<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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to ___________________
Commission File Number 0-21163
CBES BANCORP, INC.
--------------------------------------------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Delaware 43-1753244
----------------------------------------- ----------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
1001 North Jesse James Road, Excelsior Springs, Missouri 64024
--------------------------------------------------------------------------------
(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, 2000 were
$14.6 million.
As of September 6, 2000, there were 1,031,851 shares issued and 873,062
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 6, 2000, was $10.0 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, 2000.
Part III of Form 10-KSB - Portions of Proxy Statement for 2000 Annual
Meeting of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
-------------------------------
General
-------
CBES Bancorp, Inc. ("CBES Bancorp" and, with its subsidiaries, the
"Company") was formed in June 1996 at the direction of Community Bank of
Excelsior Springs, a Savings Bank ("Community Bank" or the "Bank") for the
purpose of owning all of the outstanding stock of the Bank issued upon the
conversion of the Bank from the mutual to stock form (the "Conversion"). On
September 27, 1996, CBES Bancorp acquired all of the shares of the Bank in
connection with the completion of the Conversion. All references to the Company,
unless otherwise indicated, at or before September 27, 1996 refer to the Bank.
The Company's common stock is quoted on the NASDAQ SmallCap Market under the
symbol "CBES".
Community Bank is a federally chartered savings bank headquartered in
Excelsior Springs, Missouri. Community Bank was originally chartered as a
Missouri savings and loan association in 1931 under the name Excelsior Springs
Savings and Loan Association. In 1991, the Bank changed its name to its current
form, and in 1995 the Bank amended its charter to become a federal mutual
savings bank. Its deposits are insured up to the maximum allowable amount by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC"). Through its main office in Excelsior Springs and its
branch offices in Kearney and Liberty, Community Bank primarily serves
communities located in Clay and Ray Counties and to a lesser extent in
surrounding counties in the State of Missouri. The Liberty office commenced
operations in March 1998. This office gives the Bank visibility in the Kansas
City northland area, which is experiencing good growth which we expect to
continue for the next few years. At June 30, 2000, Community Bank had total
assets of $180.7 million, deposits of $135.6 million and stockholders' equity
of $15.8 million.
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At June 30, 2000, the Bank's total loan
portfolio was $186.7 million, of which 45.3% were one- to four-family
residential mortgage loans, 39.2% were construction and land loans (the vast
majority of which related to single-family residential properties), and 10.0%
were consumer loans. During the fiscal year ended June 30, 2000, the Bank
originated $31.1 million of fixed-rate one- to four-family residential mortgage
loans, of which $21.0 million, or 67.5%, 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 and U.S.
Treasury Bills.
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.
Supervisory Agreement
---------------------
On August 4, 2000 the Bank entered into a Supervisory Agreement with the
Office of Thrift Supervision (the "OTS"). By signing the Supervisory Agreement,
the Bank has agreed to take certain actions in response to concerns raised by
the OTS. The Supervisory Agreement provides that the Bank shall take necessary
and appropriate actions to achieve compliance with various OTS regulations
related to lending standards, lending limitations, classification of assets,
appraisal standards and other matters. The Supervisory Agreement provides that
the Bank take certain corrective steps to improve its internal asset review
program. The Supervisory Agreement requires the Bank to establish adequate
allowance for loan losses and shall not reduce the allowance without prior
notice of no objection from the OTS. The Supervisory Agreement also provides
that the Bank refrain from making any new loan commitments with new builders or
subdivision developments without prior written notice of no objection from the
OTS. The Bank is also prohibited from increasing the number of loans to current
builders or subdivision developments without prior written notice of no
objection from the OTS.
<PAGE>
In addition, the Supervisory Agreement provides that the Board of Directors
of the Bank must develop or revise its written policies and procedures relating
to real estate appraisals, loan underwriting and credit administration, lending
limits and related matters. The Supervisory Agreement also provides that the
Bank revise its internal audit procedures, shall update its contingency disaster
recovery plan, shall establish and implement certain budgetary procedures and
shall revise its bonus program. The Supervisory Agreement also provides that the
Bank shall refrain from making capital distributions without OTS approval.
The Supervisory Agreement is considered a formal written agreement with the
OTS. Failure to comply with the Supervisory Agreement can lead to further
enforcement actions by the OTS. The Bank believes that it can comply with the
Supervisory Agreement and is currently taking the necessary steps to do so.
Compliance with the Supervisory Agreement is not expected to have a materially
adverse impact on the operations or the financial condition of the Bank.
However, the restrictions imposed on the Bank's construction and commercial real
estate lending activities may cause a significant decrease in the Bank's
activities in these areas. The Supervisory Agreement will remain in effect until
terminated by the OTS.
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. Clay County has a population estimated at 176,000 as of 1998. The
northern portion of Clay County is a combination of suburban and rural areas
containing a number of small towns, including Excelsior Springs and Kearney.
Southern Clay County is a rapidly developing suburban market, and is home to a
large number of people who commute to jobs in areas closer to Kansas City.
Most of the employment in Clay County is provided by light manufacturing,
services and retail trade. Included among the largest employers in Clay County
are a number of hospitals (Liberty Hospital, Excelsior Springs Medical Center,
North Kansas City Hospital, and St. Luke's Northland Hospital), local school
districts and two community colleges. Employers in the manufacturing sector
include Ford Motor Company, Farmland Industries and Wilcox Electric. In the
immediate Excelsior Springs area, the largest employers are American Italian
Pasta, Precise Technology Incorporated, Douglas & Lomason and Gilmour
Manufacturing.
The Bank's business and operating results are significantly affected by the
general economic conditions present in the Bank's market area. As of June 30,
2000, the twelve-month average unemployment rate in Clay County was 1.7% and the
twelve-month average unemployment rate in Ray County was 3.8%.
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. However, the Bank expects that its construction
loan portfolio will decrease in the future. 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
2
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loans, which are originated on a direct and on an indirect basis. Pursuant to
the Supervisory Agreement, the Bank is restricted from making commercial real
estate loans, without prior written notice of no objection from the OTS.
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, 2000, the maximum amount which the Bank could have lent under this
limit to any one borrower and the borrower's related entities was
approximately $2.5 million. At June 30, 2000, the Bank had five groups of loans
to related borrowers with outstanding balances in excess of this amount. The
Bank's largest lending relationship at June 30, 2000 was approximately $3.1
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, 2000, all of these loans were performing in accordance
with their terms.
