PROSPECTUS
Up to 281,031 Shares of Common Stock
CBCT Bancshares, Inc.
(Proposed Holding Company for Community Bank of Central Texas, ssb)
Community Bank is converting from the mutual to the stock form of
organization. As part of the conversion, Community Bank will issue all of its
common stock to CBCT Bancshares, Inc. CBCT Bancshares, Inc. has been formed to
be the holding company for Community Bank.
================================================================================
TERMS OF THE OFFERING
Maximum,
Minimum Maximum as adjusted(1)
---------- ---------- --------------
Per Share Price............................ $ 10.00 $ 10.00 $ 10.00
Number of Shares........................... 180,625 244,375 281,031
Underwriting Commission and Other Expenses. $ 380,000 $ 380,000 $ 380,000
Net Proceeds to CBCT Bancshares, Inc....... $1,426,250 $2,063,750 $2,430,313
Net Proceeds Per Share..................... $ 7.90 $ 8.45 $ 8.65
(1) With the approval of the FDIC and the Texas Savings and Loan
Department, CBCT Bancshares may sell up to an additional 36,656 shares
of common stock in the conversion at $10.00 per share without the
resolicitation of subscribers.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS DOCUMENT.
Keefe, Bruyette & Woods, Inc. will use its best efforts to assist CBCT
Bancshares, Inc. in selling at least the minimum number of shares but does not
guarantee that this number will be sold. The minimum number of shares an
individual investor may purchase is 25 shares or $250.
The offering to depositors and borrowers of Community Bank will end at
12:00 Noon, Smithville, Texas time, on September 6, 2000. CBCT Bancshares, Inc.
will hold all funds of subscribers in an interest-bearing savings account at
Community Bank until the conversion is completed or terminated. Funds will be
returned promptly with interest if the conversion is terminated.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation, the Texas Savings and Loan Department, nor any other
federal agency or state securities regulator has approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center
at (512) 237-3247.
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KEEFE, BRUYETTE & WOODS, INC.
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August 4, 2000
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[MAP of Registrant's market area to be produced here.]
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements.
The Companies:
CBCT Bancshares, Inc.
312 Main Street
Smithville, Texas 78957
CBCT Bancshares, Inc. will be the holding company for Community Bank
when our conversion to stock form is complete. CBCT Bancshares, Inc. was formed
in March 2000. It has not engaged in any business.
After completing the conversion we will appear as shown below:
PUBLIC STOCKHOLDERS
-----------------------------------------------------------
|
| 100% of the common stock
CBCT BANCSHARES, INC.
-----------------------------------------------------------
|
| 100% of the common stock
COMMUNITY BANK
-----------------------------------------------------------
The principal executive offices of CBCT Bancshares, Inc. will be
located at 312 Main Street, Smithville, Texas 78957, and its telephone number
will be (512) 237-2482.
Community Bank of Central Texas, ssb
312 Main Street
Smithville, Texas 78957
Community Bank is a Texas chartered mutual savings bank. At March 31,
2000, we had total assets of $40.7 million, deposits of $30.4 million and total
equity of $2.8 million. We are changing our structure by becoming a stock
savings bank.
We are a community-oriented savings bank serving primarily Bastrop
County in Texas through its main office located in Smithville, Texas. We
emphasize residential mortgage lending, primarily originating one-to four-family
mortgage loans. We also originate commercial real estate loans and a wide
variety of consumer loans.
During the three months ended March 31, 2000, in order to improve our
interest rate risk position, we sold most of our existing investment securities
portfolio. This restructuring will
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help us continue to increase our emphasis on commercial real estate, consumer
and commercial business lending. The net proceeds from these sales will be
invested in investment securities and loans with current yields and shorter
terms to maturity.
The executive offices of Community Bank are located at 312 Main Street,
Smithville, Texas 78957, and its telephone number is (512) 237-2482.
The Stock Offering
We are converting to stock form and offering common stock to the public
primarily to better allow us to grow through expanded operations, as well as
through increased branching and acquisitions. The stock form will also give us
more flexibility to increase our capital position. See "Community Bank's
Conversion - Our Reasons for the Corporate Change."
We are offering between 180,625 and 244,375 shares of CBCT Bancshares,
Inc. at $10.00 per share. Because of changes in financial market conditions
before we complete the conversion, the number of shares we offer may increase to
281,031 shares with the approval of the Texas Savings and Loan Department and
the Federal Deposit Insurance Corporation and without any notice or
resolicitation opportunity provided to you. If so, you will not have the chance
to change or cancel your stock order.
Keefe, Bruyette & Woods, Inc. will assist us in selling the stock. For
further information about Keefe, Bruyette & Woods, Inc.'s role in the offering,
see "Community Bank's Conversion - Marketing Arrangements."
How We Determined the Offering Range and the $10.00 Price Per Share
The independent appraisal by Ferguson & Company, dated as of April 19,
2000, established the offering range. This appraisal was based on our financial
condition and operations and the effect of the additional capital raised in the
conversion. The $10.00 price per share was arbitrarily determined by our board
of directors and is the price most commonly used in stock offerings involving
conversions of mutual savings institutions. Ferguson & Company will update the
appraisal before the completion of the conversion.
Terms of the Offering
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors with us on September 30, 1998.
(2) The CBCT Bancshares, Inc. employee stock ownership plan.
(3) Depositors with us on June 30, 2000.
(4) Other members of Community Bank on July 22, 2000.
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(5) Community Bank's directors, officers and employees.
Shares of common stock not subscribed for in the subscription offering
will be offered to the general public in a direct community offering and, if
necessary, a public offering. We reserve the right, in our sole discretion, to
accept or reject any orders to purchase shares of common stock received in the
direct community offering and the public offering. See "Community Bank's
Conversion" on pages 27 to 46.
Limitations on the Purchase of Common Stock in the Conversion
(1) The minimum purchase is 25 shares.
(2) The maximum purchase by any person including related persons
or persons acting together in the offering is $100,000, which
equals 10,000 shares.
Termination of the Offering
The subscription offering will end at Noon, Smithville, Texas time on
September 6, 2000. If all of the shares are not subscribed for in the
subscription offering and we do not get orders for the remaining shares by
October 21, 2000, we will either:
(1) promptly return any payment you made to us, with interest, or
cancel any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the
extension and of your rights to cancel or change your order.
If we extend the offering and you do not respond to the
notice, then we will cancel your order and return your
payment, with interest, or cancel any withdrawal authorization
you gave us. The offering must be completed or terminated by
September 13, 2002.
How We Will Use the Proceeds Raised From the Sale of Common Stock
We intend to use the net proceeds received from the stock offering,
assuming completion of the offering at the maximum of the estimated offering
range, as follows:
$ 329,250 Retained by CBCT Bancshares, Inc. and initially placed
in short-term investments for general corporate purposes
195,500 Employee stock ownership plan loan
1,539,000 Used to buy the stock of Community Bank
----------
$2,063,750 Net proceeds from stock offering
==========
We intend to use the proceeds at Community Bank for future lending and
investment, in addition to general corporate purposes.
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We Currently Intend to Pay a Cash Dividend After Completion of the Stock
Offering
We currently intend to pay cash dividends after completion of the stock
offering. However, the amount and timing of any dividends has not yet been
determined. Based on our earnings history, and excluding the one-time
restructuring of the securities portfolio during the March 31, 2000 quarter, and
the proceeds from the conversion, we believe we will have the financial ability
to pay dividends, but future dividends are not guaranteed. See "Our Policy
Regarding Dividends" on page 17.
Benefits to Management from the Offering
We intend to establish the CBCT Bancshares, Inc. employee stock
ownership plan which will purchase up to a maximum of 8% of the shares sold in
the conversion. A loan from CBCT Bancshares, Inc. to the plan, funded by a
portion of the proceeds from this offering, will be used to purchase these
shares. If shares are not available for purchase by the employee stock ownership
plan in the subscription offering, then the plan will purchase the shares in the
open market. The employee stock ownership plan will provide a retirement benefit
to all employees eligible to participate in the plan.
We also intend to adopt a stock option plan and a restricted stock plan
for the benefit of directors, officers and employees, subject to shareholder
approval. If we adopt the restricted stock plan in which an amount of shares
equal to a maximum of 4% of the shares issued in the conversion may be available
for award, some of these individuals will be awarded stock at no cost to them.
As a result, both the employee stock ownership plan and the restricted stock
plan will increase the voting control of management without a cash outlay.
The following table presents the total value of the shares of common
stock, at the maximum of the offering range, which would be acquired by the
employee stock ownership plan and the total value of all shares to be available
for award and issuance under the restricted stock plan. The table assumes that
the value of the shares is $10.00 per share. The table does not include a value
for the options because the price paid for the option shares will be equal to
the fair market value of the common stock on the day that the options are
granted. As a result, financial gains can be realized under an option only if
the market price of common stock increases.
Percentage of
Estimated Shares Issued
Value of Shares in the Offering
--------------- ----------------
Employee Stock Ownership Plan........... $195,500 8.0%
Restricted Stock Awards................. 97,750 4.0
Stock Options........................... --- 10.0
-------- ----
Total.............................. $293,250 22.0%
======== ====
In addition, upon completion of the conversion, we intend to enter into
an employment agreement with Brad M. Hurta, president and chief executive
officer of Community Bank. The employment agreement is designed to assist us in
maintaining a stable and competent management team after the conversion. The
employment agreement will have a term of three
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years and provide for an annual base salary in an amount not less than this
individual's current salary. Mr. Hurta currently has a base salary of $75,000.
For a further discussion of benefits to management, see "Management."
How to Purchase Common Stock
Note: Once we receive your order, you cannot cancel or change it
without our consent. If CBCT Bancshares, Inc. intends to sell fewer than 180,625
shares or more than 281,031 shares, all subscribers will be notified and given
the opportunity to change or cancel their orders. If you do not respond to this
notice, we will return your funds promptly with interest.
If you want to subscribe for shares you must complete an original stock
order form and send it, together with full payment or withdrawal authorization,
to Community Bank in the postage-paid envelope provided. You must sign the
certification that is part of the stock order form. We must receive your stock
order form before the end of the offering period.
You may pay for shares in any of the following ways:
o BY CASH, if delivered in person to the home office of
Community Bank.
o BY CHECK OR MONEY ORDER made payable to CBCT Bancshares, Inc.
o BY AUTHORIZING A WITHDRAWAL FROM AN ACCOUNT AT COMMUNITY BANK.
To use funds in an Individual Retirement Account at Community
Bank, you must transfer your account to a self-directed
account with an unaffiliated institution or broker. Please
contact the conversion center at least one week before the end
of the offering for assistance.
We will pay interest on your subscription funds at the rate Community
Bank pays on passbook accounts from the date it receives your funds until the
conversion is completed or terminated, currently 2.5%. All funds authorized for
withdrawal from deposit accounts with Community Bank will earn interest at the
applicable account rate until the conversion is completed. There will be no
early withdrawal penalty for withdrawals from certificates of deposit used to
pay for stock.
Stock Information Center
If you have any questions regarding the offering or our conversion to
stock form, please call the Stock Information Center at (512) 237-3247.
Subscription Rights
Subscription rights are not allowed to be transferred and we will act
to ensure that you do not transfer your subscription rights. We will not accept
any stock orders that we believe involve the transfer of subscription rights.
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Important Risks in Owning CBCT Bancshares, Inc.'s Common Stock
Before you decide to purchase stock, you should consult with your
financial advisor regarding the suitability of purchasing shares of CBCT
Bancshares, Inc. In addition, you should read the "Risk Factors" section on
pages 11 to 13 of this document for information regarding certain risks of the
conversion, including the likelihood that a liquid trading market will not
develop.
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SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended December 31 is derived from our audited consolidated
financial statements. Consolidated financial data at March 31, 2000 and for the
three months ended March 31, 2000 and 1999 are unaudited. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included. The results of operations
and other data for the three months ended March 31, 2000 are not necessarily
indicative of the results of operations for the fiscal year ending December 31,
2000. The following information is only a summary and you should read it in
conjunction with our financial statements and notes beginning on page F-2.
At March 31, At December 31,
------------ ------------------------
2000 1999 1998 1997
------------ ------- -------- -------
(Dollars in Thousands)
Selected Financial Condition Data:
Total assets $40,656 $42,833 $39,829 $33,579
Loans receivable, net 22,688 21,693 20,890 21,370
Securities available for sale, at fair value:
Mortgage-backed securities 33 15,898 7,031 2,497
Other securities 365 379 445 290
Securities to be held to maturity, at cost:
Mortgage-backed securities --- --- 5,838 6,567
Other securities --- --- 175 205
Deposits 30,432 32,354 32,138 30,221
Federal Home Loan Bank borrowings 7,157 7,392 4,000 ---
Total equity 2,809 2,999 3,343 3,027
<TABLE>
<CAPTION>
Three Months
Ended March 31, Years Ended December 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
---------- -------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Interest and dividend income $ 757 $ 692 $ 3,050 $ 2,589 $ 2,525
Interest expense (437) (437) (1,902) (1,560) (1,484)
----- ----- ------- ------- -------
Net interest income 320 255 1,148 1,029 1,041
Provision for loan losses (7) --- --- --- (3)
----- ----- ------- ------- -------
Net interest income after loan losses 313 255 1,148 1,029 1,038
----- ----- ------- ------- -------
Other operating income:
Service charges and fees 30 27 113 83 71
Net securities gains (866) --- 76 30 ---
Net gains on sales of loans 5 25 51 51 ---
Gain on sale of other real estate owned --- --- --- --- ---
----- ----- ------- ------- -------
Total other operating income (loss) (831) 52 240 164 71
----- ----- ------- ------- -------
Other operating expenses:
Compensation and benefits (138) (100) (454) (349) (366)
Occupancy and equipment expense (65) (39) (183) (138) (103)
Other operating expenses (119) (105) (512) (403) (378)
----- ----- ------- ------- -------
Total other operating expenses (322) (244) (1,149) (890) (847)
----- ----- ------- ------- -------
Income (loss) before income taxes (840) 63 239 303 262
Income tax (expense) benefit 293 (20) (71) (91) (86)
----- ----- ------- ------- -------
Net income (loss) $(547) $ 43 $ 168 $ 212 $ 176
===== ===== ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------ -------------------------------
2000 1999 1999 1998 1997
--------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Key Operating Ratios and Other Data:
Performance ratios (quarterly amounts
have been annualized):
Return on assets (1) (5.26)% 0.43% 0.39% 0.60% 0.52%
Return on equity (2) (74.13)% 5.15% 5.29% 6.69% 5.81%
Net interest margin (3) 3.14 % 2.69% 2.79% 3.11% 3.21%
Operating expense divided by average assets 3.10 % 2.46% 2.65% 2.52% 2.49%
Average interest-earning assets divided by
average interest-bearing liabilities 105 % 103% 104% 106% 107%
Quality ratios:
Non-performing assets divided by total assets 0.01 % 0.26% 0.16% 0.29% 0.13%
Allowance for loan losses to
non-performing loans 20,500 % 134% 293% 174% 374%
Allowance for loan losses to gross loans 0.90 % 0.77% 0.91% 0.86% 0.73%
Capital ratios:
Equity to total assets at end of period 6.91 % 7.45% 7.00% 8.39% 9.01%
Average equity to average assets 6.58 % 6.96% 7.33% 9.01% 8.95%
Tier 1 risk-based capital ratio 12.54 % 14.96% 15.00% 16.70% 16.90%
Total risk-based capital ratio 13.96 % 16.57% 15.90% 18.70% 17.80%
Other data:
Number of full service offices 1 1 1 1 1
<FN>
----------------------------
(1) Ratio of net income (loss) to average total assets
(2) Ratio of net income (loss) to average equity
(3) Net interest income divided by average earning assets
</FN>
</TABLE>
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RISK FACTORS
You should consider these risk factors, in addition to the other
information in this prospectus, before deciding whether to make an investment in
this stock.
Rising interest rates may hurt our profits.
To be profitable, we have to earn more money in interest we receive on
loans and investments we make than we pay to our depositors and lenders in
interest. As of March 31, 2000, our one-year cumulative interest rate
sensitivity gap as a percentage of total assets was a negative 20.97%, which
generally means if interest rates rise, our net interest income could be reduced
because interest paid on interest-bearing liabilities, including deposits and
borrowings, could increase more quickly than interest received on
interest-earning assets, including loans and mortgage-backed and investment
securities. In addition, rising interest rates may hurt our income because they
may reduce the demand for loans and the value of our mortgage-related and
investment securities. In the alternative, if interest rates decrease, our net
interest income would increase. For a further discussion of how changes in
interest rates could impact us, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Asset and Liability Management
and Market Risk."
After this offering, our return on equity will be low compared to other
companies and our compensation expenses will increase. This could negatively
impact the price of our stock.
The proceeds we will receive from the sale of our common stock will
significantly increase our capital and it will take us time to fully use this
capital in our business operations. Our compensation expenses will also increase
because of the costs associated with the employee stock ownership and
stock-based incentive plans. Therefore, we expect our return on equity to be
below our historical level and less than our regional and national peers. This
low return on equity could hurt our stock price. We cannot guarantee when or if
we will achieve returns on equity that are comparable to industry peers. For
further information regarding pro forma income and expenses, see "Pro Forma
Data."
Our loan portfolio possesses increased risk due to our substantial number of
consumer, construction and commercial real estate and commercial business loans,
which could increase the level of our provision for loan losses.
Our consumer, construction and commercial real estate, and commercial
business loans accounted for more than one-third of our total loan portfolio as
of March 31, 2000. Generally, we consider these types of loans to involve a
higher degree of risk compared to first mortgage loans on one- to four-family,
owner occupied residential properties. In addition, we plan to increase our
emphasis on commercial real estate and commercial business lending. Because of
our planned increased emphasis on and increased investment in commercial real
estate and commercial business loans, we may determine it necessary to increase
the level of our provision for loan losses. Increased provisions for loan losses
would hurt our profits. For further information concerning the risks associated
with consumer, multi-family and commercial real
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estate and commercial business loans, see "Business of the Bank - Lending
Activities" and "--Asset Quality."
We intend to grant stock options and restricted stock to the board and
management following the conversion which could reduce your ownership interest.
If approved by a vote of the shareholders, we intend to establish a
stock option plan with a number of shares equal to 10% of the shares issued in
the conversion and a restricted stock plan with a number of shares equal to up
to 4% of the shares issued in the conversion, worth approximately $97,750 at the
purchase price and assuming the maximum of the estimated offering range, for the
benefit of directors, officers and employees of CBCT Bancshares, Inc. and
Community Bank. Awards under these plans will reduce the ownership interest of
all stockholders. For further discussion regarding these plans, see "Pro Forma
Data" and "Management - Benefits - Other Stock Benefit Plans."
The amount of common stock we will control, our articles of incorporation and
bylaws and state and federal statutory provisions could discourage hostile
acquisitions of control, which can prevent shareholders from receiving a premium
on their shares.
Our board of directors and executive officers intend to purchase
approximately 18.8% of our common stock at the maximum of the estimated offering
range. These purchases, together with the purchase of 8% of the shares by the
employee stock ownership plan, as well as the potential acquisition of common
stock through the proposed stock option plan and restricted stock plan will
result in significant inside ownership of CBCT Bancshares, Inc. This inside
ownership and provisions in our articles of incorporation and bylaws may have
the effect of discouraging attempts to acquire CBCT Bancshares, Inc., a proxy
contest for control of CBCT Bancshares, Inc., the assumption of control of CBCT
Bancshares, Inc. by a holder of a large block of common stock and the removal of
CBCT Bancshares, Inc.'s management, all of which may prevent shareholders from
receiving a premium on their shares. See "Restrictions on Acquisition of CBCT
Bancshares, Inc. and Community Bank."
Holders of CBCT Bancshares, Inc. common stock may not be able to sell their
shares when desired as a result of the likelihood that a liquid trading market
will not develop, and even if a liquid trading market does develop, they may not
be able to sell for $10.00 or more per share.
We have never issued common stock to the public. Consequently, there is
no established market for the common stock. We cannot predict whether a liquid
trading market in shares of CBCT Bancshares, Inc.'s common stock will develop or
how liquid that market might become. However, given the amount of shares being
offered, it is unlikely that a liquid trading market will develop. Persons
purchasing shares may not be able to sell their shares when they desire if a
liquid trading market does not develop or sell them at a price equal to or above
$10.00 per share even if a liquid trading market develops.
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Management will have substantial discretion over investment of the offering
proceeds and may make investments with which you disagree.
The net offering proceeds to CBCT Bancshares, Inc. are estimated to
range from $1.4 million to $2.1 million, a portion of which will be lent to
Community Bank of Central Texas's employee stock ownership plan to purchase
shares of common stock. CBCT Bancshares intends to use the remainder of these
funds for general business purposes, giving management substantial discretion
over their investment. You may disagree with investments that management makes.
See "Use Of Proceeds."
Strong competition in Community Bank's primary market area may reduce our
ability to attract and retain deposits and originate loans.
Community Bank operates in a competitive market for the attraction of
savings deposits, which is its primary source of funds, and in the origination
of loans. Historically, its most direct competition for savings deposits has
come from credit unions, community banks, large commercial banks and thrift
institutions in its primary market area. Particularly in times of extremely low
or extremely high interest rates, Community Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. Community Bank's
competition for loans comes principally from mortgage bankers, commercial banks,
other thrift institutions and insurance companies. Such competition for deposits
and the origination of loans may limit Community Bank's future growth and
earnings prospects.
CBCT BANCSHARES, INC.
CBCT Bancshares, Inc. was incorporated under Maryland law to hold all
of the stock of Community Bank. CBCT Bancshares, Inc. has received Federal
Reserve Board approval to become a bank holding company and is subject to
regulation by that agency. After we complete the conversion, CBCT Bancshares,
Inc. will be a bank holding company, which means that it will own a banking
institution. Bank holding companies are limited to banking and financial
services-related activities. CBCT Bancshares, Inc. will have no significant
assets other than all of the outstanding shares of common stock of Community
Bank, the net proceeds it keeps and its loan to the CBCT Bancshares, Inc.
employee stock ownership plan. CBCT Bancshares, Inc. will have no significant
liabilities.
Initially, the management of CBCT Bancshares, Inc. and Community Bank
will be substantially the same. CBCT Bancshares, Inc. intends to utilize the
support staff and offices of Community Bank from time to time and will pay
Community Bank for these services. If CBCT Bancshares, Inc. expands or changes
its business in the future, we may hire our own employees. See "How We Are
Regulated - CBCT Bancshares, Inc." See "How We Intend to Use the Proceeds."
We believe the proposed holding company structure will give us more
flexibility to change our business activities by forming new companies which we
own, or by buying other companies, including other financial institutions and
financial services companies. We do not
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have any current plans to do these things. CBCT Bancshares, Inc. intends to pay
for its business activities with the proceeds it keeps from the conversion and
the money we earn from investing the proceeds, as well as from dividends from
Community Bank. See "Our Policy Regarding Dividends."
COMMUNITY BANK OF CENTRAL TEXAS, ssb
Community Bank is a Texas chartered and federally insured mutual
savings bank with one full service office. At March 31, 2000, Community Bank had
total assets of $40.7 million, total deposits of $30.4 million and equity of
$2.8 million. For more information regarding the business and operations of
Community Bank, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business of Community Bank."
Community Bank is examined and regulated by the Texas Savings and Loan
Department and the Federal Deposit Insurance Corporation. Community Bank is
required to have reserves set by the Federal Reserve Board and is a member of
the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in
the Federal Home Loan Bank System.
HOW WE INTEND TO USE THE PROCEEDS
We are converting to stock form and offering common stock to the public
primarily to better allow us to grow through expanded operations, as well as
through increased branching and acquisitions. The stock form will also give us
more flexibility to increase our capital position. See "Community Bank's
Conversion - Our Reasons for the Corporate Change."
As a stock corporation upon completion of the conversion, Community
Bank will be organized in the form used by commercial banks, most major
corporations and a majority of savings institutions. The ability to raise new
equity capital through the issuance and sale of Community Bank's or CBCT
Bancshares, Inc.'s capital stock will allow Community Bank the flexibility to
increase its capital position more rapidly than by accumulating earnings and at
times deemed advantageous by the board of directors of Community Bank. It will
also support future growth and expanded operations, including increased lending
and investment activities, as business and regulatory needs require. The ability
to attract new capital also will help Community Bank address the needs of the
communities it serves and enhance its ability to make acquisitions or expand
into new businesses.
The acquisition alternatives available to Community Bank are quite
limited as a mutual institution. After the conversion, Community Bank will have
increased ability to merge with other institutions and CBCT Bancshares, Inc. may
acquire control of other stock savings institutions and retain the acquired
institution as a separate subsidiary of CBCT Bancshares, Inc. Finally, the
ability to issue capital stock will enable Community Bank to establish stock
compensation plans for directors, officers and employees, giving them equity
interests in CBCT Bancshares, Inc. and greater incentive to improve its
performance.
The actual net proceeds from the sale of the shares of common stock
cannot be determined until the conversion is completed, however, we presently
anticipate that the net
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proceeds from the sale of the shares of common stock will be between $1.4
million and $2.1 million and up to $2.4 million assuming an increase in the
estimated value of the common stock sold in the conversion by 15%. See "Pro
Forma Data" and "Community Bank's Conversion -How We Determined Our Price and
the Number of Shares to be Issued in the Stock Offering" as to the assumptions
used to arrive at such amounts.
Although a substantial portion of the net proceeds are not allocated
for a specific purpose, we intend to use the net proceeds received from the
stock offering, assuming completion of the offering at the maximum of the
estimated offering range, as follows:
$ 329,250 Retained by CBCT Bancshares, Inc. and initially placed in
short-term investments for general corporate purposes
195,500 Employee stock ownership plan loan
1,539,000 Used to buy the stock of Community Bank
----------
$2,063,750 Net proceeds from stock offering
==========
CBCT Bancshares, Inc. will purchase all of the capital stock of
Community Bank to be issued in the conversion in exchange for that portion of
the net conversion proceeds, which will increase Community Bank's tangible
capital to up to 10.0% of assets, net of the loan to be made to the employee
stock ownership plan. CBCT Bancshares, Inc. also intends to use a portion of the
net proceeds to make a loan directly to the employee stock ownership plan to
enable the employee stock ownership plan to purchase up to 8.0% of the shares of
common stock issued in the offering. Based upon the issuance of 180,625 shares
of common stock and 244,375 shares of common stock at the minimum and maximum of
the estimated offering range, respectively, the loan to the employee stock
ownership plan would be $144,500 and $195,500, respectively. The remaining net
proceeds, not to exceed 50% of the net conversion proceeds, will be retained by
CBCT Bancshares, Inc. and initially be used to invest in U.S. Government and
federal agency securities of various maturities, mortgage-backed or other
securities, deposits in either Community Bank or other financial institutions,
or a combination thereof. See "Management -Benefits - Employee Stock Ownership
Plan." The net proceeds may ultimately be used to:
o support Community Bank's lending activities;
o repay borrowings from the Federal Home Loan Bank in the
ordinary course of business; or
o support the future expansion of operations through the
establishment of additional banking offices or other customer
facilities or through acquisitions of other financial
institutions or branch offices, although no acquisition
transactions are specifically being considered at this time.
The net proceeds from the conversion may also be used for other business and
investment purposes, including the payment of regular or special cash dividends,
possible repurchases of the common stock or returns of capital. CBCT Bancshares,
Inc. and Community Bank have committed, however, not to declare or pay any
return of capital on the common stock during the
14
<PAGE>
one-year period following completion of the conversion, without prior approval
of the FDIC. Management of CBCT Bancshares, Inc. may consider expanding or
diversifying its activities, as opportunities become available.
The proceeds may also be utilized by CBCT Bancshares, Inc. to
repurchase, at prices which may be above or below the initial offering price,
shares of common stock through an open market repurchase program subject to
applicable regulations, although CBCT Bancshares, Inc. currently has no specific
plan to repurchase any of its stock. In the future, the board of directors of
CBCT Bancshares, Inc. will make decisions on the repurchase of the common stock
based on its view of the appropriateness of the price of the common stock as
well as CBCT Bancshares, Inc.'s and Community Bank's investment opportunities
and capital needs. Any stock repurchases will be subject to the determination of
CBCT Bancshares, Inc.'s board of directors that Community Bank will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases.
The portion of the net proceeds used by CBCT Bancshares, Inc. to
purchase the capital stock of Community Bank will be added to Community Bank's
general funds to be used for general corporate purposes, including increased
lending activities. While the amount of net proceeds received by Community Bank
will further strengthen Community Bank's capital position, which already
substantially exceeds all regulatory requirements, Community Bank is not
converting to stock form primarily to increase its regulatory capital. The net
proceeds may be used as described above to support lending activities as well as
future expansion of operations through the establishment of additional banking
offices or other customer facilities. After the conversion, based upon the
maximum of the estimated offering range, Community Bank's tangible capital ratio
will be approximately 10.0%. As a result, Community Bank will continue to be a
well-capitalized institution.
The net proceeds may vary because total expenses of the conversion may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the conversion is adjusted to reflect a change
in the estimated pro forma market value of Community Bank. Payments for shares
made through withdrawals from existing deposit accounts at Community Bank will
not result in the receipt of new funds for investment by Community Bank but will
result in a reduction of Community Bank's interest expense and liabilities as
funds are transferred from interest-bearing certificates or other deposit
accounts.
