Value of Financial Instruments
Fair value estimates of the Company's financial instruments as of June 30,
1999 and 1998, including methods and assumptions utilized, are set forth
below:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment and mortgage-backed
securities $ 150,275 150,000 179,066 180,000
================ ================ =============== ================
Loans, net of loans in process $ 134,459,151 135,387,000 114,822,275 116,048,000
================ ================ =============== ================
Noninterest bearing demand deposit $ 3,953,136 3,953,000 2,309,696 2,310,000
Money market and NOW deposits 14,763,902 14,764,000 14,643,985 14,644,000
Passbook accounts 4,078,618 4,079,000 3,679,644 3,680,000
Certificate accounts 78,627,942 78,392,000 65,143,460 65,279,000
---------------- ---------------- --------------- ----------------
Total deposits $ 101,423,598 101,188,000 85,776,785 85,913,000
================ ================ =============== ================
FHLB advances $ 29,450,000 29,358,000 19,500,000 19,410,000
================ ================ =============== ================
</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 the FHLB line of
credit are considered to approximate fair value based on the contractual
rates approximating the rates currently available to the Company.
The estimated fair value of mortgage-backed and investment securities,
except certain obligations of states and political subdivisions, is based on
bid prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain obligations of states and
political subdivisions is not readily available through market sources other
than dealer quotations, so fair value estimates are based upon quoted market
prices of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
(Continued)
37
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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.
(Continued)
38
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(13) Parent Company Condensed Financial Statements
Presented below are condensed financial statements of the Company (parent
only) as of June 30, 1999 and 1998 and for the years ended June 30, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
Condensed Balance Sheets
June 30, 1999 and 1998
1999 1998
-------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 1,106,161 108,404
Investment in subsidiary 13,542,418 13,000,515
ESOP loan receivable 523,944 638,867
Loan receivable from subsidiary 2,000,000 3,250,000
-------------- --------------
Total assets $ 17,172,523 16,997,786
============== ==============
Dividends payable $ 165,803 116,353
Other liabilities 59,658 24,326
-------------- --------------
Total liabilities 225,461 140,679
Stockholders' equity 16,947,062 16,857,107
-------------- --------------
Total liabilities and stockholders' equity $ 17,172,523 16,997,786
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Earnings
Years ended June 30, 1999, 1998, and 1997
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income $ 170,406 238,270 200,955
Other expense, net (206,176) (209,118) (141,767)
-------------- -------------- ---------------
Income (loss) before equity in undistributed
earnings of Bank (35,770) 29,152 59,188
Equity in earnings of Bank 1,145,351 1,025,090 825,372
-------------- -------------- ---------------
Net income $ 1,109,581 1,054,242 884,560
============== ============== ===============
</TABLE>
(Continued)
39
<PAGE>
CBES BANCORP, INC. AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Condensed Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash provided by operating activities:
Net earnings $ 1,109,581 1,054,242 884,560
Change in other liabilities 37,158 (4,272) 26,284
Undistributed earnings of Bank (1,145,351) (1,025,090) (825,372)
-------------- -------------- ---------------
Cash provided by operating activities 1,388 24,880 85,472
-------------- -------------- ---------------
Cash provided by investing activities:
Net decrease (increase) in loans receivable 1,364,923 861,608 (4,750,475)
Investment in Bank -- -- (4,319,290)
-------------- -------------- ---------------
Cash provided by (used in) investing activities 1,364,923 861,608 (9,069,765)
-------------- -------------- ---------------
Cash provided by financing activities:
Dividends from subsidiary 942,401 1,066,969 --
Proceeds from stock offering, net of conversion costs -- -- 9,695,374
Dividends paid (476,372) (370,667) (94,560)
Purchase of treasury stock (834,583) (2,090,907) --
-------------- -------------- ---------------
Cash (used in) provided by financing activities (368,554) (1,394,605) 9,600,814
-------------- -------------- ---------------
Net increase (decrease) in cash 997,757 (508,117) 616,521
Cash and cash equivalents at beginning of year 108,404 616,521 --
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 1,106,161 108,404 616,521
============== ============== ===============
Noncash investing and financing activities -
dividend declared and payable $ 155,902 116,353 94,560
============== ============== ===============
</TABLE>
40
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 4:00 p.m., Liberty, Missouri
time on October 28, 1999, at the Liberty Community Center located at 1600 S.
Withers Road, Liberty, Missouri 64068.
Stock Listing
CBES Bancorp, Inc. common stock is traded on the National Association of
Securities Dealers, Inc. Small Cap Market under the symbol "CBES."
Price Range of Common Stock
The per share price range of the common stock and the dividends declared or paid
for each quarter since the common stock began trading on September 30, 1996 is
set forth below. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and may not necessarily represent actual
transactions:
Fiscal 1999 High Low Dividends
--------------------- ---------- ---------- --------------
First Quarter $ 21.000 16.750 0.12
Second Quarter 17.750 14.438 0.14
Third Quarter 15.500 14.625 0.16
Fourth Quarter 16.063 13.000 0.18
========== ========== ==============
Fiscal 1998 High Low Dividends
--------------------- ---------- ---------- --------------
First Quarter $ 20.500 17.125 0.10
Second Quarter 22.250 19.125 0.10
Third Quarter 26.500 21.375 0.10
Fourth Quarter 22.875 18.625 0.12
========== ========== ==============
Fiscal 1997 High Low Dividends
--------------------- ---------- ---------- --------------
First Quarter $ 13.000 12.250 --
Second Quarter 14.250 12.375 --
Third Quarter 17.500 14.000 0.10
Fourth Quarter 18.000 15.875 0.10
========== ========== ==============
At June 30, 1999, there were 1,031,851 shares issued and 921,127 shares
outstanding of CBES Bancorp, Inc. common stock (including unallocated ESOP
shares) and there were approximately 238 registered holders of record.