Loan Portfolio Composition. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
2000 1999 1998
---------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- --------- -------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential..................... $ 84,645 45.33% $ 71,353 43.74% $ 65,502 48.65%
Multi-family...................................... 2,832 1.51 1,951 1.20 1,602 1.19
Commercial........................................ 7,388 3.96 5,496 3.37 2,768 2.06
Land.............................................. 7,183 3.85 6,485 3.98 4,243 3.15
Construction...................................... 66,000 35.35 63,319 38.81 48,641 36.12
-------- ------ -------- ------ -------- ------
Total real estate loans............................. 168,048 90.00 148,604 91.10 122,756 91.17
-------- ------ -------- ------ -------- ------
Consumer loans:
Direct automobile loans........................... 9,421 5.04 9,174 5.62 7,166 5.32
Indirect automobile loans......................... 4,117 2.20 2,460 1.51 2,348 1.75
Deposit accounts.................................. 739 0.40 448 0.27 616 0.46
Home improvement.................................. 30 0.02 6 -- 19 0.01
Commercial loans.................................... 1,372 0.73 257 0.16 286 0.21
Other............................................. 2,997 1.61 2,194 1.34 1,455 1.08
-------- ------ -------- ------ -------- ------
Total consumer loans............................ 18,676 10.00 14,539 8.90 11,890 8.83
-------- ------ -------- ------ -------- ------
Total loan portfolio............................ $186,724 100.00% 163,143 100.00% 134,646 100.00%
====== ====== ======
Less:
Loans in process................................... 19,355 27,153 18,661
Deferred loan origination fees and
discounts on loans, net.......................... 646 604 494
Allowance for loan losses.......................... 2,924 927 669
-------- -------- --------
Total loans receivable, net...................... $163,799 $134,459 $114,822
======== ======== ========
</TABLE>
3
<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,
----------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ---------------------
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................ $ 25,611 13.71% $ 21,614 13.25% $ 15,634 11.61%
Multi-family....................... 167 0.09 -- -- -- --
Commercial......................... 3,104 1.66 2,834 1.74 1,630 1.21
Land............................... 2,645 1.42 2,839 1.74 800 0.59
Construction....................... 66,000 35.35 63,319 38.81 48,641 36.13
-------- ------ -------- ------ -------- ------
Total real estate loans............. 97,527 52.23 90,606 55.54 66,705 49.54
-------- ------ -------- ------ -------- ------
Consumer loans...................... 18,278 9.79 14,232 8.72 11,609 8.62
-------- ------ -------- ------ -------- ------
Total fixed-rate loans............ 115,805 62.02 104,838 64.26 78,314 58.16
-------- ------ -------- ------ -------- ------
Adjustable Rate Loans:
Real estate:
One- to four-family................ 59,034 31.62 49,739 30.49 49,868 37.04%
Multi-family....................... 2,665 1.43 1,951 1.20 1,602 1.19
Commercial......................... 4,284 2.29 2,662 1.63 1,138 0.84
Land............................... 4,538 2.43 3,646 2.23 3,443 2.56
Construction....................... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total real estate loans............. 70,521 37.77 57,998 35.55 56,051 41.63
-------- ------ -------- ------ -------- ------
Consumer loans...................... 398 0.21 307 0.19 281 0.21
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans....... 70,919 37.98 58,305 35.74 56,332 41.84
-------- ------ -------- ------ -------- ------
Total loan portfolio.............. 186,724 100.00% 163,143 100.00% 134,646 100.00%
====== ====== ======
Less:
Loans in process................... 19,355 27,153 18,661
Deferred fees and discounts........ 646 604 494
Allowance for losses............... 2,924 927 669
-------- -------- --------
Total loans receivable, net....... $163,799 $134,459 $114,822
======== ======== ========
</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. Until June 19,
2000, the Bank also employed 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, 2000, the Bank had $84.6 million,
or 45.3% 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, 1999 and 2000, the Bank retained in portfolio
certain fixed-rate mortgage loan originations which provided for 15 and 30-year
amortization schedules 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,
2000, $25.6 million, or 13.7% 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.
4
<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") 4 or other
investors for sale primarily to FHLMC or other investors. 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, 2000, of the$31.1 million in fixed-rate residential
one- to four-family loans originated by the Bank,$21.0 million of such loans, or
67.5%, 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 two percentage point and six 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 300 basis points for non-
conforming ARM loans. ARM loans secured by residential one- to four-family real
estate totaled$59.0 million, or 31.6% of the Bank's total loan portfolio at June
30, 2000. 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, 2000, the Bank
originated$31.1 million in fixed-rate residential mortgage loans and$24.6
million of ARM loans. Normally, the Bank's policy is to originate ARM loans for
portfolio. However, during fiscal 2000, the Bank sold one pool of ARM loans
totaling$10.3 million as a part of the Bank's asset/liability and capital
strategies, and currently has$16.2 million in ARM loans held for sale.
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.
5
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Construction and Land Lending. The Bank invested a significant proportion
of its loan portfolio in the past 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 Supervisory
Agreement provides that the Bank refrain from making any new loan commitments
with new builders or subdivision developments without prior written notice of no
objection from the OTS. The Bank is also prohibited from increasing the number
of loans to current builders or subdivision developments without prior written
notice of no objection from the OTS. The Bank's current plans call for a
reduction in construction and land development lending.
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, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
At June 30, 2000 At June 30, 1999 At June 30, 1998
----------------------------- ----------------------------- -----------------------------
Outstanding Percent of Outstanding Percent of Outstanding Percent of
Loan Balance/(1)/ Total Loan Balance/(1)/ Total Loan Balance/(1)/ Total
----------------- ---------- ----------------- ---------- ----------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Speculative - 1-4 family............ $ 50,353 68.8% $ 51,461 66.6% $ 37,039 70.1%
Speculative - Multifamily........... 2,925 4.0 2,261 2.9 1,600 3.0
Contract............................ 377 0.5 1,718 2.2 2,275 4.3
Construction - commercial........... 2,612 3.6 4,129 5.3 704 1.3
Construction - 1-4 family........... 4,018 5.5 3,750 4.9 4,526 8.6
------------ ------ ----------- ------ --------- ------
Total construction.................. 60,285 82.4 63,319 81.9 46,144 87.3
Land development and acquisition 5,715 7.8 7,503 9.7 2,496 4.7
Land................................ 7,183 9.8 6,485 8.4 4,243 8.0
------------ ------ ----------- ----- ---------- -----
Total construction and land......... $ 73,183 100.00% $ 77,307 100.0% $ 52,883 100.0%
============ ====== =========== ===== ========== =====
</TABLE>
______________________
/(1)/Includes loans in process.
At June 30, 2000, the Bank's $60.3 million of construction loans and $12.9
million of land and land development loans represented 32.3% and 6.9%,
respectively, of total loans receivable. At the same time, the Bank's $53.3
million of speculative construction loans represented 28.5% of total loans
receivable. Speculative 1-4 family loans decreased $1.1 million from $51.5
million at June 30, 1999 to $50.4 million at June 30, 2000.