MARKET FOR THE COMMON STOCK
CBCT Bancshares, Inc. and Community Bank have never issued capital
stock, and, consequently, there is no established market for the common stock at
this time. The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
CBCT Bancshares, Inc., Community Bank or any market maker. Accordingly, the
number of active buyers and sellers of the common stock at any particular time
may be limited. CBCT Bancshares, Inc. intends to take steps necessary to have
its common stock listed for quotation on the OTC Electronic Bulletin Board upon
completion of the stock offering. In addition, Keefe, Bruyette & Woods, Inc. has
indicated its intention to assist
15
<PAGE>
CBCT Bancshares, Inc. in obtaining market makers in its common stock to
accommodate this listing.
OUR POLICY REGARDING DIVIDENDS
The board of directors of CBCT Bancshares, Inc. currently intends to
pay cash dividends on the common stock after completion of the stock offering.
However, the amount and timing of any dividends have not yet been determined.
The payment of dividends will depend upon a number of factors, including capital
requirements, CBCT Bancshares, Inc.'s and Community Bank's financial condition
and results of operations, tax considerations, statutory and regulatory
limitations and general economic conditions. No assurances can be given that any
dividends will be paid or that, if paid, will not be reduced or eliminated in
future periods. Special cash dividends, stock dividends or returns of capital
may, to the extent permitted by regulations, be paid in addition to, or in lieu
of, regular cash dividends. CBCT Bancshares, Inc. intends to file consolidated
tax returns with Community Bank. Accordingly, it is anticipated that any cash
distributions made by CBCT Bancshares, Inc. to its stockholders would be treated
as cash dividends and not as a non-taxable return of capital for federal and
state tax purposes.
Dividends from CBCT Bancshares, Inc. will depend, in large part, upon
receipt of dividends from Community Bank, because CBCT Bancshares, Inc.
initially will have no source of income other than dividends from Community
Bank, earnings from the investment of proceeds from the sale of shares of common
stock retained by CBCT Bancshares, Inc., and interest payments with respect to
CBCT Bancshares, Inc.'s loan to the employee stock ownership plan. A regulation
of the FDIC imposes limitations on "capital distributions" by savings
institutions. See "How We are Regulated - Limitations on Dividends and Other
Capital Distributions."
Any payment of dividends by Community Bank to CBCT Bancshares, Inc.
which would be deemed to be drawn out of Community Bank's bad debt reserves
would require a payment of taxes at the then-current tax rate by Community Bank
on the amount of earnings deemed to be removed from the reserves for such
distribution. Community Bank does not intend to make any distribution to CBCT
Bancshares, Inc. that would create such a federal tax liability. See "Taxation."
16
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $1.4 million and $2.1 million, or $2.4 million
in the event the estimated offering range is increased by 15%, based upon the
following assumptions:
o all shares of common stock will be sold through
non-transferable rights to subscribe for the common stock, in
order of priority, to Eligible Account Holders, the employee
stock ownership plan, Supplemental Eligible Account Holders,
Other Members and Directors, Officers and Employees;
o Keefe, Bruyette & Woods, Inc. will receive a fee of $75,000
upon completion of the conversion;
o total expenses, including the marketing fees paid to Keefe,
Bruyette & Woods, Inc., are estimated to be approximately
$380,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income and stockholders' equity of CBCT
Bancshares, Inc. have been calculated for the three months ended March 31, 2000
and the year ended December 31, 1999, as if the common stock to be issued in the
conversion had been sold at the beginning of the period and the net proceeds had
been invested at 6.30% and 5.95%, which represents the yield on one-year U.S.
Government securities at March 31, 2000 and December 31, 1999, respectively. In
light of changes in interest rates in recent periods, these yields are deemed by
CBCT Bancshares, Inc. and Community Bank to more accurately reflect available
reinvestment rates than the arithmetic average method. The effect of withdrawals
from deposit accounts for the purchase of common stock has not been reflected. A
tax rate of 36.0% has been assumed for periods resulting in after-tax yields of
4.03% and 3.81% for the three months ended March, 31, 2000 and the year ended
December 31, 1999, respectively. Historical and pro forma per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of common stock, as adjusted to give effect to the shares
purchased by the employee stock ownership plan and the restricted stock plan.
See Note 5 to the tables below. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
CBCT Bancshares, Inc. intends to make a loan to fund the purchase of 8.0% of the
common stock by the employee stock ownership plan and intends to retain up to
50% of the net proceeds from the conversion, subject to the intention to
increase the tangible capital of Community Bank to up to 10.0% of assets. See
"How We Intend to Use the Proceeds."
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. The table
below gives effect to the restricted stock plan, which is expected to be adopted
by CBCT Bancshares, Inc. following the conversion and presented along with the
stock option plan to stockholders for approval at an annual or special meeting
of stockholders to be held at least six months following the completion of the
conversion. If the restricted stock plan is approved by stockholders, the
restricted stock plan intends to acquire an amount of common stock equal to up
to 4.0% of the shares of common
17
<PAGE>
stock issued in the conversion, either through open market purchases or from
authorized but unissued shares of common stock, if permissible. The table below
assumes that stockholder approval has been obtained, as to which there can be no
assurance, and that the shares acquired by the restricted stock plan are
purchased in the open market at $10.00 per share. No effect has been given to
CBCT Bancshares, Inc.'s results of operations after the conversion, the market
price of the common stock after the conversion or a less than 4.0% purchase by
the restricted stock plan. See "Management - Benefits - Other Stock Benefit
Plans."
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of CBCT Bancshares, Inc.
computed in accordance with generally accepted accounting principles ("GAAP").
The pro forma stockholders' equity is not intended to represent the
fair market value of the common stock and may be different than amounts that
would be available for distribution to stockholders in the event of liquidation.
18
<PAGE>
<TABLE>
<CAPTION>
At or For the Three Months Ended March 31, 2000
--------------------------------------------------------------------------------
180,625 Shares 212,500 Shares 244,375 Shares 281,031 Shares
Sold at $10.00 Sold at 10.00 Sold at $10.00 Sold at $10.00 Per
Per Share Per Share Per Share Share (Maximum of
(Minimum of Range) (Midpoint of Range) (Maximum of Range) Range, as Adjusted)(1)
------------------ ------------------- ------------------ ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds..................................... $ 1,806 $ 2,125 $ 2,444 $ 2,810
Less offering expenses and commissions............. (380) (380) (380) (380)
---------- ---------- ---------- ----------
Estimated net conversion proceeds............... 1,426 1,745 2,064 2,430
Less: Common stock acquired by employee
stock ownership plan...................... (145) (170) (196) (225)
Less: Common stock acquired by
restricted stock plan..................... (72) (85) (98) (112)
---------- ---------- ---------- ----------
Estimated proceeds available for investment(2).. $ 1,210 $ 1,490 $ 1,771 $ 2,093
========== ========== ========== ==========
Net income (loss):
Historical...................................... $ (547) $ (547) $ (547) $ (547)
Pro Forma adjustments:
Net income from proceeds..................... 12 15 18 21
Employee stock ownership plan(3)............. (2) (3) (3) (4)
Restricted stock plan(4)..................... (2) (3) (3) (4)
---------- ---------- ---------- ----------
Pro forma net income (loss)............... $ (539) $ (537) $ (535) $ (533)
========== ========== ========== ==========
Net income (loss) per share(5)(6):
Historical...................................... $ (3.38) $ (2.87) $ (2.50) $ (2.17)
Pro Forma adjustments:
Net income from proceeds..................... 0.08 0.08 0.08 0.08
Employee stock ownership plan(3)............. (0.01) (0.01) (0.01) (0.01)
Restricted stock plan(4)..................... (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma basic earnings (loss) per share. $ (3.33) $ (2.82) $ (2.45) $ (2.12)
========== ========== ========== ==========
Number of shares used in calculating basic
earnings per share(5)(6).................. 161,840 190,400 218,960 251,804
========== ========== ========== ==========
Stockholders' equity (book value):
Historical...................................... $ 2,809 $ 2,809 $ 2,809 $ 2,809
Estimated net conversion proceeds............... 1,426 1,745 2,064 2,430
Less common stock acquired by:
Employee stock ownership plan................ (145) (170) (196) (225)
Restricted stock plan........................ (72) (85) (98) (112)
---------- ---------- ---------- ----------
Pro forma stockholders' equity............ $ 4,019 $ 4,299 $ 4,580 $ 4,902
========== ========== ========== ==========
Stockholder's equity per share:
Historical...................................... $ 15.55 $ 13.22 $ 11.49 $ 10.00
Estimated net conversion proceeds............... 7.90 8.21 8.45 8.65
Less common stock acquired by:
Employee stock ownership plan................ (0.80) (0.80) (0.80) (0.80)
Restricted stock plan........................ (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share.. $ 22.25 $ 20.23 $ 18.74 $ 17.44
========== ========== ========== ==========
Pro forma price to book value...................... 44.9% 49.4% 53.4% 57.3%
========== ========== ========== ==========
Pro forma price to earnings ratio.................. N/A N/A N/A N/A
Number of shares used in calculating equity per
share........................................... 180,625 212,500 244,375 281,031
========== ========== ========== ==========
<FN>
(Footnotes on second page following)
</FN>
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
At or For the Three Months Ended March 31, 2000
--------------------------------------------------------------------------------
180,625 Shares 212,500 Shares 244,375 Shares 281,031 Shares
Sold at $10.00 Sold at 10.00 Sold at $10.00 Sold at $10.00 Per
Per Share Per Share Per Share Share (Maximum of
(Minimum of Range) (Midpoint of Range) (Maximum of Range) Range, as Adjusted)(1)
------------------ ------------------- ------------------ ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds..................................... $ 1,806 $ 2,125 $ 2,444 $ 2,810
Less offering expenses and commissions............. (380) (380) (380) (380)
---------- ---------- ---------- ----------
Estimated net conversion proceeds............... 1,426 1,745 2,064 2,430
Less: Common stock acquired by employee
stock ownership plan...................... (145) (170) (196) (225)
Less: Common stock acquired by
restricted stock plan..................... (72) (85) (98) (112)
---------- ---------- ---------- ----------
Estimated proceeds available for investment(2).. $ 1,210 $ 1,490 $ 1,771 $ 2,093
========== ========== ========== ==========
Net income:
Historical...................................... $ 168 $ 168 $ 168 $ 168
Pro Forma adjustments:
Net income from proceeds..................... 46 57 67 80
Employee stock ownership plan(3)............. (9) (11) (13) (14)
Restricted stock plan(4)..................... (9) (11) (13) (14)
---------- ---------- ---------- ----------
Pro forma net income...................... $ 196 $ 203 $ 210 $ 219
========== ========== ========== ==========
Net income per share(5)(6):
Historical...................................... $ 1.04 $ 0.88 $ 0.77 $ 0.67
Pro Forma adjustments:
Net income from proceeds..................... 0.28 0.30 0.31 0.32
Employee stock ownership plan(3)............. (0.06) (0.06) (0.06) (0.06)
Restricted stock plan(4)..................... (0.06) (0.06) (0.06) (0.06)
---------- ---------- ---------- ----------
Pro forma basic earnings per share........ $ 1.21 $ 1.07 $ 0.96 $ 0.87
========== ========== ========== ==========
Number of shares used in calculating basic
earnings per share(5)(6).................. 161,840 190,400 218,960 251,804
========== ========== ========== ==========
Stockholders' equity (book value):
Historical...................................... $ 2,999 $ 2,999 $ 2,999 $ 2,999
Estimated net conversion proceeds............... 1,426 1,745 2,064 2,430
Less common stock acquired by:
Employee stock ownership plan................ (145) (170) (196) (225)
Restricted stock plan........................ (72) (85) (98) (112)
---------- ---------- ---------- ----------
Pro forma stockholders' equity............ $ 4,209 $ 4,489 $ 4,770 $ 5,092
========== ========== ========== ==========
Stockholder's equity per share:
Historical...................................... $ 16.60 $ 14.11 $ 12.27 $ 10.67
Estimated net conversion proceeds............... 7.90 8.21 8.45 8.65
Less common stock acquired by:
Employee stock ownership plan................ (0.80) (0.80) (0.80) (0.80)
Restricted stock plan........................ (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share.. $ 23.30 $ 21.12 $ 19.52 $ 18.12
========== ========== ========== ==========
Pro forma price to book value...................... 42.9% 47.3% 51.2% 55.2%
========== ========== ========== ==========
Pro forma price to earnings ratio.................. 8.3x 9.3x 10.4x 11.5x
========== ========== ========== ==========
Number of shares used in calculating equity per
share........................................... 180,625 212,500 244,375 281,031
========== ========== ========== ==========
<FN>
(Footnotes on next page)
</FN>
</TABLE>
21
<PAGE>
-----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to
15% to reflect changes in market and financial conditions following the
commencement of the conversion.
(2) Estimated net proceeds, as adjusted, consist of the estimated net
proceeds from the conversion minus (i) the proceeds attributable to the
purchase by the employee stock ownership plan and (ii) the value of the
shares to be purchased by the restricted stock plan, subject to
stockholder approval, after the conversion at an assumed purchase price
of $10.00 per share.
(3) It is assumed that 8.0% of the shares of common stock issued in the
conversion will be purchased by the employee stock ownership plan with
funds loaned by CBCT Bancshares, Inc. CBCT Bancshares, Inc. and
Community Bank intend to make annual contributions to the employee
stock ownership plan in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net earnings assumes
(i) that the loan to the employee stock ownership plan is payable over
10 years, with the employee stock ownership plan shares having an
average fair value of $10.00 per share in accordance with SOP 93-6,
entitled "Employers' Accounting for Employee Stock Ownership Plans," of
the AICPA, and (ii) the effective tax rate was 36.0% for the period.
See "Management - Benefits -- Employee Stock Ownership Plan."
(4) It is assumed that the restricted stock plan will purchase, following
stockholder approval of such plan, a number of shares of common stock
equal to 4.0% of the shares of common stock issued in the conversion
for issuance to directors, officers and employees. Funds used by the
restricted stock plan to purchase the shares initially will be
contributed to the restricted stock plan by CBCT Bancshares, Inc. It is
further assumed that the shares were acquired by the restricted stock
plan at the beginning of the period presented in open market purchases
at the purchase price and that 20% of the amount contributed, net of
taxes at 36%, was an amortized expense during the year ended December
31, 1999. It was assumed that the amortized expense for the three
months ended March 31, 2000 was 5% of the amount contributed net of
taxes at 36%. Statement of Financial Accounting Standards ("SFAS") No.
128 requires that unvested shares under the restricted stock plan be
excluded from the basic net income per share calculation and included
in the diluted net income per share calculation only if they are
dilutive under the treasury stock method. The issuance of authorized
but unissued shares of common stock pursuant to the restricted stock
plan in the amount of 4.0% of the common stock sold in the offering
would dilute the voting interests of existing stockholders by
approximately 3.8% and under such circumstances pro forma net earnings
per share for the year ended December 31, 1999 would be $1.17, $1.04,
$.94 and $.85 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated offering range, respectively, and pro forma
stockholders' equity per share at March 31, 2000 and December 31, 1999
would be $21.78, $19.84, $18.40 and $17.16 and $22.79, $20.70, $19.15
and $17.81, respectively, at the minimum, midpoint, maximum and 15%
above the maximum of such range, respectively. There can be no
assurance that the actual purchase price of shares purchased by or
issued to the restricted stock plan will be equal to the purchase
price. See "Management - Benefits -- Other Stock Benefit Plans."
(5) Basic net income per share calculations are determined by taking the
number of shares assumed to be sold in the conversion and, (a) in
accordance with SOP 93-6, subtracting the ESOP shares which have not
been committed for release and (b) in accordance with SFAS No. 128,
subtracting the restricted stock plan shares which have not vested.
Diluted net income per share calculations are determined by adding the
dilutive portion of the unvested restricted stock plan shares to the
number of shares used to determine basic net income per share. The
unvested restricted stock plan shares are deemed to be for future
services and not dilutive under the treasury stock method. Set forth
below is a reconciliation of the number of shares used in making the
net income per share calculations for both periods:
22
<PAGE>
Maximum,
Minimum Midpoint Maximum as Adjusted
------- -------- ------- -----------
Total shares issued................. 180,625 212,500 244,375 281,031
Less shares sold to ESOP............ 14,450 17,000 19,550 22,483
Less restricted stock plan shares... 7,225 8,500 9,775 11,241
------- ------- ------- -------
Sub-total................. 158,950 187,000 215,050 247,307
Plus ESOP shares assumed
committed to be released...... 1,445 1,700 1,955 2,248
Plus restricted stock plan shares
assumed vested................. 1,445 1,700 1,955 2,248
------- ------- ------- -------
Number of shares used in
calculating basic net income
per share...................... 161,840 190,400 218,960 251,804
Plus dilutive effect of unvested
restricted stock plan shares... --- --- --- ---
------- ------- ------- -------
Number of shares used in
calculating diluted net income
per share...................... 161,840 190,400 218,960 251,804
======= ======= ======= =======
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by CBCT
Bancshares, Inc. following the conversion and presented for approval by
stockholders at an annual or special meeting of stockholders of CBCT
Bancshares, Inc. held at least six months following the completion of
the conversion. If the stock option plan is approved by stockholders,
an amount equal to 10% of the common stock issued in the conversion, or
18,063 shares at the minimum of the estimated offering range, 21,250
shares at the midpoint of the range, 24,438 shares at the maximum of
the range and 28,103 shares at 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of
common stock pursuant to the exercise of options under the stock option
plan will result in the dilution of existing stockholders' voting
interests by approximately 9.1%. Assuming stockholder approval of the
stock option plan, that all these options were exercised at the
beginning of the period at an exercise price of $10.00 per share and
that the shares to fund the restricted stock plan are acquired through
open market purchases at the purchase price, pro forma net earnings per
share for the year ended December 31, 1999 would be$1.13, $1.00, $.90,
and $.82, at the minimum, midpoint, maximum and 15% above the maximum
of the estimated offering range, respectively, and pro forma
stockholders' equity per share at March 31, 2000 and December 31, 1999
would be $21.13, $19.30, $17.95 and $16.77 and $22.09, $20.11, $18.65
and $17.38, respectively, at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively. See "Management -
Benefits -- Other Stock Benefit Plan."
23
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Community
Bank at March 31, 2000, and the pro forma consolidated capitalization of CBCT
Bancshares, Inc. after giving effect to the conversion, based upon the sale of
the number of shares shown below and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
Capitalization
(deposits,
borrowings
and
equity) of 281,031 Shares
Community 180,625 Shares 212,500 Shares 244,375 Shares at $10 per Share
Bank at at $10 per Share at $10 per Share at $10 per Share (Maximum of
March 31, (Minimum of (Midpoint of (Maximum of Range, as
2000 Range) Range) Range) Adjusted)(1)
--------------- ---------------- ---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2).................................. $ 30,432 $ 30,432 $ 30,432 $ 30,432 $ 30,432
Borrowings................................... 7,157 7,157 7,157 7,157 7,157
-------- --------- --------- --------- ---------
Total deposits and borrowings............. $ 37,589 $ 37,589 $ 37,589 $ 37,589 $ 37,589
======== ========= ========= ========= =========
Capital Stock:
Preferred stock, $0.01 par value per share:
authorized - 1,000,000 shares
assumed outstanding - none............. $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value per share:
authorized - 4,000,000 shares;
shares to be outstanding - as shown(3). -- 2 2 2 3
Paid-in capital.............................. -- 1,424 1,743 2,062 2,427
Less:
Common stock to be acquired by
employee stock ownership plan(4)....... -- (145) (170) (196) (225)
Common stock to be acquired by
restricted stock plan(5)............... -- (72) (85) (98) (112)
Retained earnings - substantially restricted 2,667 2,667 2,667 2,667 2,667
Accumulated other comprehensive income,
net of tax................................ 142 142 142 142 142
-------- --------- -------- --------- ---------
Total stockholders' equity................... $ 2,809 $ 4,019 $ 4,299 $ 4,580 $ 4,902
======== ========= ======== ========= =========
</TABLE>
----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to
15% to reflect changes in market and financial conditions following the
commencement of the conversion.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. Any withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
24
<PAGE>
(3) Reflects the issuance of the shares of common stock to be sold in the
conversion. No effect has been given to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. See
"Pro Forma Data" and "Management - Benefits - Other Stock Benefit
Plans."
(4) Assumes that 8.0% of the common stock issued in the conversion will be
purchased by the employee stock ownership plan, which is reflected as a
reduction from stockholders' equity. The employee stock ownership plan
shares will be purchased with funds loaned to the employee stock
ownership plan by CBCT Bancshares, Inc. See "Pro Forma Data" and
"Management - Benefits -Employee Stock Ownership Plan."
(5) CBCT Bancshares, Inc. intends to adopt the restricted stock plan and to
submit such plan to stockholders at an annual or special meeting of
stockholders held at least six months following the completion of the
conversion. If the plan is approved by stockholders, CBCT Bancshares,
Inc. intends to contribute sufficient funds to the restricted stock
plan to enable the plan to purchase a number of shares of common stock
equal to up to 4.0% of the common stock issued in the conversion.
Assumes that stockholder approval has been obtained and that the shares
have been purchased in the open market at the purchase price. However,
in the event CBCT Bancshares, Inc. issues authorized but unissued
shares of common stock to the restricted stock plan in the amount of
4.0% of the common stock issued in the conversion, the voting interests
of existing stockholders would be diluted by approximately 3.8%. The
shares are reflected as a reduction of stockholders' equity. See "Pro
Forma Data" and "Management - Benefits - Other Stock Benefit Plans."
25
<PAGE>
COMMUNITY BANK
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At March 31, 2000, Community Bank exceeded all of the regulatory
capital requirements applicable to it. The table sets forth the historical
regulatory capital of Community Bank at March 31, 2000 and the pro forma
regulatory capital of Community Bank after giving effect to the conversion,
based upon the sale of the number of shares shown in the table. The pro forma
regulatory capital amounts reflect the receipt by Community Bank net stock
proceeds, which would increase tangible capital to up to 10.0% of assets, minus
expenses and the amounts to be loaned to the employee stock ownership plan. The
pro forma risk-based capital amounts assume the investment of the net proceeds
received by Community Bank in assets which have a risk-weight of 20% under
applicable regulations, as if such net proceeds had been received and so applied
at December 31, 1999. See also, "How We Are Regulated - CBCT Bancshares, Inc."
for a discussion of the regulatory capital requirements applicable to the
Company.
<TABLE>
<CAPTION>
Midpoint of Maximum of Maximum, as adjusted,
Minimum of 212,500 Shares 244,375 Shares of 281,031 Shares
Historical at 180,625 Shares Sold at Sold at Sold at
March 31, 2000 at $10.00 per Share $10.00 per Share $10.00 per Share $10.00 per Share
-------------- -------------- ------------- -------------- --------------
Amount Percent(1)Amount Percent Amount Percent Amount Percent Amount Percent
------ ---- ------ ----- ------ ----- ------- ----- ------- ----
(Dollars in Thousands)
Capital under generally accepted
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
accounting principles.................. $2,809 6.9% $4,090 9.8% $4,348 10.3% $4,348 10.3% $4,348 10.3%
====== ==== ====== ===== ====== ===== ======= ===== ======= ====
Tier 1 leverage capital................... $2,667 6.6% $3,948 9.4% $4,206 10.0% $4,206 10.0% $4,206 10.0%
Tier 1 capital requirement................ 1,621 4.0 1,672 4.0 1,682 4.0 1,682 4.0 1,682 4.0
------ ---- ------ ----- ------ ----- ------- ----- ------- ----
Excess................................. $1,046 2.6% $2,276 5.4% $2,524 6.0% $2,524 6.0% $2,524 6.0%
====== ==== ====== ===== ====== ===== ======= ===== ======= ====
Tier 1 risk adjusted capital.............. $2,667 12.6% $3,948 18.4% $4,206 19.5% $4,206 19.5% $4,206 19.5%
Tier 1 risk adjusted capital requirement.. 849 4.0 859 4.0 861 4.0 861 4.0 861 4.0
------ ---- ------ ----- ------ ----- ------- ----- ------- ----
Excess................................. $1,818 8.6% $3,089 14.4% $3,345 15.5% $3,345 15.5% $3,345 15.5%
====== ==== ====== ===== ====== ===== ======= ===== ======= ====
Risk-based capital........................ $2,968 14.0% $4,249 19.8% $4,507 20.9% $4,507 20.9% $4,507 20.9%
Risk-based capital requirement............ 1,697 8.0 1,718 8.0 1,722 8.0 1,722 8.0 1,722 8.0
------ ---- ------ ----- ------ ----- ------- ----- ------- ----
Excess................................. $1,271 6.0% $2,531 11.8% $2,785 12.9% $2,785 12.9% $2,785 12.9%
====== ==== ====== ===== ====== ===== ======= ===== ======= ====
----------------
<FN>
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
</FN>
</TABLE>
26
<PAGE>
COMMUNITY BANK'S CONVERSION
The board of directors of Community Bank and the Texas Savings and Loan
Department have approved the plan of conversion. The Texas Savings and Loan
Department approval is subject to approval of the plan of conversion by our
members and to the satisfaction of other conditions imposed by the Texas Savings
and Loan Department. Texas Savings and Loan Department approval does not
constitute a recommendation or endorsement of the plan of conversion.
General
On December 14, 1999, we adopted a plan of conversion, pursuant to
which we will convert from a Texas-chartered mutual savings bank to a
Texas-chartered stock savings bank and at the same time become a wholly owned
subsidiary of CBCT Bancshares, Inc. The conversion will include adoption of the
proposed stock charter and bylaws, which will authorize us to issue capital
stock. Under the plan, Community Bank common stock is being sold to CBCT
Bancshares, Inc. and CBCT Bancshares, Inc. common stock is being offered to our
eligible depositors and borrowers, the employee stock ownership plan, directors,
officers and employees, other members, and then to the public. The conversion
will be accounted for at historical cost in a manner similar to a pooling of
interests. The Federal Reserve Board has approved CBCT Bancshares, Inc.'s
application to become a bank holding company and to acquire all of the Community
Bank's common stock to be issued in the conversion.
The shares of CBCT Bancshares, Inc. common stock are first being
offered in a subscription offering to holders of subscription rights. To the
extent shares of common stock remain available after the subscription offering,
shares may be offered in a direct community offering on a best efforts basis
through Keefe, Bruyette & Woods, Inc. in such a manner as to promote a wide
distribution of the shares. The direct community offering, if any, may commence
with, at any time during, or as soon as practicable after the commencement of
the subscription offering. Shares not subscribed for in the subscription
offering and direct community offering may be offered for sale on a best efforts
basis in a public offering conducted by Keefe, Bruyette & Woods, Inc. We have
the right, in our sole discretion, to accept or reject, in whole or in part, any
orders to purchase shares of common stock received in the direct community
offering and the public offering. See "- Offering of CBCT Bancshares, Inc.
Common Stock."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of conversion. See "- Limitations on
Stock Purchases."
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time following approval of the plan at the meeting of our members that will be
required to complete the sale of shares being offered in the conversion. If
delays are experienced, significant changes may occur in the estimated offering
range with corresponding changes in the offering price and the net proceeds to
be realized by us from the sale of the shares. In the event the conversion is
terminated, we will charge all conversion expenses against current income and
any funds collected by us in the offering will be promptly returned, with
interest, to each subscriber.
27
<PAGE>
Our Reasons for the Corporate Change
As a mutual institution, Community Bank has no authority to issue
shares of capital stock and consequently has no access to market sources of
equity capital. Only by generating and retaining earnings from year to year is
Community Bank able to increase its capital position.
As a stock corporation upon completion of the conversion, Community
Bank will be organized in the form used by commercial banks, most major
corporations and a majority of savings institutions. The ability to raise new
equity capital through the issuance and sale of Community Bank's or CBCT
Bancshares, Inc.'s capital stock will allow Community Bank the flexibility to
increase its capital position more rapidly than by accumulating earnings and at
times deemed advantageous by the board of directors of Community Bank. It will
also support future growth and expanded operations, including increased lending
and investment activities, as business and regulatory needs require. The ability
to attract new capital also will help Community Bank address the needs of the
communities it serves and enhance its ability to make acquisitions or expand
into new businesses. The acquisition alternatives available to Community Bank
are quite limited as a mutual institution. After the conversion, Community Bank
will have increased ability to merge with other institutions and CBCT
Bancshares, Inc. may acquire control of other stock savings institutions and
retain the acquired institution as a separate subsidiary of CBCT Bancshares,
Inc. CBCT Bancshares, Inc. has no current plans in this regard. Finally, the
ability to issue capital stock will enable Community Bank to establish stock
compensation plans for directors, officers and employees, giving them equity
interests in CBCT Bancshares, Inc. and greater incentive to improve its
performance. For a description of the stock compensation plans which will be
adopted by us in connection with the conversion, see "Management."
After considering the advantages and disadvantages of the conversion,
as well as applicable fiduciary duties and alternative transactions, the board
of directors of Community Bank approved the conversion as being in the best
interests of Community Bank and equitable to its account holders.