Shareholders and General Inquiries: Transfer Agent:
Dennis D. Hartman Registrar and Transfer Co.
Chief Executive Officer 10 Commerce Drive
CBES Bancorp, Inc. Cranford, New Jersey 07016
1001 N. Jesse James Road
Excelsior Springs, Missouri 64024
(816)-630-6711
Annual and Other Reports
A copy of CBES Bancorp, Inc.'s Annual Report on Form 10-KSB for the year ended
June 30, 1999, as filed with the Securities and Exchange Commission, may be
obtained without charge by contacting Dennis D. Hartman, Chief Executive
Officer, CBES Bancorp, Inc., 1001 N. Jesse James Road, Excelsior Springs,
Missouri 64024.
41
<PAGE>
CORPORATE INFORMATION
Company and Bank Address
1001 N. Jesse James Road Telephone: (816) 630-6711
Excelsior Springs, Missouri 64024 Fax: (816) 630-1663
Board of Directors
Robert McCrorey-Chairman of the Board and President of CBES Bancorp, Inc. and
Community Bank of Excelsior Springs, a Savings Bank; and Mortgage Loan Officer.
Mr. McCrorey has served as a loan originator for the Bank since 1993. Prior to
that time, he served as a branch manager for a beer distributor.
Rodney G. Rounkles-Vice Chairman of the Board of Community Bank of Excelsior
Springs, a Savings Bank. Mr. Rounkles was the plant manager of a molding
products plant in Excelsior Springs, Missouri until his retirement in 1995.
Cecil E. Lamb - Mr. Lamb is a retired postmaster.
Richard N. Cox - Mr. Cox is the owner and operator of Cox Tool Co., Inc., a
designer/builder of plastic molds, located in Excelsior Springs, Missouri.
Robert L. Lalumondier - Mr. Lalumondier is the owner of Lalumondier Insurance
Agency, located in Kearney, Missouri.
CBES Bancorp, Inc. Executive Officers
Robert McCrorey Dennis D. Hartman
Chairman of the Board and President Chief Executive Officer
Robert F. Kirk
Chief Financial Officer
Community Bank of Excelsior Springs, a Savings Bank Executive Officers
Robert McCrorey Dennis D. Hartman
Chairman of the Board and President Chief Executive Officer
Rodney G. Rounkles Deryl R. Goettling
Vice Chairman of the Board Chief Lending Officer
Margaret E. Teegarden James V. Alderson
Savings Department Manager Consumer Loan Department Manager
Independent Accountants: Special Counsel:
KPMG 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
42
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of
Parent Subsidiary Percentage Owned Incorporation
- ------ ---------- ---------------- -------------
<S> <C> <C> <C>
CBES Bancorp, Inc. Community Bank of Excelsior Springs 100 Federal
a Savings Bank
Community Bank of Excelsior Springs, CBES Service Corporation 100 Missouri
a Savings Bank
</TABLE>
<PAGE>
Exhibit 23
Accountants' Consent
- --------------------
Board of Director's
CBES Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statement No.
333-39785 on Form S-8 of CBES Bancorp, Inc. of our report dated August 13, 1999
relating to the consolidated balance sheets of CBES Bancorp, Inc. and
subsidiaries as of June 30, 1999 and 1998 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, 1999 which report appears in the
June 30, 1999 Annual Report on Form 10-KSB of CBES Bancorp, Inc.
/s/ KPMG LLP
Kansas City, Missouri
September 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,111,855
<INT-BEARING-DEPOSITS> 6,350,923
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 150,275
<INVESTMENTS-MARKET> 150,000
<LOANS> 134,459,151
<ALLOWANCE> 926,546
<TOTAL-ASSETS> 159,418,410
<DEPOSITS> 101,423,598
<SHORT-TERM> 9,300,000
<LIABILITIES-OTHER> 1,481,920
<LONG-TERM> 20,150,000
0
0
<COMMON> 10,319
<OTHER-SE> 16,947,062
<TOTAL-LIABILITIES-AND-EQUITY> 150,405,903
<INTEREST-LOAN> 11,559,524
<INTEREST-INVEST> 5,922
<INTEREST-OTHER> 352,341
<INTEREST-TOTAL> 11,917,787
<INTEREST-DEPOSIT> 4,598,959
<INTEREST-EXPENSE> 6,484,467
<INTEREST-INCOME-NET> 5,433,320
<LOAN-LOSSES> 298,020
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,022,291
<INCOME-PRETAX> 1,759,785
<INCOME-PRE-EXTRAORDINARY> 1,109,581
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,109,581
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 7.84
<LOANS-NON> 553,902
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 669,000
<CHARGE-OFFS> 82,164
<RECOVERIES> 42,233
<ALLOWANCE-CLOSE> 926,546
<ALLOWANCE-DOMESTIC> 926,546
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