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
6
<PAGE>
concentration of principal among relatively few borrowers and development
projects, (ii) the increased difficulty at the time the loan is made of
estimating building costs and the selling price of the residence to be built,
(iii) the increased difficulty and costs of monitoring the loan, (iv) the higher
degree of risk associated with residential sales activity in changing real
estate market conditions, and (v) the increased difficulty of working out
problem loans. Speculative construction loans have the added risk associated
with identifying an end-purchaser for the finished home. The Bank has sought to
address these risks by developing and adhering to underwriting policies,
disbursement procedures, and monitoring practices.
The Bank seeks to make construction loans to those builders with which it
has a long-standing history of satisfactory performance. New builders typically
borrow from the Bank in limited amounts and may borrow additional amounts based
on proven experience with the Bank. The Bank's process when reviewing a loan
request from a new builder is to evaluate the builder's financial strength,
verify the number of years he has been building, analyze the subdivision that
the houses will be built in, review the appraisal value against the loan amount,
verify that the building cost estimates are reasonable, determine the reputation
of the builder and verify that the builder pays its subcontractors promptly for
the work they have performed. At June 30, 2000, the Bank had 29 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, 2000, the Bank had speculative construction loans secured by properties
in 115 subdivisions of which 17 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, 2000, the Bank had $2.9 million of speculative construction loans
secured by multi-family properties. At this time, the Bank does not plan on
originating any more commercial or multi-family construction loans, although the
Bank's plans may change in the future.
Land Loans. At June 30, 2000, the Bank had total land loans of $7.2 million
and land development loans of $5.7 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
7
<PAGE>
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. At this time, the Bank does not plan on
originating any more land development loans, although the Bank's plans may
change in the future.
Multi-Family and Commercial Real Estate Lending. The Bank also originates
loans secured by multi-family and commercial real estate. At June 30, 2000,
$10.2 million, or 5.5%, of the Bank's loan portfolio consisted of multi-family
loans and commercial real estate loans.
Multi-family and commercial real estate loans originated by the Bank
require prior written notice of no objection from the OTS. These loans 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. At this time, the Bank does not plan on originating any commercial or
multi-family construction loans.
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 five or more dwelling units. 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, 2000, the Bank's consumer loan portfolio totaled $18.7 million, or
10.0% 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. At this time, the Bank only originates
indirect loans to its customers. 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 required on all automobile
loans. At June 30, 2000, the Bank's indirect automobile loans totaled $4.1
8
<PAGE>
million, or 2.2% of the Bank's loan portfolio and direct automobile loans
totaled $9.4 million, or 5.0% of the Bank's loan portfolio.
Community Bank also originates Federal Housing Administration ("FHA") Title
I home improvement loans. Generally, such loans have a maximum term of ten
years, have fixed rates and may be originated up to a 100% loan-to-value ratio.
While the Bank retains a portion of such loans in portfolio, the majority of its
FHA Title I home improvement loans are originated for sale in the secondary
market. At June 30, 2000, the Bank's FHA Title I home improvement loans totaled
$30,000, or .02% 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, 2000, the Bank's second
mortgage/home equity loans totaled $3.9 million, or 2.1% 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, 2000, the Bank's lines of credit secured by
first or second mortgages totaled $3.4 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, 2000, $143,000 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.
9
<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, 2000.
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, 2000 that
have predetermined interest rates is$115.8 million, and that have floating or
adjustable rates is$70.9 million.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------------------------
Multi-Family
One-to Four-Family and Commercial Land Construction Consumer
------------------ --------------- ------------------ ---------------- ----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending June 30,
--------------------------------
2001.............................. $ 7,084 8.45% $ 167 8.50% $2,165 8.25% $65,439 8.22% $ 4,474 9.27%
2002.............................. 500 9.37 208 9.26 730 7.51 561 8.00 1,788 10.82
2003.............................. 1,738 9.26 794 8.68 3 8.50 -- -- 2,811 10.29
2004 and 2005..................... 3,490 9.12 40 9.49 236 8.68 -- -- 9,120 9.89
2006 to 2010...................... 2,971 8.56 1,672 8.09 333 8.37 -- -- 377 8.76
2011 to 2025...................... 12,086 8.26 1,726 8.49 1,026 8.26 -- -- 106 10.30
2026 and following................ 56,816 7.91 5,613 8.47 2,690 8.48 -- -- -- --
------ ---- ------ ---- ----- ---- ------ ---- ------ -----
$84,645 8.12% $10,220 8.45% $7,183 8.28% $66,000 8.22% $18,676 9.87%
<CAPTION>
Total
------------------
Weighted
Average
Amount Rate
------ ----
<S> <C> <C>
Due During Years Ending June 30,
--------------------------------
2001.............................. $ 79,289 8.31%
2002.............................. 3,787 8.25
2003.............................. 5,346 9.40
2004 and 2005..................... 12,885 9.70
2006 to 2010...................... 5,353 9.80
2011 to 2025...................... 14,944 9.17
2026 and following................ 65,120 7.93
------- ----
$186,724 8.29%
</TABLE>
10
<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. Until June 19, 2000, the Bank also employed 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. The Chief Executive Officer has authority to make secured
real estate loans up to $350,000 and secured installment loans up to $40,000.
Unsecured installment loans may be approved by the Chief Executive Officer up
to $15,000. The Consumer Loan Department Manager has authority to make secured
commercial and secured installment loans up to $40,000 and unsecured installment
loans 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, 2000, the
Bank originated $104.7 million in fixed-rate loans and $29.4 million in
adjustable-rate loans. 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, 2000, 1999 and 1998, the Bank purchased no loans. 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. For the year ended June 30,
2000, the Bank sold $31.3 million in conforming residential one- to four-family
loans (including $21.0 million of fixed rate loans and one pool of ARM loans
totaling $10.3 million), compared to $57.9 million and $22.8 million for the
years ended June 30, 1999 and 1998, 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, including a pool of $10.3 million of such loans.