Effects of the Conversion
General. The conversion will have no effect on Community Bank's present
business of accepting deposits and investing its funds in loans and other
investments permitted by law. The conversion will not result in any change in
the existing services provided to depositors and borrowers, or in our existing
office, management and staff. Community Bank will continue to be subject to
regulation, supervision and examination by the Texas Savings and Loan Department
and the FDIC.
Deposits and Loans. Each holder of a deposit account in Community Bank
at the time of the conversion will continue as an account holder in Community
Bank after the conversion, and the conversion will not affect the deposit
balance, interest rate or other terms of such accounts. Each account will be
insured by the FDIC to the same extent as before the conversion. Depositors in
Community Bank will continue to hold their existing certificates, passbooks and
other evidence of their accounts. The conversion will not affect the loan terms
of any borrower from Community Bank. The amount, interest rate, maturity,
security for and obligations under
28
<PAGE>
each loan will remain as they existed prior to the conversion. See "-- Voting
Rights" and "--Depositors' Rights if We Liquidate" below for a discussion of the
effects of the conversion on the voting and liquidation rights of the depositors
of Community Bank.
Continuity. During the conversion process, the normal business of
Community Bank of accepting deposits and making loans will continue without
interruption. Following completion of the conversion, Community Bank will
continue to be subject to regulation by the Texas Savings and Loan Department,
and FDIC insurance of accounts will continue without interruption. After the
conversion, Community Bank will continue to provide services for depositors and
borrowers under current policies and by its present management and staff.
The board of directors presently serving Community Bank will serve as
the board of directors of Community Bank after the conversion. The initial
members of the board of directors of CBCT Bancshares, Inc. will consist of the
individuals currently serving on the board of directors of Community Bank. After
the conversion, the voting stockholders of CBCT Bancshares, Inc. will elect
approximately one-third of CBCT Bancshares, Inc.'s directors annually. All
current officers of Community Bank will retain their positions with Community
Bank after the conversion.
Voting Rights. After completion of the conversion, depositor and
borrower members will have no voting rights in Community Bank or CBCT
Bancshares, Inc. and, therefore, will not be able to elect directors of
Community Bank or CBCT Bancshares, Inc. or to control their affairs. Currently
these rights are held by depositors and borrowers of Community Bank. After the
conversion, voting rights in CBCT Bancshares, Inc. will be vested exclusively in
the stockholders of CBCT Bancshares, Inc., which will own all of the stock of
Community Bank. Each holder of common stock will be entitled to vote on any
matter to be considered by the stockholders of CBCT Bancshares, Inc., subject to
the provisions of CBCT Bancshares, Inc.'s articles of incorporation.
Depositor's Rights if We Liquidate. We have no plans to liquidate,
either before or after the completion of the conversion. However, if there
should ever be a complete liquidation of Community Bank, either before or after
conversion, deposit account holders would receive the protection of insurance by
the FDIC up to applicable limits. In addition, liquidation rights before and
after the conversion would be as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of
the complete liquidation of Community Bank, each holder of a deposit
account would receive his or her pro rata share of any assets of
Community Bank remaining after payment of claims of all creditors
(including the claims of all depositors in the amount of the withdrawal
value of their accounts). Each holder's pro rata share of the remaining
assets, if any, would be in the same proportion of the assets as the
balance in his or her deposit account was to the aggregate balance in
all our deposit accounts at the time of liquidation.
29
<PAGE>
Liquidation Rights in Proposed Converted Institution. After conversion,
each deposit account holder, in the event of the complete liquidation
of Community Bank, would have a claim of the same general priority as
the claims of all our other general creditors in addition to the
protection of FDIC insurance up to applicable limits. Therefore, except
as described below, the deposit account holder's claim would be solely
in the amount of the balance in his or her deposit account plus accrued
interest. A deposit account holder would have no interest in the assets
of Community Bank above that amount, if any.
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for
the benefit of eligible account holders (i.e., eligible depositors at
September 30, 1998) and supplemental account holders (i.e., eligible
depositors at June 30, 2000). Each eligible account holder and
supplemental eligible account holder, if he or she continues to
maintain his or her deposit account with Community Bank, would be
entitled upon the complete liquidation of Community Bank after
conversion, to an interest in the liquidation account prior to any
payment to stockholders. Each eligible account holder would have an
initial interest in the liquidation account for each deposit account
held with Community Bank on the qualifying date, September 30, 1998.
Each supplemental eligible account holder would have a similar interest
as of that qualifying date, June 30, 2000. The liquidation account will
be an off-balance sheet memorandum account which will not be reflected
on the Bank's or CBCT Bancshares, Inc.'s published financial
statements.
The interest as to each deposit account would be in the same proportion
of the total liquidation account as the balance of the deposit account
on the qualifying dates was to the aggregate balance in all the deposit
accounts of eligible account holders and supplemental eligible account
holders on the qualifying dates. However, if the amount in the deposit
account on any annual closing date (December 31) is less than the
amount in the account on the respective qualifying dates, then the
interest in this special liquidation account would be reduced at that
time by an amount proportionate to any reduction, and the interest
would cease to exist if the deposit account was closed. The interest in
the special liquidation account will never be increased despite any
increase in the related deposit account after the respective qualifying
dates.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders were
satisfied would be distributed to CBCT Bancshares, Inc. as the sole
stockholder of Community Bank.
Tax Effects of the Conversion. Community Bank has received an opinion
from its special counsel, Silver, Freedman & Taff, L.L.P., Washington, D.C., as
to the material federal income tax consequences of the conversion to Community
Bank and CBCT Bancshares, Inc., and as to the generally applicable material
federal income tax consequences of the conversion on Community Bank's account
holders and to persons who purchase common stock in the offering.
30
<PAGE>
The opinion provides that, among other things:
o Community Bank's adoption of a charter in stock form will
qualify as a tax-free reorganization under Internal Revenue
Code of 1986, as amended, Section 368(a)(1)(F);
o no gain or loss will be recognized by Community Bank solely as
a result of the conversion to stock form;
o no gain or loss will be recognized by Community Bank's account
holders upon the issuance to them of accounts in Community
Bank, in stock form, immediately after the conversion, in the
same dollar amounts and on the same terms and conditions as
their accounts at Community Bank immediately prior to the
conversion;
o the tax basis of each account holder's interest in the
liquidation account received in the conversion will be equal
to the value, if any, of that interest on the date and at the
time of the conversion;
o the tax basis of the common stock purchased in the conversion
will be equal to the amount paid therefor; increased, in the
case of common stock acquired pursuant to the exercise of
subscription rights, by the fair market value, if any, of such
subscription rights;
o the holding period of the common stock purchased pursuant to
the exercise of subscription rights will commence upon the
exercise of such holder's subscription rights and, in all
other cases, the holding period of purchased common stock will
commence on the date following the date of such purchase; and
o gain or loss will be recognized by account holders upon the
receipt or exercise of subscription rights in the conversion,
but only to the extent the subscription rights are deemed to
have value, as discussed below.
The opinion of Silver, Freedman & Taff, L.L.P. is based in part upon,
and subject to the continuing validity in all material respects through the date
of the conversion of various representations of Community Bank and upon
assumptions and qualifications, including that the conversion is completed in
the manner and according to the terms provided in the plan of conversion. This
opinion is also based upon the Internal Revenue Code, regulations now in effect
or proposed, current administrative rulings and practice and judicial authority,
all of which are subject to change and any change may be made with retroactive
effect. Unlike private letter rulings received from the IRS, an opinion is not
binding upon the IRS and there can be no assurance that the IRS will not take a
position contrary to the positions reflected in this opinion, or that this
opinion will be upheld by the courts if challenged by the IRS.
31
<PAGE>
Community Bank has also obtained an opinion from outside tax advisors
that the income tax effects of the conversion under Texas tax laws will be
substantially the same as described above with respect to federal income tax
laws.
CBCT Bancshares, Inc. and Community Bank have received a letter from
Ferguson & Company, stating its belief that the subscription rights do not have
any value, based on the fact that these rights are acquired by the recipients
without cost, are nontransferable and of short duration, and give the recipients
the right only to purchase the common stock at a price equal to its estimated
fair market value, which will be the same price as the purchase price for the
unsubscribed shares of common stock. If the subscription rights granted to
eligible subscribers are deemed to have an ascertainable value, receipt of these
rights would be taxable probably only to those eligible subscribers who exercise
the subscription rights, either as a capital gain or ordinary income, in an
amount equal to such value, and CBCT Bancshares, Inc. and Community Bank could
recognize gain on any distribution. Eligible subscribers are encouraged to
consult with their own tax advisor as to the tax consequences in the event that
subscription rights are deemed to have an ascertainable value. Unlike private
rulings, the letter of Ferguson & Company is not binding on the IRS, and the IRS
could disagree with conclusions reached in the letter. In the event of any
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
How We Determined Our Price and the Number of Shares to be Issued in the Stock
Offering
The plan of conversion requires that the purchase price of the common
stock must be based on the appraised pro forma market value of CBCT Bancshares,
Inc. and Community Bank, as determined on the basis of an independent valuation.
Community Bank has retained Ferguson & Company to make this valuation. For its
services in making this appraisal, Ferguson & Company's fees and out-of-pocket
expenses are estimated to be $17,500. Community Bank has agreed to indemnify
Ferguson & Company and any employees of Ferguson & Company who act for or on
behalf of Ferguson & Company in connection with the appraisal against any and
all loss, cost, damage, claim, liability or expense of any kind, including
claims under federal and state securities laws, arising out of any misstatement
or untrue statement of a material fact or an omission to state a material fact
in the information supplied by Community Bank to Ferguson & Company, unless
Ferguson & Company is determined to be negligent or otherwise at fault.
An appraisal has been made by Ferguson & Company in reliance upon the
information contained in this prospectus, including the financial statements.
Ferguson & Company also considered the following factors, among others:
o the present and projected operating results and financial
condition of CBCT Bancshares, Inc. and Community Bank and the
economic and demographic conditions in Community Bank's
existing marketing areas;
o historical, financial and other information relating to
Community Bank;
32
<PAGE>
o a comparative evaluation of the operating and financial
statistics of Community Bank with those of other similarly
situated publicly traded thrift holding companies; the
aggregate size of the offering of the common stock;
o the impact of the conversion on Community Bank's net worth and
earnings potential;
o the proposed dividend policy of CBCT Bancshares, Inc. and
Community Bank; and
o the trading market for securities of comparable institutions
and general conditions in the market for such securities.
In its review of the appraisal provided by Ferguson & Company, the board of
directors reviewed the methodologies and the appropriateness of the assumptions
used by Ferguson & Company in addition to the factors listed above, and the
board of directors believes that these assumptions were reasonable.
On the basis of the foregoing, Ferguson & Company has advised CBCT
Bancshares, Inc. and Community Bank that in its opinion, dated April 19, 2000,
the estimated pro forma market value of the common stock on a fully converted
basis ranged from a minimum of $1.8 million to a maximum of $2.4 million with a
midpoint of $2.1 million. The board of directors of Community Bank determined
that the common stock should be sold at $10.00 per share. Based on the estimated
offering range and the purchase price, the number of shares of common stock that
CBCT Bancshares, Inc. will issue will range from between 180,625 shares and
244,375 shares, with a midpoint of 212,500 shares. The estimated offering range
may be amended with the approval of the Texas Savings and Loan Department and
the FDIC, if required, or if necessitated by subsequent developments in the
financial condition of CBCT Bancshares, Inc. and Community Bank or market
conditions generally, or to fill the order of the employee stock ownership plan.
In the event the estimated offering range is updated to amend the value of the
common stock below $1.8 million or above $2.8 million, which is the maximum of
the estimated offering range, as adjusted by 15%, a new appraisal will be filed
with the Texas Savings and Loan Department and the FDIC.
Based upon market and financial conditions, in the event CBCT
Bancshares, Inc. receives orders for common stock in excess of $2.4 million (the
maximum of the estimated offering range) and up to $2.8 million (the maximum of
the estimated offering range, as adjusted by 15%), CBCT Bancshares, Inc. may be
required by the Texas Savings and Loan Department and the FDIC to accept all
such orders. No assurances, however, can be made that CBCT Bancshares, Inc. will
receive orders for common stock in excess of the maximum of the estimated
offering range or that, if these orders are received, that all orders will be
accepted because CBCT Bancshares, Inc.'s final valuation and number of shares to
be issued are subject to the receipt of an updated appraisal from Ferguson &
Company which reflects an increase in the valuation and the approval of the
increase by the Texas Savings and Loan Department and the FDIC. There is no
obligation or understanding on the part of management to take and/or pay for any
shares in order to complete the conversion.
33
<PAGE>
Ferguson & Company's valuation is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
these shares. Ferguson & Company did not independently verify the consolidated
financial statements and other information provided by Community Bank, nor did
Ferguson & Company value independently the assets or liabilities of Community
Bank. The valuation considers Community Bank as a going concern and should not
be considered as an indication of the liquidation value of Community Bank.
Moreover, because this valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing common stock in the
offerings will thereafter be able to sell such shares at prices at or above the
purchase price or in the range of the valuation described above.
Prior to completion of the conversion, the maximum of the estimated
offering range may be increased up to 15% and the number of shares of common
stock may be increased to 281,031 shares to reflect changes in market and
financial conditions, without the resolicitation of subscribers. See "--
Limitations on Stock Purchases" as to the method of distribution and allocation
of additional shares that may be issued in the event of an increase in the
estimated offering range to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the conversion may be completed
unless prior to such completion Ferguson & Company confirms that nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the aggregate value of the common stock to be
issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of CBCT Bancshares, Inc. and Community Bank.
If this confirmation is not received, CBCT Bancshares, Inc. may cancel the
conversion, extend the offering period and establish a new estimated offering
range and/or estimated price range, extend, reopen or hold a new offering or
take any other action the Texas Savings and Loan Department or the FDIC may
permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the purchase price is not below
the minimum or more than 15% above the maximum of the estimated offering range.
In the event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated offering
range or more than 15% above the maximum of such range, purchasers will be
resolicited and be permitted to continue their orders, in which case they will
need to reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at Community Bank's passbook rate of interest, or be permitted to
modify or rescind their subscriptions. Any change in the estimated offering
range must be approved by the Texas Savings and Loan Department and the FDIC. If
the number of shares of common stock issued in the conversion is increased due
to an increase of up to 15% in the estimated offering range to reflect changes
in market or financial conditions, persons who subscribed for the maximum number
of shares will be given the opportunity to subscribe for the adjusted maximum
number of shares. See "-- Limitations on Stock Purchases."
34
<PAGE>
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and CBCT Bancshares, Inc.'s pro forma net income
and stockholders' equity on a per share basis while increasing pro forma net
income and stockholders' equity on an aggregate basis. A decrease in the number
of shares of common stock would increase both a subscriber's ownership interest
and CBCT Bancshares, Inc.'s pro forma net income and stockholders' equity on a
per share basis while decreasing pro forma net income and stockholders' equity
on an aggregate basis. See "Risk Factors - We intend to grant stock options and
restricted stock to the board and management following the change in structure
and stock offering which could further reduce your voting interest" and "Pro
Forma Data."
Copies of the appraisal report of Ferguson & Company, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Community Bank and the other locations specified under "Additional
Information."
Subscription Offering and Subscription Rights
Under the plan of conversion, rights to subscribe for the purchase of
common stock have been granted to the following persons in the following order
of descending priority:
o depositors of Community Bank as of the close of business on
September 30, 1998 ("Eligible Account Holders"),
o tax-qualified employee plans, ("Tax-Qualified Employee
Plans"),
o depositors of Community Bank as of the close of business on
June 30, 2000 ("Supplemental Eligible Account Holders"),
o certain borrowers and depositors of Community Bank, as of the
close of business on July 22, 2000, other than Eligible
Account Holders or Supplemental Eligible Account Holders
("Other Members") and
o directors, officers and employees of Community Bank.
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of conversion and as described below under "-- Limitations
on Stock Purchases."
Preference Category No. 1: Eligible Account Holders. Each Eligible
Account Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $100,000 or 10,000 shares of common stock;
35
<PAGE>
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is
the amount of the qualifying deposit of the Eligible Account
Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders in Community Bank in
each case as of the close of business on September 30, 1998,
the "Eligibility Record Date," subject to the overall purchase
limitations.
See "-- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unfilled pro rata in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of qualifying deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. For example, if an Eligible Account Holder
with an unfilled subscription has qualifying deposits totaling $100, and the
total amount of qualifying deposits for Eligible Account Holders with unfilled
subscriptions was $1,000, then the number of shares that may be allocated to
fill this Eligible Account Holder's subscription would be 10% of the shares
remaining available, up to the amount subscribed for.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of Community Bank or
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in the
year preceding September 30, 1998.
Preference Category No. 2: Tax-Qualified Employee Plans. The Employee
Stock Ownership Plan, a tax-qualified plan and the only tax-qualified employee
plan that is expected to purchase shares in the conversion, shall be entitled to
receive, without payment therefor, second priority, nontransferable subscription
rights to purchase up to 10% of common stock, provided that individually or in
the aggregate these plans, other than that portion of the plans which is
self-directed, shall not purchase more than 10% of the shares of common stock,
including any increase in the number of shares of common stock after the date
hereof as a result of an increase of up to 15% in the maximum of the estimated
offering range. The employee stock ownership plan intends to purchase 8.0% of
the shares of common stock issued in the conversion, or 14,450 shares, 19,550
shares and 22,483 shares based on the minimum, maximum and 15% above the maximum
of the estimated offering range, respectively. Subscriptions by any of the
Tax-Qualified Employee Plans will not be aggregated with shares of common stock
purchased directly by or which are otherwise attributable to any other
participants in the subscription and direct community offerings, including
subscriptions of any of Community Bank's directors,
36
<PAGE>
officers, employees or associates thereof. Subscription rights received pursuant
to this category shall be subordinated to all rights received by Eligible
Account Holders to purchase shares pursuant to preference category No.1. See
"Management - Benefits -- Employee Stock Ownership Plan."
Preference Category No. 3: Supplemental Eligible Account Holders. To
the extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the Tax-Qualified Employee Plans,
each Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of common stock in an amount equal to the greater of:
(1) $100,000 or 10,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is
the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator of which is the
total amount of qualifying deposits of all Supplemental
Eligible Account Holders in Community Bank in each case on the
close of business on June 30, 2000, the "Supplemental
Eligibility Record Date," subject to the overall purchase
limitations.
See "-- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation, including the number of shares, if any, allocated in accordance with
preference category No.1, equal to the lesser of the number of shares subscribed
for or 100 shares. Thereafter, any shares remaining available will be allocated
among the Supplemental Eligible Account Holders whose subscriptions remain
unfilled pro rata in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of qualifying deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
Preference Category No. 4: Other Members. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible
Account Holders, each Member as of the voting record date or July 22, 2000
("Other Member") shall receive, without payment therefor, fourth priority,
nontransferable subscription rights to subscribe for shares of CBCT Bancshares,
Inc. common stock, up to the greater of $100,000 or 10,000 shares of common
stock or one-tenth of one percent of the total offering of shares of common
stock in the offerings, subject to the overall purchase limitations. See "--
Limitations on Stock Purchases."
37
<PAGE>
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in
excess of the total number of shares of common stock offered in the conversion,
available shares will be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the close of business on July
22, 2000, the date for determining voting members entitled to vote at the
special meeting, which we call the voting record date, bears to the total number
of votes on the voting record date of all subscribing Other Members on that
date. This number of votes shall be determined based on Community Bank's mutual
charter and bylaws in effect on the date of approval by members of the plan of
conversion.
Preference Category No. 5: Directors, officers and employees. To the
extent that there are sufficient shares remaining after satisfaction of all
subscriptions by Eligible Account Holders, the Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders and Other Members, then directors,
officers and employees of Community Bank as of the date of the commencement of
the subscription offering shall be entitled to receive, without payment, fifth
priority, nontransferable subscription rights to purchase in this category an
aggregate of up to 25% of the common stock being offered. The maximum amount of
shares which may be purchased under this category by any person is $100,000 of
common stock. The ability of directors, officers and employees to purchase
common stock under this category is in addition to rights which are otherwise
available to them under the plan of conversion as they may fall within higher
priority categories, and the plan of conversion generally allows these persons
to purchase in the aggregate up to 35% of common stock sold in the offerings.
See "-- Limitations on Stock Purchases."
In the event of an oversubscription in this category, the shares
available shall be allocated pro rata among all of the subscribing directors,
officers and employees in this category.
Expiration Date for the Subscription Offering. The subscription
offering will expire at noon, Smithville, Texas time, on September 6, 2000, the
"subscription expiration date," unless extended for up to 45 days or for such
additional periods by CBCT Bancshares, Inc. and Community Bank as may be
approved by the Texas Savings and Loan Department. The subscription offering may
not be extended beyond September 13, 2002. Subscription rights which have not
been exercised prior to the subscription expiration date, unless extended, will
become void.
CBCT Bancshares, Inc. and Community Bank will not execute orders until
at least the minimum number of shares of common stock, 180,625 shares, have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the subscription expiration date, unless this period
is extended with the consent of the Texas Savings and Loan Department and the
FDIC, all funds delivered to Community Bank pursuant to the subscription
offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be canceled. If an extension beyond the 45-day
period following the subscription expiration date is granted, CBCT Bancshares,
Inc. and Community Bank will notify subscribers of the extension of time and of
any rights of subscribers to modify or rescind their subscriptions.
38
<PAGE>
Direct Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, the Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members and
directors, officers and employees of Community Bank, we anticipate we will offer
shares pursuant to the plan of conversion to members of the general public who
receive a prospectus, with a preference given to natural persons residing in
Bastrop County. These natural persons are referred to as preferred subscribers.
Persons, together with an associate or group of persons acting in concert with
these persons, may not subscribe for or purchase more than $100,000 of common
stock in the direct community offering, if any. CBCT Bancshares, Inc. and
Community Bank may limit total subscriptions in the direct community offering so
as to assure that the number of shares available for the public offering may be
up to a specified percentage of the number of shares of common stock.
Finally, CBCT Bancshares, Inc. and Community Bank may reserve shares
offered in the direct community offering for sales to institutional investors.
The opportunity to subscribe for shares of common stock in any direct community
offering will be subject to the right of CBCT Bancshares, Inc. and Community
Bank, in their sole discretion, to accept or reject any orders in whole or in
part from any person either at the time of receipt of an order or as soon as
practicable following the subscription expiration date.
The direct community offering, if any, shall be for a period of not
less than 20 days nor more than 45 days unless extended by CBCT Bancshares, Inc.
and Community Bank, and shall commence concurrently with, during or promptly
after the subscription offering.
In the event of an oversubscription for shares in the direct community
offering, shares may be allocated, to the extent shares remain available, first
to each preferred subscriber whose order is accepted by CBCT Bancshares, Inc.
Thereafter, shares may be allocated to cover the orders of any other person
subscribing for shares in the direct community offering so that each person
subscribing for shares may receive 1,000 shares, if available, and thereafter on
an equal number of shares basis per order until all orders have been filled.
Public Offering
As a final step in the conversion, the plan of conversion provides
that, if feasible, all shares of common stock not purchased in the subscription
offering and direct community offering may be offered for sale to selected
members of the general public in a public offering through an underwriter. We
call this the public offering. It is expected that the public offering will
commence as soon as practicable after termination of the subscription offering
and the direct community offering, if any. CBCT Bancshares, Inc. and Community
Bank, in their sole discretion, have the right to reject orders in whole or in
part received in the public offering. Neither Keefe, Bruyette & Woods, Inc. nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of common stock in the public offering; however, Keefe, Bruyette & Woods,
Inc. has agreed to use its best efforts in the sale of shares in the public
offering.
39
<PAGE>
The price at which common stock is sold in the public offering will be
the same price at which shares are offered and sold in the subscription offering
and direct community offering. No person, by himself or herself, or with an
associate or group of persons acting in concert, may purchase more than $100,000
of common stock in the public offering, subject to the maximum purchase
limitations. See "-- Limitations on Stock Purchases."
Keefe, Bruyette & Woods, Inc. may enter into agreements with
broker-dealers to assist in the sale of the shares in the public offering,
although no agreements of this kind exist as of the date of this prospectus. No
orders may be placed or filled by or for a selected dealer during the
subscription offering. After the close of the subscription offering, Keefe,
Bruyette & Woods, Inc. will instruct selected dealers as to the number of shares
to be allocated to each selected dealer. Only after the close of the
subscription offering and upon allocation of shares to selected dealers may
selected dealers take orders from their customers.
During the subscription offering and direct community offering,
selected dealers may only solicit indications of interest from their customers
to place orders with CBCT Bancshares, Inc. as of an order date for the purchase
of shares of CBCT Bancshares, Inc. common stock. If Keefe, Bruyette & Woods,
Inc. and Community Bank believe that not enough indications of interest and
orders have been received in the subscription offering and direct community
offering to consummate the conversion, Keefe, Bruyette & Woods, Inc. will
request, as of the order date, selected dealers to submit orders to purchase
shares for which they have previously received indications of interest from
their customers. Selected dealers will send confirmations of the orders to such
customers on the next business day after the order date. Selected dealers will
debit the accounts of their customers on the settlement date, which date will be
three business days from the order date.
Customers who authorize selected dealers to debit their brokerage
accounts are required to have the funds for payment in their account on but not
before the settlement date. On the settlement date, selected dealers will
deposit funds to the account established by Community Bank for each selected
dealer. Each customer's funds forwarded to Community Bank, along with all other
accounts held in the same title, will be insured by the FDIC up to $100,000 in
accordance with applicable FDIC regulations. After payment has been received by
Community Bank from selected dealers, funds will earn interest at Community
Bank's passbook rate until the completion or termination of the conversion.
Funds will be promptly returned, with interest, in the event the conversion is
not consummated as described above.
The public offering will be completed within 90 days after the
termination of the subscription offering, unless extended by Community Bank with
the approval of the Texas Savings and Loan Department. See "-- How We Determined
Our Price and the Number of Shares to be Issued in the Stock Offering" above for
a discussion of rights of subscribers, if any, in the event an extension is
granted.
Persons Who are Not Permitted to Participate in the Stock Offering
Community Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the plan of
40
<PAGE>
conversion reside. However, Community Bank is not required to offer stock in the
subscription offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which:
o the number of persons otherwise eligible to subscribe for
shares under the plan of conversion who reside in such
jurisdiction is small;
o the granting of subscription rights or the offer or sale of
shares of common stock to these persons would require any of
CBCT Bancshares, Inc. and Community Bank or their officers,
directors or employees, under the laws of that jurisdiction,
to register as a broker, dealer, salesman or selling agent or
to register or otherwise qualify its securities for sale in
that jurisdiction or to qualify as a foreign corporation or
file a consent to service of process in that jurisdiction; or
o the registration, qualification or filing in the judgment of
Community Bank would be impracticable or unduly burdensome for
reasons of cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, Community Bank will base its decision as to whether or not to offer the
common stock in that state on a number of factors, including but not limited to
the size of accounts held by account holders in the state, the cost of
registering or qualifying the shares or the need to register Community Bank, its
officers, directors or employees as brokers, dealers or salesmen.
Limitations on Stock Purchases
In addition to the limitations previously described, the plan of
conversion includes the following limitations on the number of shares of CBCT
Bancshares, Inc. common stock which may be purchased in the conversion:
(1) No fewer than 25 shares of common stock may be purchased, to
the extent shares are available;
(2) Except for the Tax-Qualified Employee Plans, and the Eligible
Account Holders and Supplemental Eligible Account Holders
whose subscription rights are based upon the amount of their
deposits, the maximum number of shares of CBCT Bancshares,
Inc. common stock subscribed for or purchased in all
categories of the offerings by any person, together with
associates of and groups of persons acting in concert with
such persons, as defined below, shall not exceed $100,000 or
10,000 shares of common stock; and
(3) No more than 25% of the total number of shares offered for
sale in the subscription offering may be purchased by
directors, officers and employees of Community Bank in the
fifth priority category in the subscription offering. No more
than 35% of the total number of shares offered for sale in the
conversion may be purchased by directors and officers of
Community Bank and their
41
<PAGE>
associates in the aggregate, excluding purchases by the
Tax-Qualified Employee Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
Community Bank, the boards of directors of CBCT Bancshares, Inc. and Community
Bank may, in their sole discretion, increase the individual amount permitted to
be subscribed for to a maximum of 9.99% of the number of shares sold in the
conversion, provided that orders for shares exceeding 5% of the shares being
offered in the conversion shall not exceed, in the aggregate, 10% of the shares
being offered in the conversion. Requests to purchase additional shares of
common stock will be allocated by the boards of directors on a pro rata basis
giving priority in accordance with the preference categories set forth in this
prospectus.
Tax-Qualified and Non-Tax Qualified Employee Plans will not be deemed
to be an associate of any director or officer of Community Bank or CBCT
Bancshares, Inc., to the extent provided in the plan of conversion. The
determination of whether a person is an associate of another person or a group
is acting in concert shall be made solely by the board of directors of Community
Bank or officers delegated by the board of directors and may be based on any
evidence upon which the board or delegatee chooses to rely.