11
<PAGE>
Set forth below is a table showing the Bank's loan originations, sales and
repayments for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
2000 1999 1998
---------- ----------- -----------
Originations by type: (In Thousands)
<S> <C> <C> <C>
Adjustable rate:
Real estate -
One- to four-family residential ................... $ 24,646 $ 33,341 $ 16,390
Multi-family ...................................... 1,661 443 765
Commercial ........................................ 2,534 1,222 202
Land .............................................. 368 1,914 1,491
Consumer .......................................... 179 546 626
---------- ----------- -----------
Total adjustable rate .............................. 29,388 37,466 19,474
---------- ----------- -----------
Fixed rate:
Real estate -
One- to four-family residential ................... 31,112 51,038 31,195
Multifamily ....................................... 167 120 --
Commercial ........................................ 2,172 2,126 1,148
Land .............................................. 514 2,765 655
Construction ...................................... 51,974 59,564 44,627
Consumer .......................................... 18,612 13,208 10,186
---------- ----------- -----------
Commercial Business ................................ 156 -- --
Total fixed rate ................................... 104,707 128,821 87,811
---------- ----------- -----------
Total loans originated ............................. 134,095 166,827 107,285
Sales and Repayments:
Real Estate -
One- to four-family residential ................... 17,088 57,949 22,758
---------- ----------- -----------
Total loans sold .................................. 17,088 57,949 22,758
Principal repayments ............................... 80,143 97,631 67,410
---------- ----------- -----------
Total sales and repayments ........................ 97,231 155,580 90,168
Decrease (increase) in other items, net ............ (6,936) 8,895 (6,688)
---------- ----------- -----------
Net (decrease) increase ........................... $ 29,928 $ 19,602 $ 10,429
========== =========== ===========
</TABLE>
Asset Quality
The Bank's collection procedures provide that when a loan is past due, a
first notice is sent to the borrower requesting payment ten days (for consumer
loans) and 16 days (for real estate loans) after the due date. A second notice
is sent 16 days (for consumer loans) and 30 days (for real estate) after the due
date. At the time of the second notice, phone calls are made by the Bank with
personal letter backups. If the loan remains delinquent for 30 days, a telephone
contact is made. If the loan becomes 60 days delinquent, a right-to-cure letter
generally is sent and the borrower is notified of the availability of financial
or counseling aid. If consumer loans are not resolved by 90 days, the account is
put on non-accrual status and repossession and/or legal action is normally
initiated. If a real estate loan is past due 60 days or more, the loan is
presented to the Board of Directors for future disposition. In most cases, the
Board of Directors authorizes the initiation of foreclosure proceedings. At June
30, 2000, 1999 and 1998, the percentage of total loans delinquent 90 days or
more to net loans receivable were 3.07%, 0.41% and 0.33%, 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 owned is charged against earnings. At June
30, 2000, the Bank has $237,000 in real estate owned.
12
<PAGE>
The following table sets forth information with respect to the Bank's
delinquent loans at June 30, 2000.
<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 ........... 22 $ 925 1.09% 15 $ 807 0.95% 37 $1,732 2.05%
Multi-family .................. -- -- -- -- -- -- -- -- --
Commercial .................... -- -- -- 1 54 0.73 1 54 0.73
Land .......................... -- 3 220 3
Consumer ...................... 13 108 0.58 16 143 0.77 29 251 1.34
Construction or 22
--
Development ................. 11 2,289 3.47 57 3,810 5.77 33 6,099 9.24
-- ------ ---- ------ ---- --- ------ ----
Total ....................... 46 $3,322 2.03% $5,034 3.07% 103 $8,356 5.10%
====== ==== ====== ==== ====== ====
</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.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------
2000 1999 1998
---------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family ............................... 1,211 173 465
Commercial ........................................ 54 -- --
Land .............................................. 342 -- --
Construction or development ....................... 6,762 336 --
Consumer .......................................... 143 45 120
------- ------- -------
Total ........................................... 8,512 554 678
Accruing loans delinquent more than 90 days:
One- to four-family ............................... -- -- --
Consumer .......................................... -- -- --
------- ------- -------
Total ........................................... -- -- --
------- ------- -------
Foreclosed assets:
One- to four-family ............................... 179 95 10
Commercial real estate ............................ 58 58 39
Land .............................................. -- -- --
Consumer .......................................... 32 7 5
------- ------- -------
Total ........................................... 269 160 54
------- ------- -------
Total non-performing assets ......................... $ 8,781 $ 714 $ 732
======= ======= =======
Total loans delinquent 90 days or more
to net loans receivable ............................ 3.07% 0.41% 0.33%
======= ======= =======
</TABLE>
13
<PAGE>
For the fiscal year ended June 30, 2000, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $804,000. The amount that was included in
interest income on such loans was $520,000 for the fiscal year ended June 30,
2000.
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, 2000, the Bank had classified a total of $14.1 million
of its assets as substandard. At June 30, 2000, the Bank had no assets
classified as doubtful and had $63,000 assets classified as loss. At June 30,
2000, total classified assets comprised $14.2 million, or 89.9% of the Bank's
capital and 7.85% of the Bank's total assets. The increase in classified assets
at June 30, 2000, reflects comments received from OTS examiners as well as a
comprehensive review of the loan portfolio conducted by the Bank.
For a more detailed discussion of the Bank's classified assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the Years Ended June 30, 2000,
and June 30, 1999--Provision for Loan Losses," in the Company's Annual Report to
Stockholders included as Exhibit 13 to this Form 10-KSB, which information is
incorporated herein by reference.
Other Loans of Concern. In addition to the non-performing loans set forth
in the tables above, as of June 30, 2000, there were 27 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.
14
<PAGE>
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, 2000, the Bank had $237,000 in properties
which were acquired through foreclosure.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At June 30, 2000, the Bank had a total allowance for loan losses
of $2.9 million, representing 33.3% of total non-performing loans and 1.8% of
the Bank's loans receivable, net. The increase in the allowance at June 30, 2000
was primarily attributable to a significant increase in the Bank's classified
assets of $13.3 million to $14.2 million, together with the implementation of a
more conservative methodology in establishing its allowance for loan loss. The
increase in classified assets was due to comments received from the OTS
examiners as well as a comprehensive review of the loan portfolio conducted by
the Bank. For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Comparison of Operating
Results for the Years Ended June 30, 2000, and June 30, 1999--Provision for Loan
Losses," in the Company's Annual Report to Stockholders included as Exhibit 13
to this Form 10-KSB, which information is incorporated herein.
The following table sets forth the allocation for loan losses by
category for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ---------------------------- ----------------------------
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 ........... $ 107 84,645 45.33% $ 69 71,353 43.74% $ 63 65,502 48.65%
Multi-family .................. 14 2,832 1.52 10 1,951 1.20 8 1,602 1.19
Commercial real estate ........ 188 7,388 3.96 31 5,496 3.37 16 2,768 2.06
Land .......................... 108 7,183 3.85 42 6,485 3.98 42 4,243 3.15
Construction or development ... 2,237 66,000 35.34 547 63,319 38.81 372 48,641 36.12
Consumer ...................... 270 18,676 10.00 228 14,539 8.90 168 11,890 8.83
--------- -------- -------- --------- -------- -------- --------- -------- --------
Total ...................... $ 2,924 186,724 100.00% $ 927 163,143 100.00% $ 669 134,646 100.00%
========= ======== ======== ========= ======== ======== ========= ======== ========
</TABLE>
15
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses for the fiscal year indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
2000 1999 1998
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year ............................. $ 927 $ 669 $ 436
-------- --------
Charge-offs:
One- to four-family .................................... -- 8 --
Consumer ............................................... 200 74 83
--------- -------- --------
200 82 83
Recoveries:
Consumer ............................................... 45 42 50
--------- -------- --------
45 42 50
--------- -------- --------
Net charge-offs .......................................... 155 40 33
Provision for loan losses ................................ 2,152 298 266
--------- -------- --------
Balance at end of year ................................... $ 2,924 $ 927 $ 669
========= ======== ========
Ratio of net charge-offs during the year
to average loans outstanding during the year ........... 0.10% 0.00% 0.03%
========= ======== ========
Ratio of allowance for loan loss to ending
loans receivable, net .................................. 1.79% 0.69% 0.58%
========= ======== ========
Ratio of allowance for loan loss to non-
performing assets at end of year ....................... 33.30% 129.83% 91.39%
========= ======== ========
</TABLE>
16
<PAGE>
Investment Activities
General. Community Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At June 30, 2000, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 6.22%. 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, 2000,
the Bank's investment in mortgage-backed securities totaled $39,000, or 0.02% of
its total assets. At June 30, 2000 and 1999, 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.
17
<PAGE>
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,
---------------------
2000 1999 1998
----- ----- -----
(In Thousands)
Purchases........................ $ -- $ -- $ --
Sales............................ -- -- --
Repayments....................... (18) (18) (73)
----- ----- -----
Net increase (decrease).......... $ (18) $ (18) $ (73)
===== ===== =====
Other Investments. At June 30, 2000, the Bank's investment securities
other than mortgage-backed securities consisted of municipal bonds, U.S.
treasury bills, 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, 2000, the Bank was in compliance
with this regulation. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Bank's
investment activities.
The following table sets forth the composition of the Bank's investment
securities, net of premiums and discounts, at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
2000 1999 1998
----------------- ------------------ -----------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available-for-sale:
Federal agency obligations................ -- -- $ -- --% $ -- --%
------- ------- ------- ------- ------- -------
Subtotal................................... -- -- -- -- -- --
Investment securities Held-to-maturity
Subtotal................................... 187 2.17% 93 1.08% $ 98 2.77%
------- ------- ------- ------- ------- -------
FHLB stock................................. 2,323 27.01 2,173 25.22 1,025 28.94
------- ------- ------- ------- ------- -------
Total investment securities and
FHLB stock................................. 2,510 29.18 2,266 26.30 1,123 31.71
------- ------- ------- ------- ------- -------
Other interest-earning assets:
FHLB CD's.................................. 3,000 34.89 -- -- -- --
FHLB checking.............................. 1,964 22.85 3,351 38.89 2,419 68.29
FHLB Daily Time............................ 1,125 13.08 3,000 34.81 -- --
------- ------- ------- ------- ------- -------
Total other interest-earnings assets..... $ 6,089 70.82 6,351 73.70 2.419 68.29
------- ------- ------- ------- ------- -------
Total investment portfolio................. $ 8,599 100.00% $ 8,617 100.00% $ 3,542 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
18
<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, 2000.
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------- -------- -------- ---------- ---------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
---------- -------- -------- ---------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities........ $ 102 $ 13 $ 22 $ 50 $ 187 $ 187
--------- -------- -------- ---------- --------- --------
Federal agency obligations... $ -- $ -- $ -- $ -- $ -- $ --
--------- -------- -------- ---------- --------- --------
Total investment securities.. $ 102 $ 13 $ 22 $ 50 $ 187 $ 187
========= ======== ======== ========== ========= ========
Weighted average yield....... 6.06% 6.50 6.50 6.50 6.26 6.26
</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, 2000, the Bank had $26.8 million in FHLB
advances.
Deposits. Community Bank offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of
passbook, demand, NOW, money market deposit and certificate accounts. The
certificate accounts currently range in terms from 91 days to seven years.
The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Historically, Community
Bank has solicited deposits from its primary market area. However, in fiscal
2000, the Bank also solicited brokered deposits as a source of funds for its
loan originations. The Bank is no longer soliciting brokered 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, 2000, $83.9 million, or 74.6%
of the bank's certificates of deposit were in certificates of deposit with terms
of 12 months or less. The Bank believes that upon maturity most of these
deposits will remain at the Bank. The ability of the Bank to attract and
maintain savings accounts and certificates of deposit, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
The Bank's total deposits increased from $85.8 million at June 30, 1998, to
$101.4 million at June 30, 1999 to $135.6 million at June 30, 2000. This
increase resulted from the Bank's concerted efforts during the year to market
selected term certificates of deposit and the acquisition of brokered deposits
to fund the bank's lending programs.
19
<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,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Balance Percent Balance Percent Balance Percent
-------- ------- -------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions And Savings
Deposits:
Passbook savings..................... $ 3,928 2.90% $ 4,079 4.02% $ 3,680 4.29%
Now accounts......................... 9,811 7.23 8,988 8.86 8,853 10.32
Money market accounts................ 5,403 3.98 5,776 5.69 5,709 6.66
Noninterest-bearing demand accounts.. 4,021 2.97 3,953 3.90 2,392 2.79
-------- ------- -------- ------- ------- -------
Total non-certificates.............. 23,163 17.08 22,796 22.48 20,634 24.06%
-------- ------- -------- ------- ------- -------
Certificates:
2.00 - 3.99%......................... -- -- 1 -- 1 0.00
4.00 - 5.99%......................... 41,653 30.71 60,954 60.10 36,237 42.25
6.00 - 7.99%......................... 70,815 52.21 17,673 17.42 28,905 33.70
8.00 - 9.99%......................... -- -- -- -- -- --
10.00% & over........................ -- -- -- -- -- --
-------- ------- -------- ------- ------- -------
Total certificates.................. 112,468 82.92% 78,628 77.52% 65,143 75.94%
-------- ------ -------- ------- ------- -------
Total.............................. $135,631 100.00% $101,424 100.00% $85,777 100.00%
======== ------ ======== ======= ======= =======
</TABLE>
Deposit Activity
The following table sets forth the deposit activities of the Bank for the
periods indicated:
Years Ended June 30,
--------------------------------
2000 1999 1998
--------- --------- ---------
(Dollars In Thousands)
Opening balance.............. $ 101,424 $ 85,777 $ 70,693
Deposits(1).................. 299,198 250,886 221,802
Withdrawals.................. 269,531 238,780 210,450
Interest credited............ 4,540 3,541 3,732
--------- --------- ---------
Ending balance............... $ 135,631 $ 101,424 $ 85,777
========= ========= =========
Net (decrease) increase...... $ 34,207 $ 15,647 $ 15,084
========= ========= =========
Percent (decrease) increase.. 33.73% 18.24% 21.34%
========= ========= =========
------------------
(1) Does not reflect the rollover of certificates of deposit.