Marketing Arrangements
CBCT Bancshares, Inc. and Community Bank have retained Keefe, Bruyette
& Woods, Inc. as financial and marketing advisor to consult with and to advise
Community Bank, and to assist CBCT Bancshares, Inc., on a best efforts basis, in
the distribution of the shares of common stock in the subscription offering and
direct community offering. The services that Keefe, Bruyette & Woods, Inc. will
provide include, but are not limited to:
o training the employees of Community Bank who will perform
ministerial functions in the subscription offering and direct
community offering regarding the mechanics and regulatory
requirements of the stock offering process;
o managing the stock information centers by assisting interested
stock subscribers and by keeping records of all stock orders;
o preparing marketing materials; and
o assisting in the solicitation of proxies from Community Bank's
members for use at the special meeting.
For its services, Keefe, Bruyette & Woods, Inc. will receive a
management fee of $25,000 and a success fee of $50,000. The success fee paid to
Keefe, Bruyette & Woods, Inc. will be in addition to the amount of the
management fee. In the event that selected dealers are used to assist in the
sale of shares of CBCT Bancshares, Inc. common stock in the direct community
offering, these dealers will be paid a fee of up to 5.5% of the total purchase
price of the shares sold by such dealers. CBCT Bancshares, Inc. and Community
Bank have agreed to indemnify Keefe,
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<PAGE>
Bruyette & Woods, Inc. against claims or liabilities, including liabilities
under the Securities Act of 1933, as amended, and will contribute to payments
Keefe, Bruyette & Woods, Inc. may be required to make in connection with any
such claims or liabilities.
Sales of shares of CBCT Bancshares, Inc. common stock will be made by
registered representatives affiliated with Keefe, Bruyette & Woods, Inc. or by
the broker-dealers managed by Keefe, Bruyette & Woods. Keefe, Bruyette & Woods,
Inc. has undertaken that the shares of CBCT Bancshares, Inc. common stock will
be sold in a manner which will ensure that the distribution standards of the
Nasdaq Stock Market will be met. A stock information center will be established
at Community Bank's office in Smithville, Texas. CBCT Bancshares, Inc. will rely
on Rule 3a4-1 of the Securities Exchange Act of 1934 and sales of CBCT
Bancshares, Inc. common stock will be conducted within the requirements of this
rule, so as to permit officers, directors and employees to participate in the
sale of CBCT Bancshares, Inc. common stock in those states where the law
permits. No officer, director or employee of CBCT Bancshares, Inc. or Community
Bank will be compensated directly or indirectly by the payment of commissions or
other remuneration in connection with his or her participation in the sale of
common stock. Keefe, Bruyette & Woods, Inc. has not prepared a report or opinion
constituting recommendations or advice to Community Bank or CBCT Bancshares,
Inc. in connection with the conversion. In addition, Keefe, Bruyette & Woods,
Inc. has expressed no opinion as to the prices at which CBCT Bancshares, Inc.
common stock to be offered in the conversion may trade.
Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before the subscription expiration date, unless extended, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed
any later than five days prior to that date or hand delivered any later than two
days prior to that date. Execution of the order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at Community Bank, which may
be given by completing the appropriate blanks in the order form, must be
received by Community Bank by noon, Smithville, Texas time, on the subscription
expiration date, unless extended. In addition, CBCT Bancshares, Inc. and
Community Bank will require a prospective purchaser to execute a certification
in the form required by applicable regulations in connection with any sale of
common stock. Order forms which are not received by this time or are executed
defectively or are received without full payment, or appropriate withdrawal
instructions, are not required to be accepted. In addition, Community Bank will
not accept orders submitted on photocopied or facsimiled order forms nor order
forms unaccompanied by an executed certification form. Community Bank has the
right to waive or permit the correction of incomplete or improperly executed
forms, but does not represent that it will do so. Once received, an executed
order form may not be modified, amended or rescinded without the consent of
Community Bank, unless the conversion has not
43
<PAGE>
been completed within 45 days after the end of the subscription offering, or
this period has been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members and
directors, officers and employees are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date, September 30, 1998, or the Supplemental Eligibility Record Date,
June 30, 2000, and depositors and borrowers as of the close of business on the
voting record date, July 22, 2000, must list all accounts on the stock order
form giving all names in each account and the account numbers.
Payment for subscriptions may be made:
o by check or money order;
o by authorization of withdrawal from deposit accounts
maintained with Community Bank (including a certificate of
deposit); or
o in cash, if delivered in person at any full-service banking
office of Community Bank, although we request that you
exchange cash for a check with any of our tellers.
No wire transfers will be accepted. Interest will be paid on payments
made by cash, check or money order at our then-current passbook rate from the
date payment is received until completion of the conversion. If payment is made
by authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rate, but may not be used by the subscriber until all of CBCT
Bancshares, Inc. common stock has been sold or the plan of conversion is
terminated, whichever is earlier.
If a subscriber authorizes Community Bank to withdraw the amount of the
purchase price from his deposit account, Community Bank will do so as of the
effective date of the conversion. Community Bank will waive any applicable
penalties for early withdrawal from certificate accounts.
In the event of an unfilled amount of any subscription order, Community
Bank will make an appropriate refund or cancel an appropriate portion of the
related withdrawal authorization, after completion of the conversion. If for any
reason the conversion is not consummated, purchasers will have refunded to them
all payments made, with interest, and all withdrawal authorizations will be
canceled in the case of subscription payments authorized from accounts at
Community Bank.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering and direct
44
<PAGE>
community offering, if all shares are sold, or upon completion of the public
offering if shares remain to be sold in the offering. In the event that, after
the completion of the subscription offering, the amount of shares to be issued
is increased above the maximum of the estimated valuation range included in this
prospectus, the Tax-Qualified and Non-Tax-Qualified Employee Plans will be
entitled to increase their subscriptions by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range, provided that the subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRAs may use the assets of their IRAs to
purchase shares of CBCT Bancshares, Inc. common stock in the subscription
offering and direct community offering. ERISA provisions and IRS regulations
require that officers, directors and 10% stockholders who use self-directed IRA
funds to purchase shares of common stock in the offerings make the purchases for
the exclusive benefit of the IRAs. IRAs maintained at Community Bank are not
self-directed IRAs and any interested parties wishing to use IRA funds for stock
purchases may do so, but are advised to contact the stock information center at
(512) 237-3247 for additional information.
The records of Community Bank will be deemed to control with respect to
all matters related to the existence of subscription rights and one's ability to
purchase shares of common stock in the subscription offering.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to applicable rules and regulations, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the plan of conversion or the shares of common stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for that person's account. Each person exercising subscription
rights will be required to certify that the person is purchasing shares solely
for the person's own account and that the person has no agreement or
understanding regarding the sale or transfer of the shares. Regulations also
prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of common
stock prior to the completion of the conversion.
Community Bank will refer to the Texas Savings and Loan Department and
the FDIC any situations that it believes may involve a transfer of subscription
rights and will not honor orders believed by it to involve the transfer of such
rights.
Delivery of Certificates
Certificates representing common stock issued in the conversion will be
mailed by CBCT Bancshares, Inc.'s transfer agent to the persons entitled thereto
at the addresses of the persons appearing on the stock order form as soon as
practicable following completion of the conversion. Any certificates returned as
undeliverable will be held by CBCT Bancshares, Inc. until claimed by persons
legally entitled to them or otherwise disposed of in accordance with applicable
law.
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<PAGE>
Until certificates for common stock are available and delivered to subscribers,
they may not be able to sell the shares of common stock for which they have
subscribed, even though trading of the common stock may have commenced.
Required Approvals
Various regulatory approvals are required in order to consummate the
conversion. The Texas Savings and Loan Department has approved the plan of
conversion and it is anticipated that the FDIC will issue a letter to the Bank
expressing its non-objection to the conversion, subject to approval by Community
Bank's members and other standard conditions. CBCT Bancshares, Inc.'s holding
company application with the Federal Reserve Board has been approved.
CBCT Bancshares, Inc. is required to make filings with state securities
regulatory authorities in connection with the issuance of CBCT Bancshares, Inc.
common stock in the offerings.
Restrictions on Purchase or Transfer of Shares After the Conversion
All shares of common stock purchased in connection with the conversion
by a director or an executive officer of CBCT Bancshares, Inc. and Community
Bank will be subject to a restriction that the shares not be sold for a period
of one year following the conversion except in the event of the death of the
director or officer or pursuant to a merger or similar transaction approved by
the Texas Savings and Loan Department. Each certificate for restricted shares
will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within this time
period of any certificate or record ownership of the shares other than as
provided above is a violation of the restriction. Any shares of common stock
issued at a later date within this one year period as a stock dividend, stock
split or otherwise with respect to the restricted stock will be subject to the
same restrictions.
Purchases of common stock of CBCT Bancshares, Inc. by directors,
executive officers and their associates during the three-year period following
completion of the conversion may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the Texas
Savings and Loan Department. This restriction does not apply, however, to
negotiated transactions involving more than 1% of CBCT Bancshares, Inc.'s
outstanding common stock or to purchases of stock pursuant to an employee stock
benefit plan. In addition, under FDIC rules CBCT Bancshares, Inc. is restricted
from repurchasing more than 5% of its shares in the first year after the
conversion.
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PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of Community Bank's directors,
advisory directors and executive officers both individually and as a group, the
proposed purchases of common stock, assuming sufficient shares are available to
satisfy their subscriptions. The amounts include shares that may be purchased
through individual retirement accounts and by associates.
<TABLE>
<CAPTION>
At the Minimum At the Maximum
of the Estimated of the Estimated
Offering Range Offering Range
----------------------- ------------------------
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
---------------------------------- ----------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Vernon L. Richards (1) $ 20,000 2,000 1.10% 2,000 0.82%
Clinton M. Wright (1) 1,000 100 0.06 100 0.04
Mike C. Maney 100,000 10,000 5.54 10,000 4.09
Gordon N. Fowler 75,000 7,500 4.15 7,500 3.07
James A. Cowan 100,000 10,000 5.54 10,000 4.09
Rodney E. Langer 25,000 2,500 1.38 2,500 1.02
Brad M. Hurta 30,000 3,000 1.66 3,000 1.22
Georgina Chronis 1,500 150 0.08 150 0.06
Barry W. Hannath 100,000 10,000 5.54 10,000 4.09
Lynn D. Frerich 5,000 500 0.28 500 0.20
Nancy M. Janecek 2,000 200 0.11 200 0.08
All directors, advisory directors
and executive officers as a group $ 459,500 45,950 25.44% 45,950 18.80%
11 persons)
</TABLE>
(1) Mr. Richards and Ms. Wright have retired, effective March 2000.
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<PAGE>
Consolidated Statements of Income
Three Months
Ended March 31, Years Ended December 31,
-------------- -------------------------
2000 1999 1999 1998 1997
------- ------ ------- ------ -------
(Dollars in Thousands)
Interest and dividend income:
Interest and fees on loans $ 489 443 $ 1,878 $1,889 $ 1,768
Debt securities:
Taxable 225 193 1,002 513 649
Tax-exempt -- -- 9 11 12
Interest on deposits in banks 35 49 131 146 68
Dividends 8 7 30 30 28
------ ----- ------- ------ -------
Total interest and dividend income 757 692 3,050 2,589 2,525
------ ----- ------- ------ -------
Interest expense:
Deposits (338) (387) (1,542) (1,545) (1,477)
Federal Home Loan Bank advances (99) (50) (360) (15) (7)
------ ----- ------- ------ -------
Total interest expense (437) (437) (1,902) (1,560) (1,484)
------ ----- ------- ------ -------
Net interest income 320 255 1,148 1,029 1,041
Provision for loan losses (7) -- -- -- (3)
------ ----- ------- ------ -------
Net interest income after
provision for loan losses 313 255 1,148 1,029 1,038
------ ----- ------- ------ -------
Noninterest income:
Service charges and other income 30 27 113 83 71
Net gains on sales of loans 5 25 51 51 --
Net gains (losses) on sales of
securities (866) -- 76 30 --
------ ----- ------- ------ -------
Total noninterest income (loss) (831) 52 240 164 71
------ ----- ------- ------ -------
Noninterest expenses:
Salaries and employee benefits (138) (100) (454) (349) (366)
Occupancy and equipment expenses (65) (39) (183) (138) (103)
Other operating expenses (119) (105) (512) (403) (378)
------ ----- ------- ------ -------
Total noninterest expenses (322) (244) (1,149) (890) (847)
Income (loss) before income taxes (840) 63 239 303 262
Income tax benefit (expense) 293 (20) (71) (91) (86)
------ ----- ------- ------ -------
Net income (loss) $ (547) $ 43 $ 168 $ 212 $ 176
====== ===== ======= ====== =======
Notes to consolidated financial statements form an integral part of these
statements.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in understanding the
financial condition and results of operations of Community Bank. The discussion
and analysis does not include any comments relating to CBCT Bancshares, Inc.,
since CBCT Bancshares, Inc. has no significant operations. The information
contained in this section should be read in conjunction with the consolidated
financial statements and the accompanying notes to consolidated financial
statements and the other sections contained in the prospectus.
Community Bank's results of operations depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, which principally consist of loans and mortgage-backed
and investment securities, and interest expense on interest-bearing liabilities,
which principally consist of deposits and borrowings. Community Bank's results
of operations also are affected by the level of its noninterest income and
expenses and income tax expense.
Forward-Looking Statements
This prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of CBCT
Bancshares, Inc. and Community Bank. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar words. Our ability to predict
results or the actual effect of future plans or strategies is uncertain. Factors
which could have a material adverse effect on our operations include, but are
not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market areas and accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
you should not rely too much on these statements.
Management Strategy
Our strategy is to operate as an independent, retail oriented financial
institution dedicated to serving the needs of customers in our market area. Our
commitment is to provide a broad range of products and services to meet the
needs of our customers. As part of this commitment, we are looking to increase
our emphasis on commercial and consumer business products and services. In
addition, we are continually looking at cost-effective ways to expand our market
area.
49
<PAGE>
Financial highlights of our strategy include:
o CONTINUING AS A DIVERSIFIED LENDER. We have been successful in
diversifying our loan portfolio to reduce our reliance on any
one type of loan. Since 1997, we have increased the percentage
of our loan portfolio consisting of consumer and commercial
real estate and commercial business loans from 26% to 44% as
of March 31, 2000. After the conversion, we intend to continue
to increase our emphasis on offering commercial and consumer
business products and services due to their higher yields and
shorter terms to maturity as compared to one- to four-family
residential loans. Management has not set any predetermined
goals or percentages regarding our loan composition subject to
any regulatory limitations. This diversification, however,
increases the potential credit risk of our loan portfolio. See
"Risk Factors - Our loan portfolio possesses increased risk
due to our substantial percentage of consumer and commercial
real estate and commercial business loans."
o CONTINUING OUR STRONG ASSET QUALITY. Since 1995, our ratio of
non-performing assets to total assets has not exceeded .42%
and at March 31, 2000 this ratio was 0.00%.
o CONTINUING OUR STRONG CAPITAL POSITION. As a result of our
conservative risk management and consistent profitability, we
have historically maintained a strong capital position. At
March 31, 2000, our ratio of equity to total assets was 6.9%.
o EFFORTS TO INCREASE TRANSACTION ACCOUNTS. As part of our
emphasis on commercial and consumer business products and
services, we are attempting to increase our non-certificate
deposit accounts, including transaction accounts. During 1999
and the first quarter of 2000, our non-certificate deposit
accounts increased from $6.0 million to $6.9 million.
All of these are designed to improve our profitability.
Asset and Liability Management and Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally have
longer maturities than our deposits. Accordingly, our results of operations,
like those of other financial institutions, are impacted by changes in interest
rates and the interest rate sensitivity of our assets and liabilities. The risk
associated with changes in interest rates and our ability to adapt to these
changes is known as interest rate risk and is our most significant market risk.
As of March 31, 2000, our one-year cumulative interest rate sensitivity gap as a
percentage of total assets was a negative 20.97%, which generally means if
interest rates rise, our net interest income could be reduced because interest
paid on interest-bearing liabilities, including deposits and borrowings, could
increase more quickly than interest received on interest-earning assets,
including loans and mortgage-backed and investment securities. In addition,
rising interest rates may hurt our income because they may reduce the
50
<PAGE>
demand for loans and the value of our mortgage-related and investment
securities. In the alternative, if interest rates decrease, our net interest
income would increase.
How We Measure Our Risk of Interest Rate Changes. As part of our
attempt to manage our exposure to changes in interest rates and comply with
applicable regulations, we monitor our interest rate risk. In monitoring
interest rate risk we continually analyze and manage assets and liabilities
based on their payment streams and interest rates, the timing of their
maturities, and their sensitivity to actual or potential changes in market
interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we have
adopted investment/asset and liability management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability policies of Community Bank which are implemented by the
investment/asset and liability management committee. The investment/asset and
liability management committee is chaired by Mike Maney and is comprised of
members of our board of directors and senior management.
The purpose of the investment/asset and liability management committee
is to communicate, coordinate and control asset/liability management consistent
with our business plan and board approved policies. The investment/asset and
liability management committee establishes and monitors the volume and mix of
assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs. The objectives are to manage
assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The investment/asset and liability management committee generally meets
on a monthly basis to review, among other things, economic conditions and
interest rate outlook, current and projected liquidity needs and capital
position, anticipated changes in the volume and mix of assets and liabilities
and interest rate risk exposure limits versus current projections pursuant to
net present value of portfolio equity analysis and income simulations. The
investment/asset and liability management committee recommends appropriate
strategy changes based on this review. The President or his designee is
responsible for reviewing and reporting on the effects of the policy
implementations and strategies to the board of directors, at least quarterly.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
o originating adjustable rate mortgage loans and commercial
business loans,
o originating shorter-term consumer loans,
o managing our deposits to establish stable deposit
relationships,
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<PAGE>
o acquiring longer-term borrowings at fixed interest rates, when
appropriate, to offset the negative impact of longer-term
fixed rate loans in our loan portfolio, and
o selling to the secondary market fixed-rate residential loans
originated by us.
At times, depending on the level of general interest rates, the
relationship between long-and short-term interest rates, market conditions and
competitive factors, the investment/asset and liability management committee may
determine to increase our interest rate risk position somewhat in order to
maintain our net interest margin. In the future, we intend to increase our
emphasis on the origination of relatively short-term and/or adjustable rate
loans.
During the three months ended March 31, 2000, in order to improve our
interest rate risk position, we sold most of our existing investment securities
portfolio. This resulted in a significant improvement in our one-year cumulative
interest rate sensitivity gap, from a negative 46.03% at December 31, 1999 to a
negative 20.97% at March 31, 2000. It also increased our flexibility to invest
in other assets, including investment securities and loans, at current yields
and shorter terms to maturity.
The investment/asset and liability management committee regularly
reviews interest rate risk by forecasting the impact of alternative interest
rate environments on net interest income and market value of portfolio equity,
which is defined as the net present value of an institution's existing assets,
liabilities and off-balance sheet instruments, and evaluating such impacts
against the maximum potential changes in net interest income and market value of
portfolio equity that are authorized by the board of directors of Community
Bank.
The following table presents the contractual maturities and repricing
data of Community Bank's interest-earning assets and interest-bearing
liabilities, commonly called a "gap" report, as of March 31, 2000. It gives an
indication of our interest rate sensitivity position; however, it is used by
management in conjunction with other reports to determine plans and strategies
for managing our interest rate risk. The gap report has limitations; for
example, all savings, NOW, and money market deposit accounts are shown as
maturing within the 90 day timeframe; in reality, these deposits are relatively
stable and do not turn over or reprice as frequently as the static gap report
suggests. In addition, no prepayment assumptions have been made with regard to
interest-earning assets.
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<PAGE>
Rate Sensitive Not Rate
--------------------------- Sensitive
Within 90 days 1 to 3 Over
90 days to 1 Year Years 3 Years Total
-------- --------- -------- ------- -------
(Dollars in Thousands)
Interest-Earning Assets:
Deposits in banks $ 14,948 $ -- $ -- $ -- $14,948
Investment securities 17 35 72 274 398
Loans 1,815 3,209 4,370 13,500 22,894
Other interest-earning assets -- -- -- 504 504
-------- -------- -------- ------- -------
Total interest-earning assets 16,780 3,244 4,442 $14,278 $38,744
-------- -------- -------- ======= =======
Interest-Bearing Liabilities:
Passbook savings accounts 1,766 -- -- $ -- $ 1,739
NOW and money market accounts 4,469 -- -- -- 4,469
Time deposit accounts 6,213 12,896 3,515 938 23,589
Federal Home Loan Bank advances 1,237 1,967 3,953 -- 7,157
-------- -------- -------- ------- -------
Total interest-bearing liabilities 13,685 14,863 7,468 $ 938 $36,954
-------- -------- -------- ======= =======
Interest sensitivity gap $ 3,095 $(11,619) $ (3,026)
======== ======== ========
Cumulative gap $ 3,095 $ (8,524) $(11,550)
======== ======== ========
Ratio of interest-earning assets
to interest-bearing liabilities 122.62% 21.83% 59.48%
======== ======== ========
Cumulative gap as a percentage
of total assets 7.61% (20.97)% (28.41)%
======== ======== ========
As with any method of measuring interest rate risk, shortcomings are
inherent in the method of analysis presented in the foregoing tables. For
example, although assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate mortgage loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, if interest rates change, expected rates of prepayments on loans and
early withdrawals from certificates could deviate significantly from those
assumed in calculating the table.
Changes in Financial Condition from December 31, 1999 to March 31, 2000
General. Total assets decreased by approximately $2.2 million, to
$40.66 million at March 31, 2000 from $42.83 million at December 31, 1999. The
decrease in assets consisted of a decrease in investment securities and
interest-bearing deposits in banks partially offset by an increase in loans. The
decrease in investment securities, to $398,000 from $16.3 million, occurred in
the first quarter of 2000 as most investment securities owned were sold to take
advantage of a restructuring opportunity in the investment portfolio. The
restructuring was an asset/liability management decision designed to improve
future interest rate risk exposure.
53
<PAGE>
Proceeds from the sales of investment securities were being temporarily held in
interest-bearing correspondent bank accounts at the end of the quarter. The
increase in loans, to $22.7 million from $21.7 million, was attributed to the
continued growth of loan demand in the Bank's market areas.
The allowance for loan losses at March 31, 2000 increased to $206,000,
or 0.90% of total loans, from the December 31, 1999 amount of $199,000, or 0.91%
of total loans. The increase in dollar amount was due to loan loss provisions
exceeding loan charge-offs during the period. Non-performing loans were $9,000
at March 31, 2000, compared to $68,000 at December 31, 1999.
Total deposits decreased by approximately $1.9 million, to $30.4
million at March 31, 2000 from $32.4 million at December 31, 1999. The decrease
was attributed to a reduction in the interest rate paid on deposits during the
first quarter of 2000, resulting in an outflow of higher interest-bearing
deposits. Federal Home Loan Bank advances decreased by $235,000 as a result of
repayments on the advances.
Total equity decreased by $190,000, to $2.8 million at March 31, 2000
from $3.0 million at December 31, 1999. The decrease resulted primarily from the
sale of investment securities, discussed above, in order to improve our interest
rate risk position. As of December 31, 1999, the book value of our existing
available for sale investment securities portfolio reflected a $215,000 net
unrealized loss. Due to an increase in market rates of interest during the March
31, 2000 quarter, the actual recognized loss resulting from these sales was
$866,000, or $572,000 on an after-tax basis. This exceeded the existing net
unrealized loss reflected in total equity as of December 31, 1999 by $357,000 on
an after-tax basis. The $142,000 net unrealized gain on securities available for
sale as of March 31, 2000 reflects the appreciated value of our remaining
investment securities as of March 31, 2000.
Changes in Financial Condition from December 31, 1998 to December 31, 1999
General. Our total assets increased by $3.0 million or 7.5% to $42.8
million at December 31, 1999 compared to $39.8 million at December 31, 1998. The
increase was primarily due to a $2.8 million or 20.7% increase in securities,
which totaled $16.3 million at December 31, 1999 compared to $13.5 million at
December 31, 1998.
Loans. Our net loan portfolio increased from $20.9 million at December
31, 1998 to $21.7 million at December 31, 1999. The increase in the loan
portfolio over this time period was due to increased loan demand caused by our
efforts to expand Community Bank's commercial and consumer lending. The loan
portfolio increased in all categories, except the one-to four-family category,
with the largest increase occurring in the commercial real estate category, from
$2.9 million at December 31, 1998 to $3.7 million at December 31, 1999.
Securities. Available for sale securities amounted to $16.3 million at
December 31, 1999, and $7.5 million at December 31, 1998. The increase of $8.8
million or 117% was primarily due to the reclassification of securities held to
maturity into the available-for-sale
54
<PAGE>
category and the purchase of additional securities partially match-funded by
Federal Home Loan Bank advances, to increase income.
Liabilities. Our total liabilities increased $3.3 million or 9.0% to
$39.8 million at December 31, 1999 compared to $36.5 million at December 31,
1998. This increase was due primarily to an increase in Federal Home Loan Bank
advances of $3.4 million, principally to fund the increase in securities and
loans.
Equity. Total equity amounted to $3.0 million at December 31, 1999 and
$3.3 million or 8.4% at December 31, 1998. The decrease in equity over the
period was due to a change in accumulated other comprehensive income from a gain
of $300,000 at December 31, 1998 to a loss of $215,000 at December 31, 1999,
partially offset by net income of $168,000 during 1999. The changes in
accumulated other comprehensive income resulted from net unrealized losses in
our available-for-sale securities due to an increase in interest rates.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
55
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------------------------- ---------------------------------------------
2000 1999 1999 1998
----------------------- ---------------------- ---------------------- ----------------------
Interest Interest Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ------- ------ ------- ------- ------ -------- ------- ------ ------- ------- -----
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits in banks $ 4,527 $ 35 3.09% $ 3,824 $ 49 5.13% $ 2,633 $ 131 4.98% $ 2,537 $ 146 5.75%
Investment securities 12,381 225 7.27 12,549 193 6.15 16,505 1,011 6.13 8,752 524 5.99
Loans 22,418 490 8.74 21,026 443 8.43 21,500 1,878 8.73 21,322 1,889 8.86
Other interest-earning assets 503 7 5.57 534 7 5.24 544 30 5.51 494 30 6.07
------- ----- ---- ------- ---- ---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 39,829 757 7.60 37,933 692 7.30 41,182 3,050 7.41 33,105 2,589 7.82
----- ---- ---- ---- ------ ---- ------ ----
Noninterest-earning assets 1,748 1,710 2,130 2,228
------- ------- ------- -------
Total assets $41,577 $39,643 $43,312 $35,333
======= ======= ======= =======
Interest-Bearing Liabilities:
Passbook savings accounts $ 1,730 $ 12 2.77 $ 1,344 $ 8 2.38 $ 1,520 $ 41 2.70 $ 1,241 $ 34 2.74
NOW and money market accounts 5,510 31 2.25 4,673 31 2.65 5,015 133 2.65 4,091 113 2.76
Time deposit accounts 24,114 295 4.89 26,310 348 5.29 26,305 1,368 5.20 25,662 1,398 5.48
Federal Home Loan Bank advances 7,275 99 5.44 4,444 50 4.50 6,716 360 5.36 296 15 5.07
------- ----- ---- ------- ---- ---- ------- ------ ---- ------- ------ ----
Total interest-bearing liabilities 38,629 437 4.53 36,771 437 4.75 39,556 1,902 4.81 31,290 1,560 4.99
----- ---- ---- ---- ------ ---- ------ ----
Noninterest-bearing liabilities
and equity 2,948 2,872 3,756 4,043
------- ------- ------- -------
Total liabilities and equity $41,577 $39,643 $43,312 $35,333
======= ======= ======= =======
Net interest income $320 $255 $1,148 $1,029
==== ==== ====== ======
Net interest spread(1) 3.07% 2.55% 2.60% 2.83%
==== ==== ==== ====
Net interest margin(2) 3.21% 2.69% 2.79% 3.11%
==== ==== ==== ====
<FN>
---------------------
(1) The net interest spread is the difference between the average rate on
interest-earning assets and interest-bearing liabilities.
(2) The net interest margin is net interest income divided by average earning
assets.
</FN>
</TABLE>
56
<PAGE>
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate,
and (2) changes in rate, which are changes in rate multiplied by the old volume.
Changes attributable to both rate and volume which cannot be segregated have
been allocated proportionately to the change due to volume and the change due to
rate.
Three Months Ended March 31, Years Ended December 31,
2000 vs. 1999 1999 vs. 1998
-------------------------- ------------------------
Increase Increase
(decrease) (decrease)
due to Total due to Total
------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ --------- -------- ----- --------
(Dollars in Thousands)
Interest income:
Deposits in banks $ 9 $(23) $ (14) $ 6 $ (21) $ (15)
Investment securities (3) 35 32 464 23 487
Loans 29 18 47 16 (27) (11)
Other earning assets (1) 1 -- 3 (3) --
---- ---- ----- ---- ----- -----
Total interest income 34 31 65 489 (28) 461
---- ---- ----- ---- ----- -----
Interest expense:
Savings accounts 2 2 4 7 -- 7
NOW and money market accounts 6 (6) -- 26 (6) 20
Time deposit accounts (29) (24) (53) 35 (65) (30)
Federal Home Loan Bank advances 32 17 49 326 19 345
---- ---- ----- ---- ----- -----
Total interest expense 11 (11) -- 394 (52) 342
---- ---- ----- ---- ----- -----
Net interest income $ 23 $ 42 $ 65 $ 95 $ 24 $119
==== ==== ===== ==== ===== =====
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<PAGE>
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings and borrowings and the resultant interest rate spreads at
March 31, 2000.