20
<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, 2000.
<TABLE>
<CAPTION>
Weighted
Certificate accounts maturing in Total Average Percent of
--------------------------------
quarter ending: Balance Rate Total
-------------- ------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
September 30, 2000.................. $ 22,147 5.90% 19.69%
December 31, 2000................... 15,457 6.17 13.75
March 31, 2001...................... 31,468 6.32 27.98
June 30, 2001....................... 14,699 6.45 13.07
September 30, 2001.................. 2,688 6.07 2.39
December 31, 2001................... 3,018 6.13 2.68
March 31, 2002...................... 4,431 6.57 3.94
June 30, 2002....................... 4,696 6.91 4.18
September 30, 2002.................. 1,735 6.42 1.54
December 31, 2002................... 981 6.24 0.87
March 31, 2003...................... 1,094 6.02 0.97
June 30, 2003....................... 836 5.84 0.74
Thereafter.......................... 9,218 6.64 8.20
-------- ------
Total $112,468 100.00%
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2000.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over
or Less Months Months 12 Months Total
-------- ----------- ------------ --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000...................... $17,154 $14,289 $31,337 $23,626 $ 86,406
Certificates of deposit of
$100,000 or more................... 4,993 1,168 14,830 5,071 26,062
------- ------- ------- ------- --------
Total certificates of deposit..... $22,147 $15,457 $46,167 $28,697 $112,468
======= ======= ======= ======= ========
</TABLE>
21
<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, 2000, the Bank had $26.8 million in
advances from the FHLB. The Bank has the ability to purchase additional capital
stock from the FHLB. For additional information regarding the term to maturity
on FHLB advances, see Note 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.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
2000 1999 1998
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
----------------
FHLB advances...................... $45,450 $43,450 $19,500
Average Balance:
---------------
FHLB advances...................... $33,288 $33,837 $12,672
</TABLE>
<TABLE>
<CAPTION>
At June 30,
---------------------------
2000 1999 1998
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
FHLB advances...................... $26,750 $29,450 $19,500
======= ======= =======
Weighted average interest rate..... 6.16% 5.43% 5.65%
</TABLE>
Service Corporation Activities
As a federally chartered savings association, Community Bank is permitted
by OTS regulations to invest up to 2% of its assets, or approximately $3.6
million at June 30, 2000, 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, 2000,
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, 2000, the Bank's investment in
CBES was $1,000. Also, for the fiscal year ended June 30, 2000, CBES had no
pre-tax income.
22
<PAGE>
REGULATION
General
Community Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Des Moines and is subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Bank, the Company also is
subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings and
loan associations. The Bank is a member of the SAIF. The deposits of the Bank
are insured by the SAIF of the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
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
2000 and April 1991, respectively. The most recent OTS examination resulted in
the Bank entering into the Supervisory Agreement. See "Description of Business-
-Supervisory Agreement" herein. 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, as occurred with the recent OTS
examination.
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, 2000, was approximately $42,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Holding
Company. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders and
to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For example, no
savings institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings and
loan associations are also generally authorized to branch nationwide. The Bank
is in compliance with the noted restrictions.
OTS regulations limit a thrift institution's loans to one borrower to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired capital and surplus). At June 30, 2000, the
Bank's lending limit under this restriction was approximately $2.5 million. See
"Description of Business--Supervisory Agreement" herein.
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
23
<PAGE>
will subject the institution to further enforcement action. The OTS and the
other federal banking agencies have also adopted additional guidelines on asset
quality and earnings standards, which are designed to enhance early
identification and resolution of problems and problem assets.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of depository institutions. The FDIC currently
maintains two separate insurance funds: the Bank Insurance Fund and the Savings
Association Insurance Fund. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over the Bank.
The Bank's accounts are insured by the Savings Association Insurance Fund
to the maximum extent permitted by law. The Bank pays deposit insurance premiums
based on a risk-based assessment system established by the FDIC. Under
applicable regulations, institutions are assigned to one of three capital groups
that are based solely on the level of an institution's capital -- "well
capitalized," "adequately capitalized," and "undercapitalized" -- which are
defined in the same manner as the regulations establishing the prompt corrective
action system, as discussed below. These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates that until September 30, 1996 ranged
from 0.23% for well capitalized, financially sound institutions with only a few
minor weaknesses to 0.31% for undercapitalized institutions that pose a
substantial risk of loss to the Savings Association Insurance Fund unless
effective corrective action is taken.
Under the Deposit Insurance Funds Act, which was enacted on September 30,
1996, the FDIC imposed a special assessment on each depository institution with
Savings Association Insurance Fund-assessable deposits which resulted in the
Savings Association Insurance Fund achieving its designated reserve ratio. As a
result, the FDIC reduced the assessment schedule for Savings Association
Insurance Fund members, effective January 1, 1997, to a range of 0% to 0.27%,
with most institutions, including the Bank, paying 0.01%. This assessment
schedule is the same as that for the Bank Insurance Fund, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, Savings
Association Insurance Fund members are charged an assessment of .065% of Savings
Association Insurance Fund-assessable deposits to pay interest on the
obligations issued by the Financing Corporation in the 1980s to help fund the
thrift industry cleanup. Bank Insurance Fund-assessable deposits have been
charged an assessment to help pay interest on the Financing Corporation bonds at
a rate of approximately .013% until the earlier of December 31, 1999 or the date
upon which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The Deposit Insurance Funds Act also contemplates the development of a
common charter for all federally chartered depository institutions and the
abolition of separate charters for national banks and federal savings
associations. It is not known what form the common charter may take and what
effect, if any, the adoption of a new charter would have on the operation of the
Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC.
24
<PAGE>
Capital Requirements.
The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5% tangible capital standard, a 3.0% leverage (core
capital) standard, and an 8.0% risk-based capital standard. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, minority interests
in equity accounts of consolidated subsidiaries less intangibles other than
certain mortgage servicing rights ("MSRs") and purchased credit card
relationships. The OTS regulations require that, in meeting the tangible, core
and risk-based capital standards, institutions generally must deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4.0%
(3.0% for institutions receiving the highest CAMELS examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8.0%. In determining the amount of risk-
weighted assets, assets and certain off-balance sheet assets items are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3.0% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan losses. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is exempt from the
interest rate risk component, unless the OTS determines otherwise. The rule also
provides that the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the calculated interest rate risk component, as calculated by the
OTS, overstates its interest rate risk exposure. In addition, certain "well-
capitalized" institutions may obtain authorization to use their own interest
rate risk model to calculate their interest rate risk component in lieu of the
amount as calculated by the OTS. The OTS has postponed the date that the
component will first be deducted from an institution's total capital.
At June 30, 2000, the Bank had tangible capital of $13.6 million, or 7.5%
of adjusted total assets, which is approximately $10.9 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. At June
30, 2000, the Bank had core capital equal to $13.6 million, or 7.5% of adjusted
total assets, which is $6.4 million above the minimum leverage ratio requirement
of 4% as in effect on that date. At that date, the Bank had total risk based
capital of $15.3 million (including approximately $13.6 million in core capital
and $1.7 million in qualifying supplementary capital) and risk-weighted assets
of $134.3 million (with no converted off-balance sheet assets); or total
25
<PAGE>
capital of 11.4% of risk-weighted assets. This amount was $4.6 million above the
8% requirement in effect on that date.
Prompt Corrective Regulatory Action
Each federal banking agency is required to implement a system of prompt
corrective action for institutions that it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement this
system of prompt corrective action. Under the regulations, an institution shall
be deemed to be "well capitalized" if it has a total risk-based capital ratio of
10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not required to meet and maintain a
specific capital level for any capital measure;"adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, has a Tier I risk-based
capital ratio of 4.0% or more, has a leverage ratio of 4.0% or more, or 3.0%
under certain circumstances, and does not meet the definition of "well
capitalized"; "undercapitalized" if it has a total risk-based capital ratio that
is less than 8.0%, has a Tier I risk-based capital ratio that is less than 4.0%
or has a leverage ratio that is less than 4.0%, or 3.0% under certain
circumstances; "significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, has a Tier I risk-based capital ratio that
is less than 3.0% or has a leverage ratio that is less than 3.0%; and
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall face various mandatory and discretionary restrictions on its
operations.
At June 30, 2000, the Bank was categorized as "well capitalized"under the
prompt corrective action regulations.
Standards for Safety and Soundness
The federal banking regulatory agencies have adopted regulatory guidelines
for all insured depository institutions relating to internal controls,
information systems and internal audit systems; loan documentation; credit
underwriting; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. The guidelines outline the safety
and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the OTS determines that the Bank fails to meet any standard
prescribed by the guidelines, it may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard. OTS regulations
establish deadlines for the submission and review of safety and soundness
compliance plans.
Capital Distributions
OTS regulations govern capital distributions by savings institutions, which
include cash dividends, stock repurchases and other transactions charged to the
capital account of a savings institution to make capital distributions. Under
new regulations effective April 1, 1999, a savings institution must file an
application for OTS approval of the capital distribution if either (1) the total
capital distributions for the applicable calendar year exceed the sum of the
institution's net income for that year to date plus the institution's retained
net income for the preceding two years, (2)
26
<PAGE>
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company, as well as certain other institutions, must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
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 associations are required to meet a qualified thrift lender
test to avoid certain restrictions on their operations. A savings institution
that fails to become or remain a qualified thrift lender shall either convert to
a national bank charter or face the following restrictions on its operations.
These restrictions are: the association may not make any new investment or
engage in activities that would not be permissible for national banks; the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; the association shall be ineligible to obtain new advances from
any Federal Home Loan Bank; and the payment of dividends by the association
shall be under the rules regarding the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after the
date on which the savings institution ceases to be a qualified thrift lender,
the savings institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any Federal Home Loan Bank. In
addition, within one year of the date on which a savings association controlled
by a company ceases to be a qualified thrift lender, the company must register
as a bank holding company and follow the rules applicable to bank holding
companies. A savings institution may requalify as a qualified thrift lender if
it thereafter complies with the test.
Currently, the qualified thrift lender test requires that either an
institution qualify as a domestic building and loan association under the
Internal Revenue Code or that 65% of an institution's "portfolio assets" consist
of certain housing and consumer-related assets on a monthly average basis in
nine out of every 12 months. Assets that qualify without limit for inclusion as
part of the 65% requirement are loans made to purchase, refinance, construct,
improve or repair domestic residential housing and manufactured housing; home
equity loans; mortgage-backed securities where the mortgages are secured by
domestic residential housing or manufactured housing; Federal Home Loan Bank
stock; direct or indirect obligations of the FDIC; and loans for educational
purposes, loans to small businesses and loans made through credit cards. In
addition, the following assets, among others, may be included in meeting the
test based on an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer loans; and stock issued by Freddie Mac or Fannie
Mae. Portfolio assets consist of total assets minus the sum of goodwill and
other intangible assets, property used by the savings institution to conduct its
business, and liquid assets up to 20% of the institution's total assets. At June
30, 2000, the Bank was in compliance with the qualified thrift lender test.
27
<PAGE>
Community Reinvestment Act
Savings associations are required to follow the provisions of the Community
Reinvestment Act of 1977, which requires the appropriate federal bank regulatory
agency, in connection with its regular examination of a savings association, to
assess the savings association's record in meeting the credit needs of the
community serviced by the savings associations, including low and moderate
income neighborhoods. The regulatory agency's assessment of the savings
association's record is made available to the public. Further, an assessment is
required of any savings associations which has applied, among other things, to
establish a new branch office that will accept deposits, relocate an existing
office or merge or consolidate with, or acquire the assets or assume the
liabilities of, a federally regulated financial institution. The Bank received
an "outstanding" rating as a result of its most recent examination.
Activities of Associations and Their Subsidiaries
A savings association may establish operating subsidiaries to engage in any
activity that the savings association may conduct directly and may establish
service corporation subsidiaries to engage in certain pre-approved activities
or, with approval of the OTS, other activities reasonably related to the
activities of financial institutions. When a savings association establishes or
acquires a subsidiary or elects to conduct any new activity through a subsidiary
that the association controls, the savings association must notify the FDIC and
the OTS 30 days in advance and provide the information each agency may, by
regulation, require. Savings associations also must conduct the activities of
subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices. Based upon that determination, the
FDIC or the OTS has the authority to order the savings association to divest
itself of control of the subsidiary. The FDIC also may determine by regulation
or order that any specific activity poses a serious threat to the Savings
Association Insurance Fund. If so, it may require that no Savings Association
Insurance Fund member engage in that activity directly.
Transactions with Affiliates
Savings associations must comply with Sections 23A and 23B of the Federal
Reserve Act relative to transactions with affiliates in the same manner and to
the same extent as if the savings association were a Federal Reserve member
bank. A savings and loan holding company, its subsidiaries and any other company
under common control are considered affiliates of the subsidiary savings
association under the Home Owners Loan Act. Generally, Sections 23A and 23B
limit the extent to which the insured association or its subsidiaries may engage
in certain covered transactions with an affiliate to an amount equal to 10% of
the institution's capital and surplus and place an aggregate limit on all
transactions with affiliates to an amount equal to 20% of capital and surplus,
and require that all transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term"covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions.