At March 31,
2000
----------------------
(Dollars in Thousands)
Weighted average yield on:
Deposits in banks................................... 6.19%
Investment securities............................... 5.73%
Loans............................................... 8.64%
FHLB stock.......................................... 5.57%
Combined weighted average yield on
interest-earning assets........................... 7.65%
Weighted average rate paid on:
Savings accounts.................................... 2.50%
NOW and money market accounts....................... 2.72%
Time deposit accounts............................... 4.86%
Federal Home Loan Bank advances..................... 5.44%
Combined weighted average rate paid on
interest-bearing liabilities...................... 4.56%
Spread................................................. 3.09%
Comparison of Results of Operations for the Three Months Ended March 31, 1999
and 2000
Net Interest Income. Net interest income for the quarter ended March
31, 2000 was $313,000, compared to $255,000 for the quarter ended March 31,
1999. The increase was attributed to higher yields and volumes of loans as well
as a decrease in the rate paid on deposits, partially offset by an increase in
average interest-bearing liabilities.
Other Operating Income. Other operating income for the quarter ended
March 31, 2000 included an $866,000 realized loss on the sale of available for
sale investment securities during the first quarter of 2000, with no
corresponding loss in the March 31, 1999 quarter.
Other Operating Expense. Operating expenses for the quarter ended March
31, 2000 were $322,000, compared to $244,000 for the quarter ended March 31,
1999. Compensation expense increased as a result of increased personnel.
Occupancy and equipment expenses also increased as a result of increased
depreciation charges for computer and other equipment.
For the quarter ended March 31, 2000, Community Bank had a net loss of
$547,000, compared to net income of $43,000 for the quarter ended March 31,
1999. The loss for the March 31, 2000 quarter was primarily due to the realized
losses on the sale of investment securities during that quarter.
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<PAGE>
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1999
General. We reported net income of $168,000 for the year ended December
31, 1999 and $212,000 for the year ended December 31, 1998.
Net Interest Income. Net interest income increased $119,000 or 11.6% to
$1.1 million for 1999 compared to 1998, reflecting a $461,000 or 17.8% increase
in interest income, partially offset by a $342,000 or 21.9% increase in interest
expense. Our interest rate spread decreased to 2.60% for 1999 compared to 2.83%
for 1998. In addition, the ratio of average interest-earning assets to average
interest-bearing liabilities decreased to 104% for 1999 compared to 106% for
1998.
Interest Income. The increase in interest income during the year ended
December 31, 1999 was primarily due to an increase in the average balance of
interest-earning assets offset by a lower yield. The average balance of the
securities portfolio increased $7.8 million or 88.6% to $16.5 million for 1999
due to the shift of assets from short term money funds to investment securities
and the purchase of securities partially match-funded by Federal Home Loan Bank
advances to increase income. The average yield earned on our interest-earning
assets decreased from 7.82% in 1998 to 7.41% in 1999, primarily due to a general
decrease in market rates of interest.
Interest Expense. The increase in interest expense during the year
ended December 31, 1999 was primarily due to the increase of $6.4 million or
246.9% in the average balance of Federal Home Loan Bank advances, primarily to
fund the increase in securities and, to a lesser extent, loan growth. The
average rate paid on interest-bearing liabilities decreased from 4.99% in 1998
to 4.81% in 1999, due to a general decrease in market rates of interest,
partially offset by an increase in the average rate paid on advances from 5.07%
in 1998 to 5.36% in 1999.
Provision for Loan Losses. For the years ended December 31, 1999 and
1998, there was no provision for loan losses. At December 31, 1999, the ratio of
our allowance for loan losses to non-performing loans was 293%, and the ratio of
our allowance for loan losses to total loans was 0.91%. See "Business of
Community Bank - Asset Quality - Allowance for Loan Losses."
Other Operating Income. Other operating income amounted to $240,000 and
$164,000 for the years ended December 31, 1999 and 1998, respectively. The
increase consisted primarily of a $76,000 net gain from the sale of securities
in 1999 compared to a $30,000 net gain in 1998, as well as a $30,000 increase in
service charges and other income. The increase in service charges and other
income was primarily due to an increase in rental income from third party
brokerage activity.
Other Operating Expenses. Other operating expenses increased $259,000
or 29.1% to $1.1 million for the year ended December 31, 1999 compared to
$890,000 for the year ended December 31, 1998. This increase was primarily due
to a $105,000 or 30.1% increase in compensation and benefits, a $45,000 or 32.6%
increase in occupancy and equipment costs and a $109,000 or 27.0% increase in
other expenses. These increases resulted principally as a result of increased
staffing, occupancy and other expenses related to a proposed new branch, which
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<PAGE>
opened only as a loan production office and was subsequently closed.
Approximately $50,000 was also related to Year 2000 expenses.
Liquidity and Commitments
We are required to maintain minimum levels of investments that qualify
as liquid assets under government 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, we have maintained
liquid assets at levels above the minimum requirements and above levels believed
to be adequate to meet the requirements of normal operations, including
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At March 31, 2000, our
regulatory liquidity ratio, which is our liquid assets as a percentage of
deposits and current borrowings, was 49.92%.
Community Bank's liquidity, represented by cash and cash equivalents
and investment securities, is a product of its operating, investing and
financing activities. Our primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans and mortgage-backed securities,
maturities and sales of investment securities and other short-term investments
and funds provided from operations. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, we invest
excess funds in short-term interest-earning assets, which provide liquidity to
meet lending requirements. We also generate cash through borrowings. We utilize
Federal Home Loan Bank advances to leverage our capital base and provide funds
for our lending and investment activities, and to enhance our interest rate risk
management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. On a longer term basis, we
maintain a strategy of investing in various lending products as described in
greater detail under "Business of Community Bank - Lending Activities." We use
our sources of funds primarily to meet ongoing commitments, to pay maturing time
deposits and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-backed securities and investment securities. At March 31,
2000, the total approved loan origination commitments outstanding amounted to
$2.1 million. At the same date, the unadvanced portion of construction loans was
$470,000. There were no outstanding letters of credit at March 31, 2000. Time
deposits scheduled to mature in one year or less at March 31, 2000, totaled
$19.1 million. Investment and mortgage-backed securities scheduled to mature in
less than one year at March 31, 2000 totaled $52,000. Based on historical
experience, management believes that a significant portion of maturing deposits
will remain with Community Bank. Community Bank anticipates that we will
continue to have sufficient funds, through deposits and borrowings, to meet its
current commitments.
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Capital
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity was $2.8 million at March 31,
2000, or 6.9% of total assets on that date. As of March 31, 2000, we exceeded
all capital requirements of the FDIC and the Texas Savings and Loan Department.
Our regulatory capital ratios at March 31, 2000 were as follows: core capital
6.6%; Tier I risk-based capital, 12.5%; and total risk-based capital, 14.0%. The
regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%
and 10.0%, respectively.
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities structures of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Change in Accountants
On November 1, 1999 our prior auditors, Seidel Schroeder & Company,
were terminated as part of a competitive bid process solely because we had
decided to pursue an initial public offering, and Seidel Schroeder & Company had
no public offering experience. At or about the same time, we engaged Padgett,
Stratemann & Co., L.L.P. to audit our financial statements for the fiscal year
ended December 31, 1999. The decision to change accountants was made with the
approval of our board of directors.
We believe and we have been advised by Seidel Schroeder & Company that
it concurs in such belief that, during its tenure with us, we did not have any
disagreement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Seidel Schroeder & Company would have caused it
to make reference in connection with its report on our financial statements to
the subject matter of the disagreement.
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No report of Seidel Schroeder & Company on our financial statements for
either of the past two fiscal years contained an adverse opinion, a disclaimer
of opinion or a qualification or was modified as to uncertainty, audit, scope or
accounting principles. During such fiscal periods, there were no 'reportable
events' within the meaning of Item 304(a)(1) of Regulation S-B promulgated under
the Securities Act of 1933.
BUSINESS OF CBCT BANCSHARES, INC.
Community Bank is converting to the stock form of organization and will
become a wholly owned subsidiary of CBCT Bancshares, Inc. CBCT Bancshares, Inc.
initially will not be an operating company and, after the conversion, is not
expected to engage in any significant business activity other than to hold the
common stock of Community Bank and the employee stock ownership plan loan, and
to invest the funds retained by it.
CBCT Bancshares, Inc. is not expected to own or lease real or personal
property initially, but will instead use the facilities of Community Bank. At
the present time, CBCT Bancshares, Inc. does not intend to employ any persons
other than officers of Community Bank, but will utilize the support staff of
Community Bank from time to time.
BUSINESS OF COMMUNITY BANK
General
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and a variety
of consumer loans. We also originate commercial real estate and, to a much
lesser extent, construction and commercial business loans.
Our revenues are derived principally from interest on loans and
investment and mortgage-backed securities. We also generate revenue from service
charges and other income.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, NOW and non-interest bearing demand deposit accounts and time deposit
accounts with varied terms ranging from 30 days to 60 months. We solicit
deposits in our primary market area of Bastrop County and we have not accepted
brokered deposits.
Market Area
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We are headquartered in Smithville, Texas, and have one full service
banking office primarily serving Bastrop County, Texas. We also originate loans
in our primary market area and the greater metropolitan Austin, Texas area. See
"-Consumer and Other Lending."
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Lending Activities
General. Our mortgage loans carry either a fixed or an adjustable rate
of interest. Mortgage loans are generally long-term and amortize on a monthly
basis with principal and interest due each month. Our fixed rate one- to
four-family residential loans are originated for sale to the secondary market.
At March 31, 2000, our net loan portfolio totaled $22.7 million, which
constituted 55.8% of our total assets.
Secured loans up to $10,000 may be approved by the consumer loan
officer, up to $25,000 by the vice president of lending and up to $75,000 by the
President. Any secured loan over the individual approval limits must be approved
by the executive committee. Unsecured loans may be approved by these individuals
up to $1,000, $5,000 and $10,000, respectively.
At March 31, 2000, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was approximately $500,000. Our
largest lending relationship to a single borrower or group of related borrowers
consisted of one loan for $500,000 secured by eleven duplexes located in
Smithville, Texas. At March 31, 2000, this loan was current and performing in
accordance with its terms.
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The following table presents information concerning the composition of
Community Bank's loan portfolio in dollar amounts and in percentages as of the
dates indicated.
December 31,
March 31 ------------------------------
2000 1999 1998
-------------- --------------- --------------
Amount Percent Amount Percent Amount Percent
------- ------ ------- ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family residential $12,309 54% $11,627 53% $13,218 63%
Multi-family residential 135 -- 137 1 -- --
------- --- ------- --- ------- ---
Total residential loans 12,444 54 11,764 54 13,218 63
Commercial real estate 3,486 15 4,122 18 2,940 14
Construction loans 1,543 7 1,125 5 864 4
------- --- ------- --- ------- ---
Total real estate loans 17,473 76 17,011 77 17,022 81
------- --- ------- --- ------- ---
Consumer Loans:
Home equity 689 3 568 1 455 2
Automobile loans 2,950 13 3,040 14 2,853 13
Other personal and
installment loans 1,829 8 1,315 6 783 4
------- --- ------- --- ------- ---
Total consumer loans 5,468 24 4,923 21 4,091 19
------- --- ------- --- ------- ---
Unearned discount -- -- (3)
Unamortized loan fees and costs (47) (42) (39)
------- ------- -------
Total loans 22,894 100% 21,892 100% 21,071 100%
=== === ===
Allowance for loan losses (206) (199) (181)
------- ------- -------
Net loans receivable $22,688 $21,693 $20,890
======= ======= =======
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The following schedule illustrates the contractual maturity of
Community Bank's loan portfolio at March 31, 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
possible prepayments or enforcement of due-on-sale clauses.
Over One
One Year Year to Over Five
or Less Five Years Years Total
------ ------- ------ -------
(Dollars in Thousands)
One- to four-family residential loans $2,239 $ 6,909 $3,161 $12,309
All other loans 2,785 6,552 1,295 10,632
------ ------- ------ -------
$5,024 $13,461 $4,456 22,941
====== ======= ======
Unamortized fees and costs (47)
Allowance for loan losses (206)
-------
Net loans $22,688
=======
Of our total loans of $22.7 million at March 31, 2000, approximately
$9.5 million have fixed rates of interest and approximately $13.2 million have
adjustable rates of interest.
One- to Four-Family Residential Real Estate Lending. At March 31, 2000,
one- to four-family residential mortgage loans totaled $12.3 million, or 54% of
our gross loan portfolio. We generally underwrite our one- to four-family loans
based on the applicant's employment and credit history and the appraised value
of the subject property. Presently, we lend up to 90% of the lesser of the
appraised value or purchase price for one- to four-family residential loans. For
loans with a loan-to-value ratio in excess of 80%, we generally require private
mortgage insurance in order to reduce our exposure below 80%. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
We currently originate one- to four-family mortgage loans on either a
fixed- or adjustable-rate basis, as consumer demand dictates. Our pricing
strategy for mortgage loans includes setting interest rates that are competitive
with Freddie Mac and other local financial institutions, and consistent with our
internal needs. Adjustable-rate mortgage, or ARM loans, are offered with either
a one-year, three-year or, to a lesser extent, five-year term to the initial
repricing date. After the initial period, the interest rate for each ARM loan
adjusts on an annual basis. We use the weekly average of the appropriate term
Treasury Bill Constant Maturity to reprice our ARM loans. During the year ended
December 31, 1999, and the three months ended March 31, 2000, we originated $1.4
million and $751,000 of one- to four-family ARM loans and $5.3 million and
$751,000 of one- to four-family fixed rate mortgage loans, respectively.
Fixed-rate loans originated for sale to the secondary market are
secured by one- to four-family residences and have contractual maturities of up
to 30 years, they are generally fully
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amortizing, with payments due monthly. A significant change in the current level
of interest rates could alter the average life of a residential loan in our
portfolio considerably. Our one- to four-family loans do not contain prepayment
penalties and do not permit negative amortization of principal. Most are written
using underwriting guidelines which make them saleable in the secondary market.
Our real estate loans generally contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property.
Our one- to four-family residential ARM loans are fully amortizing
loans with contractual maturities of up to 30 years and payments due monthly.
Our ARM loans generally provide for specified minimum and maximum interest
rates, with a lifetime cap and floor, and a periodic adjustment on the interest
rate over the rate in effect on the date of origination. As a consequence of
using caps, the interest rates on these loans may not be as rate sensitive as is
our cost of funds.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality --Non-Performing
Assets" and "-- Classified Assets." At March 31, 2000, our one- to four-family
ARM loan portfolio totaled $10.1 million, or 44% of our gross loan portfolio. At
that date the fixed-rate one- to four-family mortgage loan portfolio totaled
$2.2 million, or 10% of our gross loan portfolio.
Multi-Family Residential and Commercial Real Estate Lending. We offer a
variety of multi-family residential and commercial real estate loans. These
loans are secured primarily by small retail establishments, rental properties,
small office buildings and storage facilities located in our primary market
area. At March 31, 2000, multi-family residential and commercial real estate
loans totaled $3.6 million or 15% of our gross loan portfolio.
Our currently originated loans secured by multi-family residential and
commercial real estate are originated with an adjustable interest rate. The
interest rate on these loans is generally tied to the prime rate of interest.
Loan-to-value ratios on our multi-family residential and commercial real estate
loans typically do not exceed 70% of the appraised value of the property
securing the loan. These loans typically require monthly payments, are fully
amortizing and have maximum maturities of 20 years.
Loans secured by multi-family residential and commercial real estate
are underwritten based on the income producing potential of the property and the
financial strength of the borrower. The net operating income, which is the
income derived from the operation of the property less all operating expenses,
must be sufficient to cover the payments related to the outstanding debt. We may
require an assignment of rents or leases in order to be assured that the cash
flow from the project will be used to repay the debt. Appraisals on properties
securing multi-family residential and commercial real estate loans are performed
by independent state licensed fee appraisers approved by the board of directors.
See "-- Loan Originations, Purchases, Sales and Repayments."
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Loans secured by multi-family residential and commercial real estate
properties are generally larger and involve a greater degree of credit risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family residential and commercial real estate 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, or if
leases are not obtained or renewed, the borrower's ability to repay the loan may
be impaired. See "- Asset Quality --Non-Performing Loans."
Construction and Development Lending. We originate construction loans
to builders and to individuals for the construction of their residences.
Substantially all of these loans are secured by property located within our
market area or within the greater metropolitan Austin, Texas area. At March 31,
2000, we had $1.5 million in construction and development loans outstanding,
representing 7% of our gross loan portfolio.
Construction and development loans are obtained through continued
business with builders who have previously borrowed from us, from walk-in
customers and through referrals from existing customers and realtors. The
application process includes submission of accurate plans, specifications and
costs of the project to be constructed. These items are used as a basis to
determine the appraised value of the subject property. Loans are based on the
lesser of current appraised value and the cost of construction, including the
land and the building. We generally conduct regular inspections of the
construction project being financed.
Loans to individuals for the construction of their residences may be
either short term construction financing or a construction/permanent loan which
automatically converts to a long term mortgage consistent with our one- to
four-family residential loan products. Loan-to-value ratios on our construction
and development loans typically do not exceed 85% of the appraised value of the
project on an as completed basis. Single family construction loans with a
loan-to-value ratio over 80% require private mortgage insurance.
Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed above regarding commercial real estate loans and tend to be more
sensitive to general economic conditions than many other types of loans. In
addition, payment of interest from loan proceeds can make it difficult to
monitor the progress of a project.
Consumer and Other Lending. Consumer loans generally have shorter terms
to maturity, which reduces our exposure to changes in interest rates, and carry
higher rates of interest than do one- to four-family residential mortgage loans.
In addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities. At
March 31, 2000, our consumer loan portfolio totaled $5.5 million, or 24% of our
gross loan portfolio. We offer a variety of secured consumer loans, including
home equity loans, auto loans, boat and recreational vehicle loans and loans
secured by savings deposits. We
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also offer a limited amount of unsecured loans. We originate our consumer and
commercial business loans in our market area.
Our home equity loans totaled $689,000, and comprised 3% of our gross
loan portfolio at March 31, 2000. These loans may be originated in amounts,
together with the amount of the existing first mortgage, of up to 80% of the
value of the property securing the loan. The term to maturity on our home equity
loans may be up to 20 years.
We originate auto loans, boat loans and recreational vehicle loans on a
direct basis. These loans totaled $3.0 million at March 31, 2000, or 13% of our
gross loan portfolio. Auto, boat and recreational vehicle loans may be written
for up to five years and usually have fixed rates of interest. Loan to value
ratios for automobile loans are up to 100% of the sales price for new autos and
up to 100% of value on used cars, based on valuation from official used car
guides.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles, boats and
recreational vehicles. In these cases, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance. As a result, consumer loan collections are dependent
on the borrower's continuing financial stability and, thus, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy. See
"Risk Factors - Our Loan Portfolio Possesses Increased Risk Due to Our
Substantial Number of Consumer, Commercial and Construction Real Estate and
Commercial Business Loans."
We intend to expand our consumer and other lending in the future to
include commercial business lending. Commercial business loans are loans
extended to finance local businesses and include short term loans to finance
machinery and equipment purchases and inventory.
Unlike residential mortgage loans, commercial business loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on the
success of the business itself (which, in turn, is often dependent in part upon
general economic conditions). Commercial business loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Loan Originations, Purchases, Sales and Repayments
We originate loans through referrals from real estate brokers and
builders, our marketing efforts, and our existing and walk-in customers. While
we originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon customer demand for loans in our market areas. Demand is
affected by local competition and the interest rate environment. During the last
several years, due to low market interest rates, our dollar volume of
fixed-rate, one- to four-family loans has exceeded the dollar volume of the same
type of adjustable-rate loans. From time to time, we sell fixed rate, one- to
four-family residential loans. Furthermore,
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during the past few years, we, like many other financial institutions, have
experienced significant prepayments on loans due to the low interest rate
environment prevailing in the United States.
In periods of economic uncertainty, the ability of financial
institutions, including us, to originate or purchase large dollar volumes of
real estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.
The following table shows the loan origination and repayment activities
of Community Bank for the periods indicated, and includes loans originated for
both our own portfolio and for sale in the secondary market.
Years Ended
Three Months Ended December 31,
March 31, -------------------
2000 1999 1998
------- -------- --------
(Dollars in Thousands)
Total loans, beginning of year...... $21,892 $ 21,071 $ 21,527
Loan originations:
Real estate mortgage loans....... 1,750 9,414 7,450
Consumer loans................... 750 2,405 2,564
Other loans...................... 47 173 194
------- -------- --------
Total loan originations........ 2,547 11,992 10,208
------- -------- --------
Loan repayments and sales........... (1,545) (11,171) (10,664)
------- -------- --------
Total loans, end of period......... $22,894 $ 21,892 $ 21,071
======= ======== ========
Asset Quality
When a borrower fails to make a payment on a mortgage loan on or before
the default date, we mail a delinquency notice to the borrower when the loan is
10 days past due. When the loan is 15 days past due, we mail a subsequent
delinquent notice to the borrower. All delinquent accounts are reviewed by loan
personnel, who attempt to cure the delinquency by contacting the borrower once
the loan is 30 days past due. If the loan becomes 60 days delinquent, the
collector will generally contact by phone or send a personal letter to the
borrower in order to identify the reason for the delinquency. Once the loan
becomes 90 days delinquent, contact with the borrower is made requesting payment
of the delinquent amount in full, or the establishment of an acceptable
repayment plan to bring the loan current. If an acceptable repayment plan has
not been agreed upon, loan personnel will generally refer the account to legal
counsel, with instructions to prepare a notice of intent to foreclose. The
notice of intent to foreclose allows the borrower up to 30 days to bring the
account current. Once the loan becomes 120 days
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delinquent, and an acceptable repayment plan has not been agreed upon, the
collection officer will turn over the account to our legal counsel with
instructions to initiate foreclosure.
For consumer loans a similar process is followed, with the initial
written contact being made once the loan is 7 days past due. Follow-up contacts
are generally on an accelerated basis compared to the mortgage loan procedure.
Delinquent Loans. The following table sets forth our loans delinquent
60 - 89 days by type, number, amount and percentage of type at March 31, 2000.
<TABLE>
<CAPTION>
60 to 89 days past due 90 days and over past due Total over 60 days past due
---------------------- ------------------------- ---------------------------
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:
Residential -- $ -- -- -- $ -- -- -- $ -- --
Commercial -- -- -- -- -- -- -- -- --
Construction -- -- -- -- -- -- -- -- --
Other:
Consumer 6 13 0.30% 3 9 0.21% 9 22 0.56%
Commercial -- -- -- -- -- -- -- -- --
---- ---- ----- ---- ----- ----
Total 6 $ 13 3 $ 9 9 $ 22
==== ==== ===== ==== ===== ====
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more, and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. All loans past due 90 days and over are classified as
non-accrual. On non-accrual loans, interest income is not recognized until
actually collected. At the time the loan is placed on non-accrual status,
interest previously accrued but not collected is reversed and charged against
current income.
Foreclosed assets consist of real estate and other assets which have
been acquired through foreclosure on loans. At the time of foreclosure, assets
are recorded at the lower of their estimated fair value less selling costs or
the loan balance, with any write-down charged against the allowance for loan
losses. Any future write-downs, expenses related to the assets, and any gain or
loss. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates.
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December 31,
March 31, -----------------------
2000 1999 1998 1997
----- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential $ -- $ 60 $ 84 $ 26
Multi-family residential -- -- -- --
Commercial real estate -- -- -- --
Commercial non-real estate -- -- -- --
Consumer -- 1 17 14
----- ---- ---- ----
Total -- 61 101 40
----- ---- ---- ----
Accruing loans past due 90 days and over:
One-to-four family residential -- -- 3 --
Multi-family residential -- -- -- --
Commercial real estate -- -- -- --
Commercial non-real estate -- -- -- --
Consumer 9 7 -- 2
----- ---- ---- ----
Total 9 7 3 2
----- ---- ---- ----
Total non-performing loans 9 68 104 42
Foreclosed assets -- -- -- --
----- ---- ---- ----
Total non-performing assets $ 9 $ 68 $104 $ 42
===== ==== ==== ====
Allowance for loan losses $ 206 $199 $181 $157
===== ==== ==== ====
Coverage of non-performing loans 2,289% 293% 174% 374%
===== ==== ==== ====
Non-performing assets as a
percentage of total assets 0.00% 0.16% 0.26% 0.13%
===== ==== ==== ====
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 2000, there was also an aggregate of
$200,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers have caused management to
have 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. These loans have been considered in
management's determination of the adequacy of our allowance for loan losses.
Classified Assets. Regulations provide for the classification of loans
and other assets, such as debt and equity securities considered by regulators 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 of 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
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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 loan losses in
an amount deemed prudent by management and approved by the board of directors.
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 FDIC, which may
order the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the FDIC and
in accordance with our classification of assets policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets, at March 31, 2000, we had classified $208,000
of our assets as substandard, $0 as doubtful and $1,000 as loss. The total
amount classified represented 7.44% of our equity capital and 0.5% of our assets
at March 31, 2000.
Provision for Loan Losses. The provision for loan losses is charged to
income to bring our allowance for loan losses to a level deemed appropriate by
management based on the factors discussed below under "-- Allowance for Loan
Losses." The provision for loan losses during the three months ended March 31,
2000 and the year ended December 31, 1999 was based on management's review of
such factors which indicated that the allowance for loan losses was adequate to
cover losses inherent in the loan portfolio as of March 31, 2000 and December
31, 1999, respectively.
Allowance for Loan Losses. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
for identified problem loans and portfolio segments and the unallocated
allowance. In addition, the allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loans or pools of
loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
72
<PAGE>
The appropriateness of the allowance is reviewed by management based
upon its evaluation of then-existing economic and business conditions affecting
our key lending areas and other conditions, such as credit quality trends
(including trends in nonperforming loans expected to result from existing
conditions), collateral values, loan volumes and concentrations, specific
industry conditions within portfolio segments and recent loss experience in
particular segments of the portfolio that existed as of the balance sheet date
and the impact that such conditions were believed to have had on the
collectibility of the loan. Senior management reviews these conditions quarterly
in discussions with our senior credit officers. To the extent that any of these
conditions is evidenced by a specifically identifiable problem credit or
portfolio segment as of the evaluation date, management's estimate of the effect
of such condition may be reflected as a specific allowance applicable to such
credit or portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the loss related to this condition
is reflected in the unallocated allowance. The evaluation of the inherent loss
with respect to these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments.
The allowance for loan losses is based on estimates of losses inherent
in the loan portfolio. Actual losses can vary significantly from the estimated
amounts. Our methodology as described permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available.
At March 31, 2000, our allowance for loan losses was $206,000 or 0.90%
of the total loan portfolio and approximately 2,289% of total non-performing
loans. Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in our loan portfolios.
73
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Years Ended December 31,
------- ----------------------------
2000 1999 1998 1997
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding (at end of period) $22,893 $21,892 $21,071 $21,527
======= ======= ======= =======
Average loans outstanding (period to date) $22,418 $21,485 $21,299 $19,901
======= ======= ======= =======
Allowance for loan losses, beginning of period $ 199 $ 181 $ 157 $ 157
Loan charge-offs:
One- to four-family residential -- -- -- --
Multi-family residential -- -- -- --
Commercial real estate -- -- -- --
Construction -- -- -- --
Consumer loans -- (12) -- (3)
Commercial loans -- -- -- --
------- ------- ------- -------
Total loan charge-offs -- (12) -- (3)
------- ------- ------- -------
Loan recoveries:
One- to four-family residential -- 30 24 --
Multi-family residential -- -- -- --
Commercial real estate -- -- -- --
Construction -- -- -- --
Consumer loans -- -- -- --
Commercial loans -- -- -- --
------- ------- ------- -------
Total loan recoveries -- 30 24 --
------- ------- ------- -------
Net loan (charge-offs) recoveries -- 18 24 (3)
Provision charged to operations 7 -- -- 3
------- ------- ------- -------
Allowance for loan losses, end of period $ 206 $ 199 $ 181 $ 157
======= ======= ======= =======
Ratio of net loan charge-offs during the period
to average loans outstanding 0.00% (0.08)% (0.11)% 0.02%
==== ===== ===== ====
Provision as a percentage of average loans 0.03% 0.00 % 0.00 % 0.02%
==== ===== ===== ====
Allowance as a percentage of total loans 0.90% 0.91 % 0.86 % 0.73%
==== ===== ===== ====
</TABLE>
74
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997
--------------------- ------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of
Loans Loans Loans Loans
in Each in Each in Each in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- ------- ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family residential...... $ 54,590 53% $ 52,735 53% $ 57,015 63% $ 58,090 74%
Multi-family residential............. 1,030 1 995 1 -- -- -- --
Commercial real estate............... 18,540 18 17,910 18 12,670 14 9,420 12
Construction loans................... 5,150 5 4,975 5 3,620 4 2,355 3
Home equity.......................... 9,785 3 8,457 3 6,787 2 1,177 --
Automobile loans..................... 45,835 14 44,775 14 43,440 13 34,540 8
Other personal and investment loans.. 19,570 6 19,403 6 12,218 4 12,168 3
Unallocated.......................... 51,500 -- 49,750 -- 45,250 -- 39,250 --
-------- --- -------- --- -------- --- -------- ---
$206,000 100% $199,000 100% $181,000 100% $157,000 100%
======== === ======== === ======== === ======== ===
</TABLE>
75
<PAGE>
Investment Activities
The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, including callable agency securities, certificates of deposit of
insured banks and savings institutions, bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, savings
institutions may also invest their assets in investment grade commercial paper
and corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. See "How We Are Regulated - Community Bank" for a
discussion of additional restrictions on our investment activities.
The president has the basic responsibility for the management of our
investment portfolio, subject to the direction and guidance of the
Investment/Asset and Liability Management Committee. The president considers
various factors when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated slope of the yield curve, the level of interest rates, the trend
of new deposit inflows, and the anticipated demand for funds via deposit
withdrawals and loan originations and purchases.
The current objectives of our investment portfolio are to provide
liquidity when loan demand is high, to assist in maintaining earnings when loan
demand is low and to maximize earnings while satisfactorily managing risk,
including credit risk, reinvestment risk, liquidity risk and interest rate risk.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk."
Our investment securities currently consist of state and political
subdivision securities, mortgage-backed securities, and corporate obligations.
See Note 2 of the Notes to Consolidated Financial Statements. Our
mortgage-backed securities portfolio currently consists of securities issued
under government-sponsored agency programs.
While mortgage-backed securities, carry a reduced credit risk as
compared to whole loans, these securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors like the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of the mortgage loans and so affect both the prepayment speed,
and value, of the securities.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current
76
<PAGE>
resale are classified as "trading securities." These securities are reported at
fair value, and unrealized gains and losses on the securities would be included
in earnings. Community Bank does not currently use or maintain a trading
account. Debt and equity securities not classified as either "held to maturity"
or "trading securities" are classified as "available for sale." These securities
are reported at fair value, and unrealized gains and losses on the securities
are excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
The following table sets forth the composition of our investment and
mortgage-related securities portfolio and other investments at the dates
indicated. Our investment securities portfolio at March 31, 2000, did not
contain securities of any issuer with an aggregate book value in excess of 10%
of our equity capital, excluding those issued by the United States Government or
its agencies.
March 31, December 31,
-------------- ----------------------------
2000 1999 1998
-------------- ------------- --------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------ ---- ------- ---- ------ ---
(Dollars in Thousands)
Securities available for sale,
at fair value:
State and political subdivisions $ 148 37% $ 148 1% $ -- --%
Mortgage-backed securities 33 8 15,898 98 7,031 94
Other 217 55 231 1 445 6
------ ---- ------- ---- ------ ---
Total $ 398 100% $16,277 100% $7,476 100%
====== ==== ======= ==== ====== ===
Securities to be held to maturity,
at amortized cost:
State and political subdivisions $ -- --% $ -- --% $ 175 3%
Mortgage-backed securities -- -- -- -- 5,838 97
Other -- -- -- -- -- --
------ ---- ------- ---- ------ ---
Total $ -- --% $ -- --% $6,013 100%
====== ==== ======= ==== ====== ===
Securities to be held to maturity,
at fair value $ -- $ -- $5,974
====== ======= ======
76
<PAGE>
The composition and maturities of the investment securities and
mortgage-backed securities portfolio, excluding Federal Home Loan Bank stock and
our trading portfolio as of March 31, 2000 are indicated in the following table.
<TABLE>
<CAPTION>
Less than 1 Year 1 to 5 Years 5 to 10 Years Over 10 Years Total Securities
---------------- ------------- ------------- ------------- ----------------
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- ------ ------ ------ ------ ------ ------ ------- --------
(Dollars in Thousands)
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State and political subdivisions $ 35 5.75% $ 113 5.75% $ -- --% $ -- --% $148 5.75%
Mortgage-backed securities 17 -- -- -- 16 5.47 -- -- 33 5.47
Other -- -- -- -- -- -- 217 -- 217 --
----- ---- ----- ---- ---- ---- ---- ---- ---- ----
Total $ 52 5.75% $ 113 5.75% $ 16 5.47% $217 --% $398 5.73%
===== ==== ===== ==== ==== ==== ==== ==== ==== ====
</TABLE>
78
<PAGE>
Sources of Funds
General. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.
Deposits. We offer a variety of deposit accounts to both consumer and
businesses having a wide range of interest rates and terms. Our deposits consist
of NOW accounts, time deposit accounts, savings and money market and demand
accounts and certificates of deposit. We solicit deposits in our market areas
and have not accepted brokered deposits. We primarily rely on competitive
pricing policies, marketing and customer service to attract and retain these
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We try to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives, subject to competitive
factors. Based on our experience, we believe that our deposits are relatively
stable sources of funds. Despite this stability, our ability to attract and
maintain these deposits and the rates paid on them has been and will continue to
be significantly affected by market conditions.
The following table sets forth our deposit flows during the periods
indicated.
Three Years Ended
Months Ended December 31,
March 31, -----------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
Deposits to deposit accounts $ 11,832 $ 36,324 $ 27,635 $ 20,005
Withdrawals from deposit accounts (14,105) (37,292) (26,924) (20,923)
Interest credited to deposit accounts 351 1,184 1,206 1,159
-------- -------- -------- --------
Net increase (decrease) (1,922) 216 1,917 241
Opening balance of deposit accounts 32,354 32,138 30,221 29,980
-------- -------- -------- --------
Ending balance of deposit accounts $ 30,432 $ 32,354 $ 32,138 $ 30,221
======== ======== ======== ========
Percent annual increase (decrease) (23.76)% 0.67% 6.34% 0.80%
======== ======== ======== ========
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<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered at the dates indicated.
December 31
March 31, --------------------------------
2000 1999 1998
--------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent
------- ------- -------- ------- ------ --------
(Dollars in Thousands)
Noninterest-bearing accounts $ 635 2% $ 377 1% $ 200 1%
Savings accounts 1,766 6 1,770 5 1,326 4
NOW and money market accounts 4,469 15 4,852 15 4,438 14
------- --- ------- ---
Total non-certificates 6,870 23 6,999 21
------- --- ------- ---
Certificates of deposit:
4.00% to 4.99% 15,784 51 15,230 47
5.00% to 5.99% 6,940 23 7,120 22
6.00% to 6.99% 838 3 3,005 10
------- --- -------
Total certificates 23,562 77 25,355 79 26,174 81
------- --- ------- --- ------- ---
Total deposits $30,432 100% $32,354 100% $32,138 100%
======= === ======= === ======= ===
The following table shows rate and maturity information for Community
Bank's certificates of deposit as of December 31, 1999.
Weighted Average
Amount Rate
------------ -------------
(Dollars in Thousands)
Certificate accounts maturing within:
One month $ 3,492 5.38%
One to three months 4,329 4.69
Three to six months 6,169 4.93
Six to nine months 3,533 4.91
Nine to twelve months 2,842 4.71
Twelve to eighteen months 2,814 4.81
Eighteen months to two years 784 4.92
Over two years 1,392 5.33
-------- ----
Total $ 25,355 4.93%
======== ====
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<PAGE>
The following table indicates the amount of Community Bank's
certificates of deposit and other deposits by time remaining until maturity as
of March 31, 2000.
Maturity
----------------------
Over Over
3 Months 3 to 12 12
or Less Months months Total
------- ------- ------ -------
(In Thousands)
Certificates of deposit less than $100,000....... $ 977 $ 979 $ 416 $ 2,372
Certificates of deposit of $100,000 or more...... 5,236 11,917 4,037 21,190
------ ------- ------ -------
Total certificates of deposit.................... $6,213 $12,896 $4,453 $23,562
====== ======= ====== =======
Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to fund loan demand or when they meet our asset/liability management goals. Our
borrowings historically have consisted of advances from the Federal Home Loan
Bank of Dallas. See Note 8 of the Notes to Consolidated Financial Statements.
We may obtain advances from the Federal Home Loan Bank of Dallas upon
the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At March
31, 2000, we had $7.2 million in Federal Home Loan Bank advances outstanding.
The following table sets forth information as to our Federal Home Loan
Bank advances for the periods indicated.
Three Months
Ended Years Ended
March 31, December 31,
----------- ---------------------
2000 1999 1998
---------- -------- -----------
(Dollars in Thousands)
Federal Home Loan Bank advances:
Maximum balance $7,392 $8,000 $4,000
====== ====== ======
Average monthly balance $7,275 $6,716 $ 296
====== ====== ======
Amount outstanding at end of period $7,157 $7,392 $4,000
====== ====== ======
Weighted average interest rate of advances 5.44% 5.36% 5.07%
====== ====== ======
Subsidiary and Other Activities
At March 31, 2000, Community Bank had a $1,000 investment in an
inactive subsidiary. The subsidiary was engaged in securities brokerage
activities through a third party from 1993 through 1998. Effective January 1,
1999, its operations were combined into Community Bank and the subsidiary became
inactive.
81
<PAGE>
Competition
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our branch office system.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions located in the same community, as well as
mutual funds and other alternative investments. We compete for these deposits by
offering superior service and a variety of deposit accounts at competitive
rates. As of March 31, 2000, we believe that we hold less than 10% of the
deposits in our primary market area.
Employees
At March 31, 2000, we had a total of 15 employees, including two
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Properties
At March 31, 2000, we had one full service office. We own the office
building in which our home office and executive offices are located, which was
built in 1994. We also hold a piece of real estate in Manor, Texas for possible
future expansion. The net book value of our investment in premises, equipment
and leaseholds, excluding computer equipment, was approximately $1.3 million at
March 31, 2000.
We believe that our current facilities are adequate to meet the present
and immediately foreseeable needs of Community Bank and CBCT Bancshares, Inc.
We utilize a third party service provider to maintain our data base of
depositor and borrower customer information. The net book value of the data
processing and computer equipment utilized by us at March 31, 2000 was
approximately $50,000.
Legal Proceedings
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of such litigation.
82
<PAGE>
MANAGEMENT
Management of CBCT Bancshares, Inc.
The board of directors of CBCT Bancshares, Inc. consists of the same
individuals who currently serve as directors of Community Bank. The board of
directors of CBCT Bancshares, Inc. is divided into three classes, as equal as
possible. The directors shall be elected by the stockholders of CBCT Bancshares,
Inc. for three year terms, or until their successors are elected. One class of
directors, consisting of James A. Cowan and Mike C. Maney, has a term of office
expiring at the first annual meeting of stockholders. A second class, consisting
of Georgina Chronis and Rodney E. Langer, has a term of office expiring at the
second annual meeting of stockholders. The third class, consisting of Gordon N.
Fowler, Jr., Brad M. Hurta and Barry Hannath, has a term of office expiring at
the third annual meeting of stockholders.
The following individuals are executive officers of CBCT Bancshares,
Inc. and hold the offices set forth below opposite their names.
Executive Position Held with
------------- -----------------------------------------------------
Brad Hurta President and Chief Executive Officer
Lynn Frerich Vice President, Chief Operating Officer and Secretary
The executive officers of CBCT Bancshares, Inc. are elected annually
and hold office until their respective successors have been elected or until
death, resignation or removal by the board of directors.
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of CBCT Bancshares, Inc. is
set forth under "- Management of Community Bank" and "- Executive Officers Who
Are Not Directors." Directors of CBCT Bancshares, Inc. initially will not be
compensated by CBCT Bancshares, Inc. but will serve and be compensated by
Community Bank. It is not anticipated that separate compensation will be paid to
directors of CBCT Bancshares, Inc. until such time as these persons devote
significant time to the separate management of CBCT Bancshares, Inc. affairs,
which is not expected to occur until CBCT Bancshares, Inc. becomes actively
engaged in additional businesses other than holding the stock of Community Bank.
CBCT Bancshares, Inc. may determine that such compensation is appropriate in the
future.
Management of Community Bank
Because Community Bank is a mutual savings bank, its members have
elected its board of directors. Upon completion of the conversion, the directors
of Community Bank immediately prior to the conversion will continue to serve as
directors of Community Bank in stock form. The board of directors of Community
Bank in stock form will consist of seven directors divided into three classes,
with approximately one-third of the directors elected at each annual meeting of
stockholders. Because CBCT Bancshares, Inc. will own all the issued and
outstanding capital
83
<PAGE>
stock of Community Bank following the conversion, the board of directors of CBCT
Bancshares, Inc. will elect the directors of Community Bank.
The following table sets forth information regarding the board of
directors of Community Bank as of December 31, 1999.
Term of
Director Office
Name Age(1) Positions Held With Since Expires
------------------- ------ ----------------------- --------- -----------
Vernon L. Richards 70 Director 1991 (2)
Clinton M. Wright 70 Director 1993 (2)
Mike C. Maney 49 Director 1991 2001
Gordon N. Fowler 50 Director 1992 2003
James A. Cowan 56 Director 1996 2001
Rodney E. Langer 58 Director 1999 2002
Brad M. Hurta 34 President and Director 1999 2003
Georgina Chronis 43 Director 1999 2002
Barry W. Hannath 55 Director 1983 2003
-----------------
(1) As of December 31, 1999.
(2) Retired as of March 2000, in compliance with Community Bank's age
limitation for directors.
The business experience of each director for at least the past five
years is set forth below.
Vernon L. Richards. Mr. Richards retired in 1986 as an executive with
Southwestern Bell Telephone company. Mr. Richards currently has ranching
interests in Smithville, Texas.
Clinton M. Wright. Ms. Wright is the President and Financial Director
of Pendergrass-People's Mortuary, Inc. in Smithville, Texas. Ms. Wright has held
these positions since 1985.
Mike C. Maney. Mr. Maney has been the owner of Maney Tax Service, a tax
preparation service since 1999. Previously, he was the Foreman-Gas Measurement
for Western Gas Resources, a natural gas pipeline, a position he retired from in
October 1998, after 17 years.
Gordon N. Fowler, Jr. Mr. Fowler is the owner/operator of Diamond F
Ranch, a cattle operation located in Rosanky, Texas. Prior to 1997, Mr. Fowler
was the ranch manager of Double D Ranch, located in Rosanky, Texas.
James A. Cowan. Mr. Cowan is a self-employed consultant in the
telecommunications field.
Rodney E. Langer. Mr. Langer retired as a Captain with Delta Airlines
in July 1997.
Brad M. Hurta. Mr. Hurta is the President of Community Bank, a position
he has held since May 1999. Prior to this, he was the Senior Vice President of
First State Bank, Smithville, Texas.
84
<PAGE>
Georgina Chronis. Ms. Chronis is the President of Clara Inc., which
operates La Cabana Restaurant Chevron Store in Smithville, Texas. Ms. Chronis
has held this position since 1985.
Barry W. Hannath. Mr. Hannath is a self-employed rancher. From 1975
until 1993, Mr. Hannath was the President and Chief Executive Officer of Hannath
Inc., a grocery store.
Executive Officers Who Are Not Directors
Each of the executive officers of CBCT Bancshares, Inc. will retain
office following the conversion. Officers are elected annually by the board of
directors of CBCT Bancshares, Inc. The business experience for at least the past
five years for each of the executive officers of CBCT Bancshares, Inc. who do
not serve as directors is set forth below.
Lynn D. Frerich. Age 29 years. Mr. Frerich serves as Vice President and
Chief Operating Officer. He has been employed by Community Bank since 1999.
Prior to joining Community Bank, he was the Branch Manager of First State Bank
of Bastrop, Texas.
Meetings and Committees of the Board of Directors
Our board of directors meets monthly. During the year ended December
31, 1999, the board of directors held 15 meetings. No director attended fewer
than 75% of the total meetings of the board of directors and committees on which
such board member served during this period.
We currently have standing Audit, Asset, Investment/Asset and Liability
Management and Executive Committees. We do not have a standing Nominating
Committee; rather, the Executive Committee performs this function.
The Audit Committee is comprised of Vernon Richards, Clinton Wright,
and Gordon Fowler, Jr. The Audit Committee meets as needed. The Audit Committee
recommends the independent auditors and reviews the audit report prepared by the
independent auditors. This committee met five times in 1999. The Audit Committee
also reviews the policies of the Bank and recommends approval to the Board.
The Asset Committee is chaired by James Cowan, who is designated the
Asset Review Officer and Clinton Wright and Gordon Fowler, Jr. as members. The
Asset Committee meets quarterly or more frequently on an as needed basis. The
Asset Committee reviews, identifies and classifies Community Bank's assets based
on credit risk, in accordance with regulatory guidelines. This committee is also
responsible for reviewing asset valuation and classification policies, as well
as developing and monitoring asset disposition. This committee met four times in
1999.
The Investment/Asset and Liability Management Committee is comprised of
Brad Hurta, James Cowan, and Barry Hannath with Mike Maney as Chairman. The
Investment/Asset and Liability Management Committee meets as needed. The
Investment/Asset and Liability Management Committee reviews and monitors
Community Bank's investment portfolio,
85
<PAGE>
liquidity position and interest rate risk. The committee is also responsible for
reviewing and establishing loan and deposit interest rates. This committee met
15 times in 1999.
The Executive Committee is comprised of Brad Hurta, Mike Maney and
Vernon Richards with Barry Hannath as Chairman. The Executive Committee meets at
least monthly or on an as needed basis. The Executive Committee is authorized to
conduct any business which the full board of directors may conduct. The
committee specifically reviews loan applications and the underwriting policy,
monitors the performance of senior management and accounting personnel. In
addition, the committee acts as a search and nominating committee for board
members and senior management. This committee met 44 times in 1999.
Directors' Compensation
Members of Community Bank's board of directors receive a fee of $375
per meeting attended and $100 per committee meeting attended.
Executive Compensation
The following table sets forth a summary of information concerning the
compensation paid by Community Bank, including amounts deferred to future
periods by the officers, for services rendered in all capacities during the year
ended December 31, 1999 to the President and Chief Executive Officer of
Community Bank. No other executive officer of Community Bank received salary and
bonus exceeding $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------- -------------------- -------------
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) (#)(2) sation
--------------------------------- ------- ---------- ------ ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Brad M. Hurta, 1999 $44,692(3) $--- --- --- --- $---
President and Chief Executive
Officer
-------------
<FN>
(1) This amount does not include personal benefits or perquisites which did not
exceed the lesser of $50,000 or 10% of the named individuals' salary and
bonus.
(2) As a mutual institution, Community Bank does not have any stock option or
restricted stock plans. CBCT Bancshares, Inc. does, however, intend to
adopt such plans following the conversion. See "- Benefits -- Other Stock
Benefit Plans."
(3) Employment began May 27, 1999.
</FN>
</TABLE>
Benefits
General. Community Bank currently provides health and welfare benefits
to its employees, including hospitalization, comprehensive medical insurance,
dental insurance and life
86
<PAGE>
insurance, subject to deductibles and copayments by employees. Community Bank
also provides retirements benefits. See Note 12 of the Notes to Consolidated
Financial Statements.
401(k) and Profit Sharing Plan. Community Bank has a qualified,
tax-exempt savings and profit-sharing plan with a cash or deferred feature
qualifying under Section 401(k) of the Internal Revenue Code. Employees of CBCT
Bancshares, Inc. and Community Bank may participate in this plan, beginning on
the first of January or July after the employee has completed three months of
service. Employees of CBCT Bancshares, Inc. and Community Bank who are active
participants and have worked at least 1,000 hours during the plan year, are
eligible for matching contributions.
Participants are permitted to make salary reduction contributions to
the 401(k) Plan of up to 12% of the participant's annual salary. In addition,
Community Bank may match the participant's contribution on a dollar for dollar
basis up to 100% of the participant's before-tax contribution up to a maximum
contribution by Community Bank of 3% of the participant's annual salary for the
year. Community Bank may also make discretionary contributions. All participant
contributions and earnings are fully and immediately vested. The percentage of a
participant's ownership in Community Bank's contributions vest 100% after five
years of service, 20% per year, with Community Bank. However in the event of
retirement, permanent disability or death, a participant will automatically
become 100% vested in the value of all contributions by Community Bank and
earnings thereon, regardless of the number of years of employment with Community
Bank.
Participants may invest amounts contributed to their 401(k) Plan
accounts in one or more investment options available under the 401(k) Plan. Each
participant receives an annual statement which provides information regarding,
among other things, the market value of his investments and contributions made
to the 401(k) Plan on the participant's behalf. Participants are permitted to
borrow against their account balance in the 401(k) Plan. For the year ended
December 31, 1999, Community Bank's contribution to the 401(k) Plan on behalf of
Mr. Hurta was $0.
Employee Stock Ownership Plan. CBCT Bancshares, Inc. intends to adopt
an employee stock ownership plan for employees of CBCT Bancshares, Inc. and
Community Bank to become effective upon the conversion. Employees of CBCT
Bancshares, Inc. and Community Bank who have been credited with at least 1,000
hours of service during a twelve month period are eligible to participate in the
employee stock ownership plan.
As part of the conversion, it is anticipated that the employee stock
ownership plan will borrow funds from CBCT Bancshares, Inc. The employee stock
ownership plan will use these funds to purchase up to 8.0% of the common stock
issued in the conversion. It is anticipated that this loan will equal 100% of
the aggregate purchase price of the common stock acquired by the employee stock
ownership plan. The loan to the employee stock ownership plan will be repaid
principally from Community Bank's contributions to the employee stock ownership
plan over a period of 10 years, and the collateral for the loan will be the
common stock purchased by the employee stock ownership plan. The interest rate
for the loan is expected to be the minimum rate prescribed by the Internal
Revenue Code. CBCT Bancshares, Inc. may, in any plan year, make
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additional discretionary contributions for the benefit of plan participants in
either cash or shares of common stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
upon the original issuance of additional shares by CBCT Bancshares, Inc. or upon
the sale of treasury shares by CBCT Bancshares, Inc. These purchases, if made,
would be funded through additional borrowings by the employee stock ownership
plan or additional contributions from CBCT Bancshares, Inc. The timing, amount
and manner of future contributions to the employee stock ownership plan will be
affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.
Shares purchased by the employee stock ownership plan with the proceeds
of the loan will be held in a suspense account and released to participants'
accounts as debt service payments are made. Shares released from the employee
stock ownership plan will be allocated to each eligible participant's employee
stock ownership plan account based on the ratio of each such participant's
compensation to the total compensation of all eligible employee stock ownership
plan participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount CBCT Bancshares, Inc. might otherwise have
contributed to the employee stock ownership plan. The account balances of
participants within the employee stock ownership plan will become 100% vested
after five years of service. Credit for eligibility and vesting is given for
years of service with Community Bank prior to adoption of the employee stock
ownership plan. In the case of a "change in control," as defined in the employee
stock ownership plan, which triggers a termination of the employee stock
ownership plan, participants will become immediately fully vested in their
account balances. Benefits are payable upon retirement or other separation from
service. CBCT Bancshares, Inc.'s contributions to the employee stock ownership
plan are not fixed, so benefits payable under the employee stock ownership plan
cannot be estimated.
First Bankers Trust, Quincy, Illinois will serve as trustee of the
employee stock ownership plan. Under the employee stock ownership plan, the
trustee must vote all allocated shares held in the employee stock ownership plan
in accordance with the instructions of the participating employees, and
unallocated shares will be voted in the same ratio on any matter as those
allocated shares for which instructions are given.
GAAP requires that any third party borrowing by the employee stock
ownership plan be reflected as a liability on CBCT Bancshares, Inc.' statement
of financial condition. Since the employee stock ownership plan is borrowing
from CBCT Bancshares, Inc., this obligation is not treated as a liability, but
will be excluded from stockholders' equity. If the employee stock ownership plan
purchases newly issued shares from CBCT Bancshares, Inc., total stockholders'
equity would neither increase nor decrease, but per share stockholders' equity
and per share net earnings would decrease as the newly issued shares are
allocated to the employee stock ownership plan participants.
The employee stock ownership plan will be subject to the requirements
of ERISA, and the regulations of the IRS and the Department of Labor thereunder.
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Other Stock Benefit Plans. In the future, we intend to adopt a stock
option plan and a restricted stock plan for the benefit of selected directors,
officers and employees. We anticipate that the stock option plan will have
reserved a number of shares equal to 10% of the CBCT Bancshares, Inc. common
stock sold in the conversion, and the restricted stock plan will have reserved a
number of shares equal to up to 4% of the CBCT Bancshares, Inc. common stock
sold in the conversion subject, if applicable, to regulatory limitations. Grants
of stock option will be made at a price equal to 100% of the market value on the
date of grant. Grants of common stock pursuant to the restricted stock plan will
be issued without cost to the recipient. If a determination is made to implement
a stock option plan or restricted stock plan, it is anticipated that any such
plans will be submitted to stockholders for their consideration at which time
stockholders would be provided with detailed information regarding such plan. If
such plans are approved, and effected, they will have a dilutive effect on CBCT
Bancshares, Inc. stockholders as well as affect CBCT Bancshares, Inc.' net
income and stockholders' equity, although the actual results cannot be
determined until such plans are implemented. Any such stock option plan or
restricted stock plan will not be submitted to stockholders for approval or
implemented less than six months after the date of the completion of the
conversion, subject to continuing Texas Savings and Loan Department
jurisdiction. If either the stock option plan or the restricted stock plan are
implemented within one year of the consummation of the conversion, the granting
of options and restricted stock will be subject to regulatory restrictions,
including a requirement that the awards vest equally over a five year period.
Employment Agreement for Brad M. Hurta. In connection with the
conversion, Community Bank intends to enter into a three-year employment
agreement with Mr. Hurta. Under the employment agreement, the initial salary
level will be Mr. Hurta's current salary of $75,000, and the agreement also
provides for equitable participation by Mr. Hurta in Community Bank's employee
benefit plans. The salary may be increased at the discretion of the board of
directors. The agreement may be terminated by Community Bank at any time or by
the executive if he is assigned duties inconsistent with his initial position,
duties, responsibilities and status. In the event that Mr. Hurta's employment is
terminated without cause or upon his voluntary termination following the
occurrence of an event described in the preceding sentence, Community Bank would
be required to honor the terms of the agreement through the expiration of the
contract, including payment of then current cash compensation and continuation
of employee benefits.
The employment agreement also provides for a severance payment and
other benefits if Mr. Hurta is involuntarily terminated because of a change in
control of CBCT Bancshares, Inc. or Community Bank. The agreement authorizes
severance payments on a similar basis if Mr. Hurta involuntarily terminates his
employment following a change in control because he is assigned duties
inconsistent with his position, duties, responsibilities and status immediately
prior to the change in control.
The maximum value of the severance benefits under the employment
agreements is 2.99 times the executive's average annual W-2 compensation during
the five calendar year period prior to the effective date of the change in
control (base amount). Assuming that a change in control had occurred at March
31, 2000 Mr. Hurta would be entitled to a payment of approximately $133,630.
Section 280G of the Internal Revenue Code provides that severance
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payments that equal or exceed three times the individual's base amount are
deemed to be "excess parachute payments" if they are conditioned upon a change
in control. Individuals receiving parachute payments in excess of three times of
their base amount are subject to a 20% excise tax on the amount of the excess
payments. If excess parachute payments are made, CBCT Bancshares, Inc. and
Community Bank would not be entitled to deduct the amount of the excess
payments. The employment agreement provides that severance and other payments
that are subject to a change in control will be reduced as much as necessary to
ensure that no amounts payable to the executive will be considered excess
parachute payments.
Loans and Other Transactions with Officers and Directors
Community Bank has followed a policy of granting loans to officers and
directors, which fully complies with all applicable federal regulations. Loans
to directors and executive officers are made in the ordinary course of business
and on the same terms and conditions as those of comparable transactions with
unaffiliated third parties prevailing at the time, in accordance with our
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features. In addition, all loans and
forgiveness of loans to directors and executive officers are approved by at
least a majority of the independent, disinterested members of the board.
All loans we make to our directors and executive officers are subject
to regulations restricting loans and other transactions with affiliated persons
of Community Bank. Loans to all directors and executive officers and their
associates totaled approximately $377,000 at March 31, 2000, which was 13% of
our equity at that date. All loans to directors and executive officers were
performing in accordance with their terms at March 31, 2000.
HOW WE ARE REGULATED
Set forth below is a brief description of all material aspects of the
laws and regulations which are applicable to CBCT Bancshares, Inc. and Community
Bank.
Legislation is introduced from time to time in the United States
Congress that may affect the operations of CBCT Bancshares, Inc. and Community
Bank. In addition, the regulations governing CBCT Bancshares, Inc. and Community
Bank may be amended from time to time by the Texas Savings and Loan Department
and the FDIC. Any such legislation or regulatory changes in the future could
adversely affect CBCT Bancshares, Inc. or Community Bank. No assurance can be
given as to whether or in what form any such changes may occur.