Any loan or extension of credit by the Bank to an affiliate must be secured
by collateral in accordance with Section 23A.
Three additional rules apply to savings associations. First, a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies. Second, a savings association may not purchase or invest insecurities
issued by an affiliate, other than securities of a subsidiary. Third, the OTS
may, for reasons of safety and soundness, impose more stringent restrictions on
savings associations but may not exempt transactions from or otherwise abridge
Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by
the Federal Reserve, as is currently the case with respect to all FDIC-insured
banks.
28
<PAGE>
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by those persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation
O thereunder. Among other things, these regulations require that loans be made
on terms and conditions substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. Regulation O
also places individual and aggregate limits on the amount of loans the Bank may
make to those persons based, in part, on the Bank's capital position, and
requires certain board approval procedures to be followed. The OTS regulations,
with certain minor variances, apply Regulation O to savings institutions.
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 holding companies
and their non-savings association subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
Federal law and regulation generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring more than 5% of the voting
stock of any other savings association or savings and loan holding company or
controlling the assets thereof. They also prohibit, among other things, any
director or officer of a savings and loan holding company, or any individual who
owns or controls more than 25% of the voting shares of the Company from
acquiring control of any savings association not a subsidiary of a savings and
loan holding company, unless the acquisition is approved by the OTS.
Until recently, a unitary savings and loan holding company was not
restricted as to the types of business activities in which it could engage,
provided that its subsidiary savings association continued to be a qualified
thrift lender. Recent legislation, however, restricts unitary saving and loan
holding companies not existing or applied for before May 4, 1999 to activities
permissible for a financial holding company as defined under the legislation,
including insurance and securities activities, and those permitted for a
multiple savings and loan holding company as described below. The Company has
certain grandfather rights under this legislation. Upon any non-supervisory
acquisition by the Company of another savings association as a separate
subsidiary, the Company would become a multiple savings and loan holding company
and would have extensive limitations on the types of business activities in
which it could engage. The Home Owner's Loan Act limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for the bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, provided the prior
approval of the Office of Thrift Supervision is obtained, and to other
activities authorized by Office of Thrift Supervision regulation. Multiple
savings and loan holding companies are generally prohibited from acquiring or
retaining more than 5% of a non-subsidiary company engaged in activities other
than those permitted by the Home Owners. Loan Act.
The activities authorized by the Federal Reserve Board as permissible for
bank holding companies also must be approved by the OTS prior to being engaged
in by a multiple savings and loan holding company.
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."
29
<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,
2000, 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, 2000, the Bank had $2.3 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 6.88% and were 6.55% for fiscal 2000.
For the fiscal year ended June 30, 2000, dividends paid by the FHLB of Des
Moines to the Bank totaled approximately $148,000, which constitutes a $32,000
increase over the amount of dividends received in fiscal year 1999. 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.
30
<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, 2000, the Bank's bad debt reserve subject to
recapture over a six-year period totaled approximately $65,000.
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
31
<PAGE>
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, 2000, the Bank's excess for tax purposes totaled approximately
$1,700,000.
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, 2000, the Bank had a total of 72 full-time and 9 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
--------------------------------------------------------------------
Margaret E. Teegarden. Ms. Teegarden, age 51, 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 54, 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.
Robert F. Kirk. Mr. Kirk, age 53, 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.
32
<PAGE>
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, 2000. 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, 2000 was approximately $2.6
million.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 2000
-------- -------- -------- -------------
(In thousands)
<S> <C> <C> <C>
Main Office: 1983 10,000 $1,163
1001 North Jesse James Road
Excelsior Springs, Missouri 64024
Branch Offices: 1998 2,725 1,053
601 N. Country
Kearney, Missouri 64020
913 Liberty Drive Leased 7,150 367
Liberty, Missouri 64020 (Expires March
2003)
</TABLE>
Community Bank believes that its current facilities are adequate to meet
the present and foreseeable needs of the Bank and the Holding Company.
Item 3. Legal Proceedings
---------------------------
The Company is involved, from time to time, as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's financial position or results of
operations on a consolidated basis. For a discussion of the Supervisory
Agreement entered into by the Bank, see "Item 1. Description of Business--
Supervisory Agreement" herein.
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, 2000.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
------------------------------------------------------------------------------
Matters
-------
Page 42 of the attached 2000 Annual Report to Shareholders is herein
incorporated by reference.
33
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
Pages 5 to 15 of the attached 2000 Annual Report to Shareholders are
herein incorporated by reference.
Item 7. Financial Statements
------------------------------
Pages 16 to 41 of the attached 2000 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 26, 2000.
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 26, 2000.
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 26, 2000.
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 26, 2000.
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, 2000, is incorporated by reference
in this Form 10-KSB Annual Report as Exhibit 13.
Page in
Annual
Annual Report Section Report
--------------------- ------
Report of Independent Auditors........................................ 16
34
<PAGE>
Consolidated Balance Sheets at June 30, 2000 and 1999................. 17
Consolidated Statements of Earnings for the Years ended June 30,
2000, 1999 and 1998................................................. 18
Consolidated Statements of Stockholders' Equity for the Years ended
June 30, 2000, 1999 and 1998........................................ 19
Consolidated Statements of Cash Flows for the Years ended June 30,
2000, 1999 and 1998................................................. 20
Notes to Consolidated Financial Statements............................ 22
(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, **
Deryl R. Goettling, Margaret E. Teegarden and
Dennis D. Hartman
35
<PAGE>
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
------------ ---------------------------------------- ---------------
11 Statement re: computation of per share earnings None
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters 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.
**Filed on September 28, 1999 as exhibits to the Registrants' Annual Report
on Form 10-KSB for the year ended June 30, 1999. 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.
36
<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 27, 2000 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 and Chairman of the Board
(Principal Executive Officer)
Date: September 27, 2000 Date: September 27, 2000
By: /s/ Robert F. Kirk By:
------------------------------- ________________________________
Robert F. Kirk, Chief Financial Robert McCrorey, Director
Officer
(Principal Accounting and
Financial Officer)
Date: September 27, 2000 Date: September __, 2000
By: /s/ Richard Cox By: /s/ Rodney Rounkles
-------------------------------- ---------------------------------
Richard Cox, Director Rodney Rounkles, Director
Date: September 27, 2000 Date: September 27, 2000
By: /s/ Robert L. Lalumodier
-------------------------------
Robert L. Lalumondier, Director
Date: September 27, 2000
37
<PAGE>
Index to Exhibits
Exhibit 13 2000 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Experts and Counsel
Exhibit 27 Financial Data Schedule
38