General
Community Bank, as a Texas chartered savings bank, is subject to both
state and federal regulation and oversight by the Texas Savings and Loan
Department and the FDIC extending to all aspects of its operations. Community
Bank also is subject to requirements established by the Federal Reserve Board.
Community Bank is required to file periodic reports with the Texas Savings and
Loan Department and the FDIC and is subject to periodic examinations by the
Texas Savings and Loan Department and the FDIC. The investment and lending
authority of
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Community Bank is prescribed by state laws and regulations, and Community Bank
is prohibited from engaging in any activities not permitted by such laws and
regulations. Such regulation and supervision primarily is intended for the
protection of depositors and not for the purpose of protecting shareholders.
This regulatory oversight will continue to apply to Community Bank following the
reorganization.
The Texas Savings and Loan Department regularly examines Community Bank
and prepares reports for the consideration of Community Bank's board of
directors on any deficiencies that it may find in Community Bank's operations.
The FDIC also has the authority to examine Community Bank in its role as the
administrator of the Savings Association Insurance Fund. Community Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both Federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of Community Bank's
mortgage requirements. In addition, the Federal Reserve Board also has the
authority to make or amend regulations which govern CBCT Bancshares and
Community Bank. Any change in such regulations, whether by the FDIC, the Texas
Savings and Loan Department or Congress, could have a material adverse impact on
CBCT Bancshares, Inc. and Community Bank and their operations.
Recent Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act modernized the financial services industry by
permitting affiliations between banks, securities firms and insurance companies.
The GLB Act also created two classes of unitary savings and loan holding
companies: grandfathered and non-grandfathered holding companies. A
grandfathered unitary savings and loan holding company is a company that (1) was
already a unitary savings and loan holding company before May 4, 1999 or (2)
applied for regulatory approval from the OTS to become a unitary savings and
loan holding company before May 4, 1999. Grandfathered unitary savings and loan
holding companies have no restrictions on their activities at the holding
company level. However, non-grandfathered unitary savings and loan holding
companies may engage in only banking, securities, insurance and merchant banking
activities permitted for financial holding companies under the GLB Act. CBCT
Bancshares, Inc. will be a non-grandfathered unitary savings and loan holding
company following the conversion.
CBCT Bancshares, Inc.
Following the conversion, CBCT Bancshares, Inc. will be a bank holding
company. A bank holding company must obtain Federal Reserve Board approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
Additionally, a bank holding company may not, with certain exceptions,
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or engage
directly or indirectly in activities other than those of
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banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the Federal
Reserve Board includes, among other things, operating a savings institution,
mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing certain investment and
financial advice; underwriting and acting as an insurance agent for certain
types of credit-related insurance; leasing property on a full-payout,
non-operating basis; selling money orders, travelers' checks and United States
Savings Bonds; real estate and personal property appraising; providing tax
planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
Further, under Federal Reserve Board policy, a bank holding company
must serve as a source of strength for its subsidiary banks. Under this policy,
the Federal Reserve Board may require, and has required in the past, a bank
holding company to contribute additional capital to an undercapitalized
subsidiary bank.
Capital Requirements. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
national banks. For bank holding companies with consolidated assets of less than
$150 million, such as CBCT Bancshares, compliance is measured on a bank-only
basis. Community Bank's primary federal banking regulator is the FDIC. The FDIC
regulations establish two capital standards for state chartered banks: a
leverage requirement and a risk-based capital requirement.
The leverage ratio adopted by the FDIC requires a minimum ratio of
"Tier 1 capital" to adjusted total assets of 3% for state chartered banks rated
composite 1 under the CAMEL rating system for banks. State chartered banks not
rated composite 1 under the CAMEL rating system for banks are required to
maintain a minimum ratio of Tier 1 capital to adjusted total assets of 4% to 5%,
depending upon the level and nature of risks of their operations. For purposes
of the FDIC's leverage requirement, Tier 1 capital generally consists of common
stockholders' equity and retained income and certain non-cumulative perpetual
preferred stock and related income, except that no intangibles and certain
purchased mortgage servicing rights and purchased credit card relationships may
be included in capital.
The risk-based capital requirements established by the FDIC's
regulations require state chartered banks to maintain "total capital" equal to
at least 8% of total risk-weighted assets. For purposes of the risk-based
capital requirement, "total capital" means Tier 1 capital (as described above)
plus "Tier 2 capital," provided that the amount of Tier 2 capital may not exceed
the amount of Tier 1 capital, less certain assets. The components of Tier 2
capital include certain permanent and maturing capital instruments as well as
unreduced gains that do not qualify as core capital and general valuation loan
and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
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Community Bank
General. As a state chartered savings bank, the Bank derives its
authority from, and is governed by, the provisions of the Texas Savings Bank Act
(the "Texas Act") and rules and regulations of the Texas Department. The Texas
Act and regulations of the Texas Department are administered by the Texas
Savings and Loan Commissioner (the "Commissioner").
Investments and Deposit Accounts. The Texas Act imposes restrictions on
the amounts and types of loans that may be made by a state savings bank,
generally bringing these restrictions into parity with the regulation of
federally chartered institutions. The manner of establishing deposit accounts
and evidencing the same is prescribed, as are the obligations of the Bank with
respect to withdrawals from deposit accounts and redemptions of deposit
accounts.
Branch Offices. Pursuant to the Texas Act and the regulations issued
thereunder, the Commissioner may permit the Bank to establish branch offices
after giving consideration to the promotion of public need, market conditions
and financial and managerial capability of the Bank to establish and maintain
each branch office sought. Interested parties, which include any savings and
loan association or branch thereof, together with any others deemed to be
interested parties by the Commissioner, are permitted to protest the
establishment of such branches and may request a hearing before the Commissioner
regarding this matter.
Consolidation or Merger. The Texas Act provides that savings banks may
consolidate or merge, subject to approval of the Commissioner, when the
Commissioner finds that such merger or consolidation is not in restraint of
trade, would not significantly curtail competition or impair other financial
institutions.
Examination. The Texas Department conducts and supervises the
examination of state chartered savings banks. An insured association such as the
Bank will also be examined periodically by the FDIC.
Supervision. The Commissioner has general supervisory authority over
savings banks and their holding companies. Upon his finding that a savings bank
is in violation of any provision of the Act or regulations, or is engaging in
unsafe or unsound practices, or is failing to maintain adequate documentary or
accounting records, he may order the savings bank or its holding company to
discontinue the violation or practice, or to establish necessary records. Upon
failure of any savings bank, its holding company or any participating person to
comply with his order, the Commissioner may issue upon the violating party (i)
an order to cease and desist from continuing such a particular action, (ii) a
removal or prohibition order suspending or prohibiting the person participating
in such violation from the affairs of the savings bank, (iii) an order requiring
divestiture of control of the savings bank, (iv) an order requiring the payment
of a civil penalty in an amount of not more than $25,000, or (v) an order
placing the affairs of the savings bank under the control of a conservator who
will manage the savings bank under the direction of the Commissioner.
Furthermore, if it appears doubtful to the Commissioner that a savings bank
subject to such a conservatorship order can be successfully rehabilitated, the
Commissioner may close the savings bank and liquidate it.
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Change of Control. A change of control of a savings bank (and therefore
the holding company) may not occur unless an application is made and approved by
the Commissioner. For the purposes of Texas law, control shall be deemed to
exist if any person owns or controls 25% or more of the voting securities of a
savings bank. Similar to federal law, there is a presumption of control if any
person owns or controls 10% or more of the voting securities of the savings
bank.
Holding Companies. The Commissioner also has the authority to regulate
and examine the holding companies of Texas chartered savings banks. Each holding
company is required by Texas law to register with the Commissioner within 90
days after becoming a holding company. Such holding companies, like that of the
Bank, must file with the Commissioner reports concerning its operations. The
Commissioner also has enforcement powers over such holding companies similar to
those applicable to savings banks.
Applicable Corporate Law. In addition to the laws of Texas specifically
governing savings banks and their holding companies, the Bank and CBCT
Bancshares, Inc. are also subject to Texas corporate law, to the extent such law
does not conflict with the laws specifically governing savings banks and their
holding companies.
Insurance of Accounts and Regulation by the FDIC
Community Bank is a member of the Savings Association Insurance Fund,
which is administered by the FDIC. Deposits are insured up to the applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Bank Insurance Fund or the Bank Insurance Fund. The FDIC
also has the authority to initiate enforcement actions against savings
institutions and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
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The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Bank Insurance Fund will
be less than the designated reserve ratio of 1.25% of Bank Insurance Fund
insured deposits. In setting these increased assessments, the FDIC must seek to
restore the reserve ratio to that designated reserve level, or such higher
reserve ratio as established by the FDIC.
Community Reinvestment Act
Under the Community Reinvestment Act, every FDIC-insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the Community Reinvestment Act. Due to the heightened
attention being given to the Community Reinvestment Act in the past few years,
Community Bank may be required to devote additional funds for investment and
lending in its local community. Community Bank was examined for Community
Reinvestment Act compliance as of May 11, 1999, and received a rating of
satisfactory.
Limitations on Dividends and Other Capital Distributions
The Holding Company is a legal entity separate and distinct from the
Bank. CBCT Bancshares, Inc.'s principal source of revenue consists of dividends
from Community Bank. The payment of dividends by the Bank is subject to various
regulatory requirements.
Under Texas State Banking Law, a Texas-chartered stock savings bank may
declare and pay dividends out of its net profits, unless there is an impairment
of capital, but approval of the Texas Savings and Loan Department is required if
the total of all dividends declared in a calendar year would exceed the total of
its net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Transactions with Affiliates
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of Community Bank include CBCT Bancshares,
Inc. and any company which is under common control with Community Bank. In
addition, a savings institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the regulators.
These conflict of interest regulations and other statutes also impose
restrictions on loans to these persons and their related interests.
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Among other things, these loans must generally be made on terms substantially
the same as loans to unaffiliated individuals.
Federal Securities Law
The offering of CBCT Bancshares, Inc. common stock has been registered
under the Securities Exchange Act of 1933, as amended. In addition, the stock of
CBCT Bancshares, Inc. is registered with the SEC under the Securities Exchange
Act of 1934, as amended. CBCT Bancshares, Inc. will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
CBCT Bancshares, Inc. stock held by persons who are affiliates of CBCT
Bancshares, Inc. may not be resold without registration unless sold in
accordance with resale restrictions. Affiliates are generally considered to be
officers, directors and principal stockholders. If CBCT Bancshares, Inc. meets
specified current public information requirements, each affiliate of CBCT
Bancshares, Inc. will be 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 non-interest bearing reserves at specified levels against their
transaction accounts, primarily checking, NOW and Super NOW checking accounts.
At March 31, 2000, Community Bank was in compliance with these reserve
requirements.
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve
Bank.
Federal Home Loan Bank System
Community Bank is a member of the Federal Home Loan Bank of Dallas,
which is one of 12 regional Federal Home Loan Banks, that administers the home
financing credit function of savings institutions. Each Federal Home Loan Bank
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 Federal Home Loan Bank System. It makes loans or advances to
members in accordance with policies and procedures, established by the board of
directors of the Federal Home Loan Bank, which are subject to the oversight of
the Federal Housing Finance Board. All advances from the Federal Home Loan Bank
are required to be fully secured by sufficient collateral as determined by the
Federal Home Loan Bank. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, Community Bank is required to purchase and maintain stock
in the Federal Home Loan Bank of Dallas. At March 31, 2000, Community Bank had
$504,000 in Federal Home Loan Bank stock, which was in compliance with this
requirement. In past years,
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Community Bank has received substantial dividends on its Federal Home Loan Bank
stock. Over the past five fiscal years such dividends have averaged 5.84% and
were 5.44% for 1999.
Under federal law the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions 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 Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Community Bank's Federal Home Loan Bank stock may result in a corresponding
reduction in Community Bank's capital.
For the year ended December 31, 1999, dividends paid by the Federal
Home Loan Bank of Dallas to Community Bank totaled $26,100, as compared to
$26,800 for 1998.
TAXATION
Federal Taxation
General. CBCT Bancshares, Inc. and Community Bank will be subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to CBCT Bancshares, Inc.
or Community Bank. Community Bank's federal income tax returns have been closed
without audit by the IRS through its year ended December 31, 1996.
Following the conversion, CBCT Bancshares, Inc. anticipates that it
will file a consolidated federal income tax return with Community Bank
commencing with the first taxable year after completion of the conversion.
Accordingly, it is anticipated that any cash distributions made by CBCT
Bancshares, Inc. to its stockholders would be considered to be taxable dividends
and not as a non-taxable return of capital to stockholders for federal and state
tax purposes.
Method of Accounting. For federal income tax purposes, Community Bank
currently reports its income and expenses on the cash method of accounting and
uses a fiscal year ending on December 31, for filing its federal income tax
return.
Bad Debt Reserves. Prior to the Small Business Job Protection Act,
Community Bank was permitted to establish a reserve for bad debts under the
percentage of taxable income method and to make annual additions to the reserve
utilizing that method. These additions could, within specified formula limits,
be deducted in arriving at taxable income. As a result of the Small Business Job
Protection Act, savings associations of Community Bank's size may now use the
experience method in computing bad debt deductions beginning with their 1996
Federal tax return. In addition, federal legislation requires Community Bank to
recapture, over a six year period, the excess of tax bad debt reserves at
December 31, 1997 over those established as of the base year reserve balance as
of December 31, 1987. The amount of such reserve subject to recapture as of
March 31, 2000 for Community Bank was approximately $13,000.
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Taxable Distributions and Recapture. Prior to the Small Business Job
Protection Act, bad debt reserves created prior to the year ended December 31,
1997, were subject to recapture into taxable income should Community Bank fail
to meet thrift asset and definitional tests. New federal legislation eliminated
these thrift related recapture rules. However, under current law, pre-1988
reserves remain subject to recapture should Community Bank make certain
non-dividend distributions or cease to maintain a thrift/bank charter.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum
tax at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Community Bank has not been subject to the alternative minimum tax, nor do we
have any such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carryback
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years prior to August 6, 1997, the carryback period was three years and the
carryforward period was 15 years. At March 31, 2000, Community Bank had net
operating loss carryforwards for federal income tax purposes of approximately
$430,000. The tax benefit of this net operating loss has been recorded in full
in the consolidated financial statements as management believes it is more
likely than not these benefits will be realized in the ordinary course of
business.
Corporate Dividends-Received Deduction. CBCT Bancshares, Inc. may
eliminate from its income dividends received from Community Bank as a wholly
owned subsidiary of CBCT Bancshares, Inc. if it elects to file a consolidated
return with Community Bank. The corporate dividends-received deduction is 100%
or 80%, in the case of dividends received from corporations with which a
corporate recipient does not file a consolidated tax return, depending on the
level of stock ownership of the payor of the dividend. Corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
70% of dividends received or accrued on their behalf.
State Taxation
The State of Texas does not have a corporate income tax, but it does
have a corporate franchise tax. Prior to January 1, 1992, savings banks had been
exempt from the corporate franchise tax. The tax for the year 1999 is the higher
of 0.25% of taxable capital, usually the amount of paid in capital plus retained
earnings, or 4.5% of "net taxable earned surplus." "Net taxable earned surplus"
is net income for federal income tax purposes increased by the compensation of
directors and executive officers and decreased by interest on obligations
guaranteed by the U.S. government. Net income cannot be reduced by net operating
loss carryforwards from years prior to 1991, and operating loss carryovers are
limited to five years.
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RESTRICTIONS ON ACQUISITION
OF CBCT BANCSHARES, INC. AND COMMUNITY BANK
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire CBCT Bancshares, Inc., Community Bank
or their respective capital stock are described below. Also discussed are
provisions in CBCT Bancshares, Inc.'s articles of incorporation and bylaws which
may be deemed to affect the ability of a person, firm or entity to acquire CBCT
Bancshares, Inc.
Federal Law
CBCT Bancshares, Inc. has filed with the SEC a registration statement
under the Securities Act, for the registration of CBCT Bancshares, Inc. common
stock to be issued pursuant to the conversion. Upon completion of the
conversion, CBCT Bancshares, Inc. common stock will be registered with the SEC
under Section 12(g) of the Securities Exchange Act of 1934, as amended. CBCT
Bancshares, Inc. will then be subject to the proxy and tender offer rules,
insider trading reporting requirements and restrictions, and other requirements
under the Exchange Act, including periodic reports and quarterly and annual
financial data.
The registration under the Securities Act of shares of CBCT Bancshares,
Inc. common stock to be issued in the conversion does not cover the resale of
such shares. Shares of CBCT Bancshares, Inc. common stock purchased by persons
who are not affiliates of CBCT Bancshares, Inc. may be sold without
registration. Shares purchased by an affiliate of CBCT Bancshares, Inc. will be
subject to the resale restrictions of Rule 144 under the Securities Act. If CBCT
Bancshares, Inc. meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of CBCT Bancshares, Inc. who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of CBCT Bancshares, Inc. or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
Articles of Incorporation and Bylaws of CBCT Bancshares, Inc.
The following discussion is a summary of provisions of the articles of
incorporation and bylaws of CBCT Bancshares, Inc. that relate to corporate
governance. The description is necessarily general and qualified by reference to
the articles of incorporation and bylaws.
Directors. Provisions of CBCT Bancshares, Inc.'s articles of
incorporation and bylaws will impede changes in majority control of the board of
directors. CBCT Bancshares, Inc.'s articles of incorporation provide that the
board of directors will be divided into three classes, with directors in each
class elected for three-year staggered terms except for the initial directors.
Thus, assuming a board of three directors or more, it would take two annual
elections to replace a majority of CBCT Bancshares, Inc.'s board. CBCT
Bancshares, Inc.'s articles of incorporation also provide that the size of the
board of directors may be increased or decreased only by a majority vote of the
whole board or by a vote of 80% of the shares eligible to be voted at a duly
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constituted meeting of stockholders called for such purpose. The bylaws also
provide that any vacancy occurring in the board of directors, including a
vacancy created by an increase in the number of directors, shall be filled only
by a majority vote of the directors then in office, and shall hold office until
the next succeeding annual meeting of stockholders, at which time the
stockholders shall elect a director to hold office for the balance of the term
then remaining. Finally, the bylaws impose notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the board of directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The bylaws of CBCT
Bancshares, Inc. provides that a special meeting of stockholders may be called
only through a resolution of the board of directors and only for business as
directed by the board or through a written request of stockholders entitled to
cast at least a majority of all the votes entitled to be cast at the meeting.
Absence of Cumulative Voting. CBCT Bancshares, Inc.'s articles of
incorporation do not provide for cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The articles of incorporation of CBCT
Bancshares, Inc. authorizes 1,000,000 shares of serial preferred stock, $.01 par
value. CBCT Bancshares, Inc. is authorized to issue preferred stock from time to
time in one or more series subject to applicable provisions of law, and the
board of directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights, which could be multiple or as a separate class, and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of CBCT Bancshares, Inc. that the board of directors
does not approve, it might be possible for the board of directors to authorize
the issuance of a series of preferred stock with rights and preferences that
would impede the completion of such a transaction. If CBCT Bancshares, Inc.
issued any preferred stock which disparately reduced the voting rights of the
common stock, the common stock could be required to be delisted from the Nasdaq
System. An effect of the possible issuance of preferred stock, therefore, may be
to deter a future takeover attempt. The board of directors has no present plans
or understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the board deems to be in the
best interests of CBCT Bancshares, Inc. and its stockholders.
Limitation on Voting Rights. The articles of incorporation of CBCT
Bancshares, Inc. provide that in no event shall any record owner of any
outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns more than 10% of the then outstanding shares of
common stock, be entitled or permitted to any vote in respect of the shares held
in excess of the 10% limit. This limitation would not stop any person from
soliciting or voting proxies from other beneficial owners for more than 10% of
the common stock. This includes shares beneficially owned by any affiliate of a
person, shares which a person or his affiliates have the right to acquire upon
the exercise of conversion rights or options and shares as to which a person and
his affiliates have or share investment or voting power, but shall
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not include shares beneficially owned by directors, officers and employees of
Community Bank or CBCT Bancshares, Inc. This provision will be enforced by the
board of directors to limit the voting rights of persons beneficially owning
more than 10% of the stock and thus could be utilized in a proxy contest or
other solicitation to defeat a proposal that is desired by a majority of the
stockholders.
Procedures for Business Combinations. CBCT Bancshares, Inc.'s articles
of incorporation require that business combinations, including transactions
initiated by management, between CBCT Bancshares, Inc., or any majority-owned
subsidiary thereof, and a 10% or more stockholder either (i) be approved by at
least 80% of the total number of outstanding voting shares, voting as a single
class, of CBCT Bancshares, Inc. or (ii) involve consideration per share
generally equal to that paid by the 10% stockholder when it acquired its block
of stock. To the extent that a business combination is approved by a majority of
the disinterested directors on the board, such business combination may only
require approval of a majority of the total number of outstanding voting shares,
voting as a single class, of CBCT Bancshares, Inc.
It should be noted that, since the board and management intend to
purchase approximately $460,000 of the shares offered in the conversion and may
control the voting of additional shares through the ESOP and proposed restricted
stock plan and stock option plan, the board and management may be able to block
the approval of combinations requiring an 80% vote even where a majority of the
stockholders vote to approve such combinations.
Evaluation of Certain Offers. CBCT Bancshares, Inc.'s articles of
incorporation provide that the board of directors, when evaluating any offer to
merge with or acquire all of the assets of CBCT Bancshares, Inc., may give due
consideration to all relevant factors, including the social and economic effect
of acceptance of such offer on the Company's present and future customers and
employees, as well as those of the Bank and the communities its serves.
Amendments to the Articles of Incorporation and Bylaws. Amendments to
CBCT Bancshares, Inc.'s articles of incorporation must be approved by CBCT
Bancshares, Inc.'s board of directors and also by a majority of the outstanding
shares of CBCT Bancshares, Inc.'s voting stock; provided, however, that approval
by at least 80% of the outstanding voting stock is generally required for
amendment of certain provisions, including provisions relating to number,
classification, election and removal of directors; amendment of bylaws; call of
special stockholder meetings; offers to acquire and acquisitions of control;
certain business combinations; power of indemnification; and amendments to
provisions relating to the foregoing in the articles of incorporation.
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of CBCT Bancshares, Inc.'s
Articles of Incorporation and Bylaws. We believe that the provisions described
above are prudent and will reduce CBCT Bancshares, Inc.'s vulnerability to
takeover attempts and other transactions which
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have not been negotiated with and approved by its board of directors. These
provisions will also assist us in the orderly deployment of the conversion
proceeds into productive assets during the initial period after the conversion.
We believe these provisions are in the best interest of Community Bank and of
CBCT Bancshares, Inc. CBCT Bancshares, Inc.'s board will be in the best position
to determine the true value of CBCT Bancshares, Inc. and to negotiate more
effectively for what may be in the best interests of our stockholders.
Accordingly, we believe that it is in the best interests of CBCT Bancshares,
Inc. and its stockholders to encourage potential acquirors to negotiate directly
with the board of directors of CBCT Bancshares, Inc. and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also our view that these provisions should not discourage persons from proposing
a merger or other transaction at prices reflective of the true value of CBCT
Bancshares, Inc. and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the board of directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the board of directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for CBCT
Bancshares, Inc. and its stockholders, with due consideration given to matters
such as the management and business of the acquiring corporation and maximum
strategic development of CBCT Bancshares, Inc.'s assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, these offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could result in CBCT
Bancshares, Inc. no longer being a reporting company with the SEC and therefore
deprive CBCT Bancshares, Inc.'s remaining stockholders of the benefits of the
disclosure requirements of the Federal securities laws.
Despite our belief as to the benefits to stockholders of these
provisions of CBCT Bancshares, Inc.'s articles of incorporation and bylaws,
these provisions may also have the effect of discouraging a future takeover
attempt which would not be approved by CBCT Bancshares, Inc.'s board, but
pursuant to which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have any opportunity to do
so. These provisions will also render the removal of CBCT Bancshares, Inc.'s
board of directors and of management more difficult. CBCT Bancshares, Inc. will
enforce the voting limitation provisions of the articles of incorporation in
proxy solicitations and accordingly could utilize these provisions to defeat
proposals that are favored by a majority of the stockholders. We, however, have
concluded that the potential benefits outweigh the possible disadvantages.
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Pursuant to applicable law, at any annual or special meeting of its
stockholders after the conversion, CBCT Bancshares, Inc. may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted to a Maryland corporation. CBCT Bancshares, Inc. does not presently
intend to propose the adoption of further restrictions on the acquisition of
CBCT Bancshares, Inc.'s equity securities.
Restrictions in Community Bank's Articles of Incorporation
Although the board of directors of Community Bank is not aware of any
effort that might be made to obtain control of Community Bank after the
conversion, the Board of Directors believes that it is appropriate to adopt
provisions permitted by Texas law to protect the interests of the converted bank
and its stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of CBCT Bancshares, Inc. as Community Bank's sole
stockholder.
Community Bank's articles of incorporation will contain a provision
whereby the acquisition of beneficial ownership of more than 10% of the issued
and outstanding shares of any class of equity securities of Community Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the conversion without the prior written
notice to Community Bank and the prior written approval of the FDIC and the
Texas Savings and Loan Department. If shares are acquired in violation of this
provision, all shares beneficially owned by any person in excess of the 10%
limit shall be considered "excess shares" and shall not be counted as shares
entitled to vote and shall not be voted by any person or counted as voting
shares in connection with any matters submitted to the stockholders for a vote.
Benefit Plans
In addition to the provisions of CBCT Bancshares, Inc.'s articles of
incorporation and bylaws described above, benefit plans of CBCT Bancshares, Inc.
and Community Bank adopted in connection with the conversion contain provisions
which also may discourage hostile takeover attempts which the board of directors
of Community Bank might conclude are not in the best interests of CBCT
Bancshares, Inc., CBCT Bancshares, Inc. and Community Bank or CBCT Bancshares,
Inc.'s stockholders. For a description of the benefit plans and the provisions
of such plans relating to changes in control of CBCT Bancshares, Inc. or
Community Bank, see "Management - Benefits."
DESCRIPTION OF CAPITAL STOCK OF
CBCT BANCSHARES, INC.
General
CBCT Bancshares, Inc. is authorized to issue four million shares of
common stock having a par value of $0.01 per share and one million shares of
preferred stock having a par value of $0.01 per share. CBCT Bancshares, Inc.
currently expects to issue up to a maximum of
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244,375 shares of common stock, or 281,031 shares in the event that the maximum
of the estimated offering range is increased by 15%, and no shares of preferred
stock in the conversion. Each share of CBCT Bancshares, Inc.'s common stock will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. Upon payment of the purchase price for the
common stock in accordance with the plan of conversion, all of the stock will be
duly authorized, fully paid and nonassessable. Presented below is a description
of all aspects of CBCT Bancshares, Inc.'s capital stock which are deemed
material to an investment decision with respect to the conversion.
The common stock of CBCT Bancshares, Inc. will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Common Stock
Distributions. CBCT Bancshares, Inc. can pay dividends if, as and when
declared by its board of directors, subject to compliance with limitations which
are imposed by law. The holders of common stock of CBCT Bancshares, Inc. will be
entitled to receive and share equally in these dividends as they may be declared
by the board of directors of CBCT Bancshares, Inc. out of funds legally
available for such purpose. If CBCT Bancshares, Inc. issues preferred stock, the
holders of such preferred stock may have a priority over the holders of the
common stock with respect to dividends. See "Our Policy Regarding Dividends."
Voting Rights. Upon the effective date of the conversion, the holders
of common stock of CBCT Bancshares, Inc. will possess exclusive voting rights in
CBCT Bancshares, Inc. Each holder of common stock will be entitled to one vote
per share and will not have any right to cumulate votes in the election of
directors, therefore, directors will be elected by a plurality of the shares
actually voting on the matter. Under certain circumstances, shares in excess of
10% of the issued and outstanding shares of common stock may be considered
"excess shares" and, accordingly, not be entitled to vote. See "Restrictions on
Acquisition of CBCT Bancshares, Inc. and Community Bank." If CBCT Bancshares,
Inc. issues preferred stock, holders of the preferred stock may also possess
voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of Community Bank, CBCT Bancshares, Inc., as holder of Community Bank's capital
stock, would be entitled to receive, after payment or provision for payment of
all debts and liabilities of Community Bank, including all deposit accounts and
accrued interest thereon, all assets of Community Bank available for
distribution. In the event of liquidation, dissolution or winding up of CBCT
Bancshares, Inc., the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of CBCT Bancshares, Inc. available for distribution. If preferred
stock is issued, the holders thereof may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
Rights to Buy Additional Shares. Holders of the common stock of CBCT
Bancshares, Inc. will not be entitled to preemptive rights with respect to any
shares which may be issued. Preemptive rights are the priority right to buy
additional shares if CBCT Bancshares, Inc. issues more shares in the future.
Therefore, if additional shares are issued by CBCT Bancshares, Inc.
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without the opportunity for existing stockholders to purchase more shares, a
stockholder's ownership interest in the Company may be subject to dilution. The
common stock is not subject to redemption.
Preferred Stock
None of the shares of CBCT Bancshares, Inc.'s authorized preferred
stock will be issued in the conversion. This stock may be issued with
preferences and designations as the board of directors may from time to time
determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. CBCT Bancshares, Inc. has no present plans to issue preferred stock. If
preferred stock is issued in the future, CBCT Bancshares, Inc. will not offer
preferred stock to promoters except on the same terms as it is offered to all
other existing stockholders or to new stockholders; or the issuance will be
approved by a majority of CBCT Bancshares, Inc.'s independent directors who do
not have an interest in the transaction and who have access, at CBCT Bancshares,
Inc.'s expense, to its or independent legal counsel.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for CBCT Bancshares, Inc. common stock
is Computershare Trust Company, Inc., Lakewood, Colorado.
EXPERTS
Our consolidated financial statements for the year ended December 31,
1999 included in this prospectus have been audited by the independent accounting
firm of Padgett, Stratemann & Co., L.L.P. Our consolidated financial statements
for the years ended December 31, 1998 and 1997 have been audited by the
independent accounting firm Seidel Schroeder & Company. As set forth in their
reports appearing elsewhere herein and in the registration statement, and are
included in reliance upon the reports of these firms given upon their authority
as experts in accounting and auditing.
Ferguson & Company has consented to the publication herein of the
summary of its report to Community Bank setting forth its opinion as to the
estimated pro forma market value of the common stock upon conversion and its
letter with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax
consequences of the conversion has been passed upon for Community Bank by
Silver, Freedman & Taff, L.L.P., Washington, D.C., special counsel to Community
Bank and CBCT Bancshares, Inc. The Texas income tax consequences of the
conversion will be passed upon for Community Bank by Padgett, Stratemann & Co.,
LLP. Certain legal matters will be passed upon for Keefe, Bruyette & Woods, Inc.
by Selman, Munson & Lerner, P.C., Austin, Texas.
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ADDITIONAL INFORMATION
CBCT Bancshares, Inc. has filed with the SEC a registration statement
under the Securities Act of 1933 with respect to the common stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus
does not contain all the information set forth in the registration statement.
This information, including the appraisal report which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of this material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including CBCT Bancshares,
Inc. The statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement
are, of necessity, brief descriptions thereof and are not necessarily complete;
each statement is qualified by reference to the contract or document. Community
Bank also maintains a website (www.cbank1.com) which contains various
information about Community Bank.
In connection with the conversion, CBCT Bancshares, Inc. has registered
its common stock with the SEC under Section 12 of the Securities Exchange Act of
1934, and, upon such registration, CBCT Bancshares, Inc. and the holders of its
stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and other requirements of the Securities Exchange Act of 1934. Under the plan of
conversion, CBCT Bancshares, Inc. has undertaken that it will not terminate this
registration for a period of at least three years following the conversion.
A copy of the plan of conversion, the articles of incorporation, the
charter and bylaws of CBCT Bancshares, Inc. and Community Bank and the
conversion appraisal report of Ferguson and Company are available without charge
from Community Bank. Requests for such information should be directed to:
Stockholder Relations, Community Bank, 312 Main Street, Smithville, Texas 78957
at (512) 237-2482.
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COMMUNITY BANK OF CENTRAL TEXAS, ssb
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report of Padgett, Stratemann & Co...................F-2
Independent Auditors' Report of Seidel Schroeder & Company.................F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998...............F-4
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997........................................... 48
Consolidated Statements of Changes in Equity Capital for the Years Ended
December 30, 1999, 1998 and 1997.........................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.........................................F-6
Notes to Consolidated Financial Statements.................................F-8
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999....................................................F-26
Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999 (unaudited) ..................................... 48
Consolidated Statements of Changes in Equity for the Three Months Ended
March 31, 2000 and 1999 (unaudited) .....................................F-27
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (unaudited) .....................................F-28
Notes to Unaudited Consolidated Financial Statements.......................F-29
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of CBCT Bancshares, Inc. have been omitted
because CBCT Bancshares, Inc. has not yet issued any stock, has no assets or
liabilities, and has not conducted any business other than that of an
organizational nature.
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Community Bank of Central Texas and Subsidiary
Smithville, Texas
We have audited the accompanying consolidated balance sheet of Community Bank of
Central Texas and Subsidiary as of December 31, 1999, and the related
consolidated statements of income, changes in equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Community Bank of Central Texas and Subsidiary for the years ended December
31, 1998 and 1997 were audited by other auditors whose report, dated February
19, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bank of
Central Texas and Subsidiary as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Padgett, Stratemann & Co.
Certified Public Accountants
San Antonio, Texas
January 13, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Community Bank of Central Texas and Subsidiary
Smithville, Texas
We have audited the accompanying consolidated statements of financial conditions
of Community Bank of Central Texas and Subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bank of
Central Texas and Subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ SEIDEL SCHROEDER & COMPANY
February 19, 1999
Brenham, Texas
F-3
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets
1999 1998
---------------- --------------
<S> <C> <C>
Cash and cash equivalents:
Cash and noninterest bearing due from banks $ 561,388 $ 96,349
Interest bearing due from banks 1,691,432 2,853,510
------------- ------------
Total cash and cash equivalents 2,252,820 2,949,859
Securities available for sale 16,277,090 7,476,467
Securities to be held to maturity (fair value of $5,974,165 in 1998) - 6,013,250
Federal Home Loan Bank stock -- at cost 496,400 470,300
Loans held for sale 363,325 349,432
Loans -- net allowance for loan losses of $198,683
($180,697 in 1998) 21,693,104 20,890,237
Bank premises and equipment -- net 1,355,082 1,389,867
Accrued interest receivable 253,342 225,982
Prepaid expenses and other assets 141,959 63,954
------------- ------------
$ 42,833,122 $ 39,829,348
============= ============
Liabilities and Equity
Liabilities
Deposits:
Noninterest bearing $ 377,094 $ 199,805
Interest bearing 31,977,075 31,937,934
------------- ------------
Total deposits 32,354,169 32,137,739
Advances from borrowers for taxes and insurance 46,810 39,230
Advances from Federal Home Loan Bank 7,392,134 4,000,000
Accrued interest payable and other liabilities 40,710 309,209
------------- ------------
Total liabilities 39,833,823 36,486,178
Equity
Retained earnings 3,213,922 3,046,240
Accumulated other comprehensive income (loss) (214,623) 296,930
------------- ------------
Total equity 2,999,299 3,343,170
------------- ------------
$ 42,833,122 $ 39,829,348
============= ============
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
F-4
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Statements of Changes in Equity
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
--------------- ------------------ ----------
<S> <C> <C> <C>
Balance at January 1, 1997 $2,658,243 $138,675 $2,796,918
Comprehensive income:
Net income -- year ended December 31, 1997 175,693 - 175,693
Change in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect - 54,341 54,341
---------- -------- ----------
Total comprehensive income 175,693 54,341 230,034
---------- -------- ----------
Balance at December 31, 1997 2,833,936 193,016 3,026,952
Comprehensive income:
Net income -- year ended December 31, 1998 212,304 - 212,304
Change in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effect - 103,914 103,914
---------- -------- ----------
Total comprehensive income 212,304 103,914 316,218
---------- -------- ----------
Balance at December 31, 1998 3,046,240 296,930 3,343,170
Comprehensive income:
Net income -- year ended December 31, 1999 167,682 - 167,682
Change in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effect - (511,553) (511,553)
---------- -------- ----------
Total comprehensive income (loss) 167,682 (511,553) (343,871)
---------- -------- ----------
Balance at December 31, 1999 $3,213,922 $ (214,623) $2,999,299
========== ======== ==========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
F-5
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 167,682 $ 212,304 $ 175,693
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 107,437 77,123 60,814
Net gains on sales of securities (76,091) (30,396) -
Provision for loan losses - - 3,253
Deferred income taxes 12,265 (1,136) 19,940
Federal Home Loan Bank stock dividends (26,100) (26,800) (25,300)
Net change in:
Loans held for sale (13,893) (341,516) -
Accrued interest receivable and other assets (80,580) (781) (4,171)
Accrued interest payable and other liabilities (35,016) (29,337) 90,315
Other -- net 1,975 (49,944) (18,494)
------------ ------------ ------------
Net cash provided by (used in) operating activities 57,679 (190,483) 302,050
------------ ------------ ------------
Cash Flows From Investing Activities
Net change in interest-bearing deposits in banks - 500,000 (500,000)
Activity in available-for-sale securities:
Sales 1,867,884 224,917 -
Maturities and prepayments 2,217,707 566,965 534,854
Purchases (4,227,401) (5,299,211) -
Activity in held-to-maturity securities:
Maturities and prepayments 1,465,074 1,724,214 1,179,565
Purchases (4,853,824) (993,750) -
Loan originations and collections -- net (784,907) 489,753 (3,247,863)
Capital expenditures (47,815) (353,585) (45,057)
Proceeds from sale of foreclosed assets - - 16,226
------------ ------------ ------------
Net cash used in investing activities (4,363,282) (3,140,697) (2,062,275)
------------ ------------ ------------
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
F-6
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net change in deposits $ 216,430 $1,916,786 $ 241,104
Proceeds of Federal Home Loan Bank advances 4,000,000 4,000,000 -
Repayment of Federal Home Loan Bank advances (607,866) - -
Other -- net - (6,864) (12,240)
----------- ---------- -----------
Net cash provided by financing activities $ 3,608,564 $5,909,922 $ 228,864
----------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents (697,039) 2,578,742 (1,531,361)
Cash and cash equivalents at beginning of year 2,949,859 371,117 1,902,478
----------- ---------- -----------
Cash and cash equivalents at end of year $ 2,252,820 $2,949,859 $ 371,117
=========== ========== ===========
Schedules of Other Cash Flow Information
Interest paid on deposits and borrowed funds $ 1,882,031 $1,544,909 $ 1,484,138
=========== ========== ===========
Income taxes paid (refunded) $ 118,614 $ 128,804 $ (17,983)
=========== ========== ===========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
F-7
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Community Bank of Central Texas (Bank)
and its wholly-owned subsidiary, Central State Service Corporation, conform to
generally accepted accounting principles and to general practices within the
banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of other real estate owned and deferred tax assets. Following is a
summary of the Bank's more significant accounting and reporting policies:
Organization and Charter
The Bank is chartered in the state of Texas as a state savings bank. It is
currently organized as a mutual form of organization, so it does not have any
stock investors or ownership. However, the Bank plans to convert to a stock
company in 2000 (see note 14).
Comprehensive Income
The Bank adopted SFAS No. 130, Reporting Comprehensive Income, as of January 1,
1998. Accounting principles generally require that recognized revenue, expenses,
and gains and losses be included in net income. Although changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on the Bank's
net income or equity.
Consolidation
The consolidated financial statements include the accounts of the Bank and its
wholly-owned subsidiary, Central State Service Corporation. Central State
Service Corporation was formed to engage in securities brokerage activities
through a third party. Effective in December 1998, these activities were
transferred to the Bank's accounts and the subsidiary became inactive. All
significant intercompany balances and transactions have been eliminated in
consolidation.
F-8
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Business
The Bank provides a variety of financial services to individuals and small
businesses through its office in Smithville, Texas. Its primary deposit products
are savings and term certificate accounts, and its primary lending products are
residential mortgage loans, commercial real estate loans, and consumer
installment loans.
Significant Group Concentrations of Credit Risk
Most of the Bank's activities are with customers located in Bastrop County,
Texas and surrounding counties. Note 2 discusses the types of securities in
which the Bank invests. Note 3 discusses the types of lending in which the Bank
engages. The Bank does not have any significant concentrations to any one
industry or customer.
Securities
The Bank's investments in securities are classified in three categories and
accounted for as follows:
Trading Securities. Government bonds held principally for resale in the
near term and mortgage-backed securities held for sale in conjunction with the
Bank's mortgage banking activities are classified as trading securities and
recorded at their fair values. Unrealized gains and losses on trading securities
are included in other income. The Bank did not have any securities classified as
trading during 1999 or 1998.
Securities to Be Held to Maturity. Bonds, notes, and debentures for
which the Bank has the positive intent and ability to hold to maturity are
reported at cost adjusted for amortization of premiums and accretion of
discounts, which are recognized in interest income using the interest method
over the period to maturity.
Securities Available for Sale. Securities available for sale are
recorded at fair value and consist of bonds, notes, and debentures not
classified as trading securities nor as securities to be held to maturity.
Unrealized holding gains and losses on securities available for sale are
excluded from earnings and reported in other comprehensive income, net of tax
effect. Gains and losses on the sale of securities available for sale are
determined using the specific-identification method and are included in
earnings. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
F-9
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Securities (continued)
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value.
The related write-downs are included in earnings as realized losses.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future, or until maturity or payoff, are reported at their outstanding principal
adjusted for any charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans.
Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well secured and in
process of collection. Consumer loans are typically charged off no later than
120 days past due. In all cases, loans are placed on nonaccrual or charged off
at an earlier date if collection of principal or interest is considered
doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
F-10
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
F-11
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Servicing
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into noninterest income in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the
extent that fair value is less than the capitalized amount for the stratum.
Bank Premises and Equipment
Land is carried at cost. Bank premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is recognized on straight-line and
accelerated methods over the estimated useful lives of the assets. The estimated
useful lives range from 3 to 30 years.
Pension Costs and Postretirement Benefits
Pension costs under the Bank's 401(k) plan are charged to salaries and employee
benefits expense and are funded as accrued.
The Bank does not have any postretirement benefit obligations.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets.
F-12
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws.
Cash and Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents include cash and noninterest and interest bearing due from
banks.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit under mortgage,
construction, and consumer line of credit loans. Such financial instruments are
recorded in the consolidated financial statements when they are funded or
related fees are incurred or received.
Derivative Financial Instruments
The Bank does not utilize derivative financial instruments as part of its
asset/liability management.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
Upon completion of a transfer of a financial asset, the Bank continues to carry
on its balance sheet any retained interests in the transferred asset, including
servicing assets. Allocation of carrying amount between the assets sold and
retained is based on their fair values at the date of transfer.
Transfers recorded as sales result in the asset being derecognized from the
balance sheet. Gain or loss on the sale is recognized in current earnings based
on the proceeds of the sale, which can include cash and other assets measured at
their fair values at the date of receipt.
F-13
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
Reclassifications
Certain amounts have been reclassified from prior presentations at December 31,
1998 and 1997 to conform to classifications at December 31, 1999. There is no
effect on previously reported net income or retained earnings.
2. Investment Securities
The amortized cost and fair value of securities, with gross unrealized gains and
losses, follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
State and municipal $ 145,000 $ 2,938 $ - $ 147,938
Mortgage-backed 16,452,470 2,097 556,602 15,897,965
----------- -------- -------- -----------
Total debt securities 16,597,470 5,035 556,602 16,045,903
Marketable equity securities 4,806 226,381 - 231,187
----------- -------- -------- -----------
$16,602,276 $231,416 $556,602 $16,277,090
=========== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Securities Available for Sale
<S> <C> <C> <C> <C>
Debt securities:
Mortgage- backed $ 7,020,379 $ 34,811 $ 24,118 $ 7,031,072
Marketable equity securities 6,768 438,627 - 445,395
----------- -------- -------- -----------
$ 7,027,147 $473,438 $ 24,118 $ 7,476,467
=========== ======== ======== ===========
Securities to Be Held to
Maturity
Debt securities:
State and municipal $ 175,000 $ - - $ 175,000
Mortgage-backed 5,838,250 7,806 46,891 5,799,165
----------- -------- -------- -----------
$ 6,013,250 $ 7,806 $ 46,891 $ 5,974,165
=========== ======== ======== ===========
</TABLE>
F-14
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
2. Investment Securities (continued)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1999 follows:
Amortized Fair
Cost Value
----------- -----------
Within one year $ 35,000 $ 35,365
Over one year through five years 110,000 112,573
----------- -----------
145,000 147,938
Mortgage-backed securities 16,452,470 15,897,965
----------- -----------
$16,597,470 $16,045,903
=========== ===========
None of the Bank's investment securities were pledged at December 31, 1999 or
1998.
For the years ended December 31, 1999, 1998, and 1997, proceeds from sales of
securities available for sale amounted to $1,867,884, $224,917, and $0,
respectively. Gross realized gains amounted to $126,091, $30,396, and $0,
respectively. Gross realized losses amounted to $50,000, $0, and $0,
respectively. The tax provision applicable to these net realized gains and
losses amounted to $25,871, $10,335, and $0, respectively.
During the year ended December 31, 1999, the Bank adopted the provisions of FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
In connection with the adoption, the Bank transferred all of its investment
securities classified as held-to-maturity to the available-for-sale category. At
the date of transfer, the securities transferred had an amortized cost of
$9,412,000, a fair value of $9,254,000, and an unrealized loss of $158,000. The
transfer was made to increase the ability of the Bank to manage its investments
securities portfolio in order to achieve its asset/liability management goals.
The adoption of FASB Statement No. 133 did not affect any other accounting
policies of the Bank.
F-15
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
3. Loans and Allowance for Loan Losses
A summary of the balances of loans follows:
December 31,
1999 1998
----------- -----------
Mortgage loans on real estate:
Residential 1-4 family $12,068,681 $14,009,636
Commercial 3,582,000 2,940,000
Construction 2,343,987 1,716,102
Second mortgages - 13,776
Equity lines of credit 127,000 68,000
----------- -----------
18,121,668 18,747,514
Commercial loans 412,825 -
Consumer installment loans 4,353,523 3,294,975
----------- -----------
22,888,016 22,042,489
Less:
Allowance for loan losses 198,683 180,697
Unadvanced loan funds 953,911 932,279
Net deferred loan fees 42,318 39,276
----------- -----------
$21,693,104 $20,890,237
=========== ===========
At December 31, 1999 and 1998, the Bank's loans secured by 1-4 family residences
were pledged as collateral for advances received from the Federal Home Loan Bank
(see note 8).
F-16
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
3. Loans and Allowance for Loan Losses (continued)
An analysis of the allowance for loan losses follows:
Years Ended December 31,
1999 1998 1997
-------- -------- -------
Balance at beginning of year $180,697 $157,345 $157,149
Provision for loan losses - - 3,253
Loans charged off (12,305) - (3,057)
Recoveries of loans previously charged off 30,291 23,352 -
-------- -------- -------
Balance at end of year $198,683 $180,697 $157,345
======== ======== ========
At December 31, 1999 and 1998, the Bank had loans of $0 and $18,726,
respectively, that were classified as impaired without a valuation allowance.
During 1999, 1998, and 1997, the average balance of these loans was $0, $19,006,
and $19,547, respectively. During 1999, 1998, and 1997, interest income was
recognized on a cash basis on these loans amounting to $0, $1,380, and $1,302,
respectively.
Loans on which the accrual of interest has been discontinued amounted to $60,000
and $86,687 as of December 31, 1999 and 1998, respectively, for which impairment
has not been recognized. If interest on the loans had been recognized at the
original interest rates, interest income would have increased $1,475, $3,055,
and $862 for the years ended December 31, 1999, 1998, and 1997, respectively.
No additional funds are committed to be advanced in connection with impaired or
nonaccrual loans.
4. Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of mortgage and other loans
serviced for others was $5,278,102 and $2,971,334 at December 31, 1999 and 1998,
respectively.
F-17
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
4. Servicing (continued)
The balance of capitalized servicing rights included in prepaid expenses and
other assets at December 31, 1999 and 1998 was $72,753 and $39,910,
respectively. There is no valuation allowance related to these amounts. The fair
value of these rights approximates their book value, using fair value
calculations with a discount rate of 8% and an estimated life of seven years.
For the years ended December 31, 1999 and 1998, $43,053 and $41,874 of servicing
rights were capitalized, respectively, and amortization was $10,210 and $1,964,
respectively. There were no servicing rights capitalized or amortized during the
year ended December 31, 1997.
5. Bank Premises and Equipment
Components of bank premises and equipment included in the consolidated balance
sheets were as follows:
December 31,
1999 1998
---------- ----------
Land $ 336,054 $ 336,054
Buildings 1,072,324 1,072,908
Equipment and furniture 282,678 260,991
---------- ----------
1,691,056 1,669,953
Less accumulated depreciation 335,974 280,086
---------- ----------
$1,355,082 $1,389,867
========== ==========
Depreciation expense for the years ended December 31, 1999, 1998, and 1997
amounted to $65,363, $52,221, and $45,408, respectively.
The Bank did not have any significant long-term lease obligations at December
31, 1999.
F-18
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
6. Foreclosed Assets
The Bank had no other real estate owned or other foreclosed assets at December
31, 1999 or 1998.
7. Deposits
The aggregate amount of certificates of deposit (CDS), each with a minimum
denomination of $100,000, was $2,899,244 at December 31, 1999 ($3,004,735 in
1998).
At December 31, 1999 the scheduled maturities of CDS are as follows:
Year ending December 31,
2000 $20,364,855
2001 3,598,777
2002 1,391,401
-----------
$25,355,033
===========
8. Advances From Federal Home Loan Bank
Advances received from the Federal Home Loan Bank are at fixed interest rates
that range from 4.97% to 5.44%. Advances are received pursuant to a collateral
pledge and security agreements giving the Federal Home Loan Bank a security
interest in the Bank's loans secured by 1-4 family residences.
At December 31, 1999, the scheduled repayments of principal due on outstanding
advances are as follows:
Year ending December 31,
2000 $ 2,954,037
2001 2,007,229
2002 2,063,389
2003 367,479
------------
$ 7,392,134
============
F-19
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
9. Federal Income Tax
The provision for federal income tax consisted of the following:
Years Ended December 31,
1999 1998 1997
------- ------- -------
Currently paid or payable $58,843 $91,754 $66,400
Deferred 12,265 (1,136) 19,940
------- ------- -------
$71,108 $90,618 $86,340
======= ======= =======
The provision for federal income tax is less than that computed by applying the
federal statutory rate of 34% as indicated in the following analysis:
Years Ended December 31,
1999 1998 1997
------- -------- -------
Tax based on statutory rate $81,188 $102,993 $89,091
Effect of tax-exempt income (12,886) (9,657) (4,191)
Interest and other nondeductible expenses 2,042 1,083 664
Other -- net 764 (3,801) 776
------- -------- -------
$71,108 $ 90,618 $86,340
======= ======== =======
F-20
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
9. Federal Income Tax (continued)
The components of the deferred income tax asset (liability) included in other
assets and liabilities were as follows:
December 31,
------------------------------
1999 1998
Deferred tax assets related to: -------------- ---------------
Allowance for loan losses $ 90,673 $ 89,332
Loan origination fees and costs 12,433 12,482
Net unrealized depreciation on securities
available for sale 110,563 -
---------- ----------
213,669 101,814
Less valuation allowance 89,332 89,332
---------- ----------
Total deferred tax assets 124,337 12,482
---------- ----------
Deferred tax liabilities related to:
Depreciation (21,701) (19,491)
Cash method of accounting for tax purposes (79,096) (66,564)
Net unrealized appreciation on securities
available for sale - (152,389)
Other (11,020) (12,205)
---------- ----------
Total deferred tax liabilities (111,817) (250,649)
---------- ----------
Net deferred tax asset (liability) $ 12,520 $ (238,167)
========== ==========
The deferred tax asset related to the allowance for loan losses has been reduced
by a valuation allowance as it has been determined it is more likely than not
that a significant portion of this deferred tax asset will not be realized. This
determination was made based on an analysis of the temporary differences
relating to the allowance for loan losses and their expected reversal in future
years.
The deferred tax asset valuation allowance decreased by $1,039 during the year
ended December 31, 1998.
F-21
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
10. Off-Balance Sheet Activities
The Bank is a party to credit related financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
under mortgage and construction loan agreements and consumer lines of credit.
Such commitments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual amount of
these commitments. The Bank follows the same credit policies in making
commitments as it does for on-balance sheet instruments.
The following commitments to extend credit were outstanding:
December 31,
1999 1998
---------- ----------
Real estate:
Fixed rate $1,412,441 $2,140,397
Variable rate 1,036,860 1,159,667
Consumer 49,045 110,214
---------- ----------
$2,498,346 $3,410,278
========== ==========
Amounts expected to be sold in the
secondary mortgage market $1,070,902 $1,433,157
========== ==========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held is usually first-lien
residential mortgage property.
The Bank did not have any letters of credit outstanding at December 31, 1999 and
1998.
F-22
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
11. Related Party Transactions
In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates (related parties) amounting to
$321,356 at December 31, 1999 and $346,243 at December 31, 1998. During the year
ended December 31, 1999, total principal additions were $91,138 and total
principal payments were $116,025.
Deposits from related parties held by the Bank at December 31, 1999 amounted to
$363,966.
Amounts paid to related parties for products and services were $18,831, $3,964,
and $354 for the years ended December 31, 1999, 1998, and 1997, respectively.
12. Employee Benefits
The Bank has a 401(k) plan for the benefit of substantially all employees. The
Bank's contribution is determined annually by the Board of Directors. The Bank
contributed $4,919, $6,033, and $6,323 to the plan for the years ended December
31, 1999, 1998, and 1997, respectively.
13. Minimum Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by
federal and state banking agencies. Failure to meet minimum capital requirements
can initiate mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999 and 1998, that
the Bank met all capital adequacy requirements to which it is subject.
F-23
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
13. Minimum Regulatory Capital Requirements (continued)
As of December 31, 1999, the most recent notification from the regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the following tables. There are no conditions or events
since the notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios as of December 31, 1999
and 1998 are also presented in the table.
<TABLE>
<CAPTION>
Minimum
to Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
-------------------- ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ------------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total Capital to Risk-
Weighted Assets $3,412,000 15.9% $1,715,000 8.0% $2,143,600 10.0%
Tier 1 Capital to Risk-
Weighted Assets $3,214,000 15.0% $857,000 4.0% $1,286,000 6.0%
Tier 1 Capital to Average
Assets $3,214,000 7.8% $1,653,000 4.0% $2,066,500 5.0%
December 31, 1998:
Total Capital to Risk-
Weighted Assets $3,402,000 18.7% $1,456,000 8.0% $1,820,000 10.0%
Tier 1 Capital to Risk-
Weighted Assets $3,042,000 16.7% $728,000 4.0% $1,092,000 6.0%
Tier 1 Capital to Average
Assets $3,042,000 8.6% $1,414,000 4.0% $1,768,000 5.0%
</TABLE>
F-24
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Consolidated Financial Statements
14. Pending Conversion to a Stock Company
In December 1999, the Board of Directors of the Bank approved a plan of
conversion from a mutual savings bank to a capital stock bank. The transaction
is subject to approval by the various regulatory agencies. If approved, the Bank
expects to conduct a stock offering during the second quarter of 2000.
F-25
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
(Unaudited)
March 31, December 31,
2000 1999
--------- ---------
(Dollars in Thousands)
ASSETS
Cash and non-interest due from banks $ 120 $ 561
Interest bearing due from banks 14,948 1,692
Total cash and cash equivalents 15,068 2,253
Securities available for sale 398 16,277
Federal Home Loan Bank stock 504 497
Loans held for sale -- 363
Loans - net of allowance for loan losses 22,688 21,693
Bank premises and equipment - net 1,318 1,355
Accrued interest receivable 166 253
Prepaid expenses and other assets 514 142
--------- ---------
$ 40,656 $ 42,833
========= =========
LIABILITIES AND EQUITY
Deposits:
Noninterest bearing $ 635 $ 377
Interest bearing 29,797 31,977
--------- ---------
Total deposits 30,432 32,354
Advances from borrowers for taxes and insurance 165 47
Advances from Federal Home Loan Bank 7,157 7,392
Accrued interest payable and other liabilities 93 41
--------- ---------
Total liabilities 37,847 39,834
--------- ---------
Equity:
Retained earnings 2,667 3,214
Accumulated other comprehensive income (loss) 142 (215)
--------- ---------
Total equity 2,809 2,999
--------- ---------
$ 40,656 $ 42,833
========= =========
See Notes to Unaudited Consolidated Financial Statements.
F-26
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Statements of Changes in Equity
Quarters Ended March 31, 2000 and 1999
(Unaudited)
Accumulated
Retained Other Comp.
Earnings Income(Loss) Total
--------- --------- ---------
(Dollars in Thousands)
Three Months Ended March 31, 2000
Balance, beginning of period $ 3,214 $ (215) $ 2,999
Comprehensive income:
Net income (loss) (547) -- (547)
Change in net unrealized loss on securities
available for sale, net of reclassification
adjustment and tax effect -- 357 357
--------- --------- ---------
Total comprehensive income (loss) -- -- (190)
--------- --------- ---------
Balance, end of period $ 2,667 $ 142 $ 2,809
========= ========= =========
Three Months Ended March 31, 1999
Balance, beginning of period $ 3,046 $ 297 $ 3,343
Comprehensive income:
Net income 43 -- 43
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effect -- (55) (55)
--------- --------- ---------
Total comprehensive income (loss) -- -- (12)
--------- --------- ---------
Balance, end of period $ 3,089 $ 242 $ 3,331
========= ========= =========
See Notes to Unaudited Consolidated Financial Statements.
F-27
<PAGE>
Community Bank of Central Texas and Subsidiary
Consolidated Statements of Cash Flows
Quarters Ended March 31, 2000 and 1999
(Unaudited)
March 31, March 31,
2000 1999
------- -------
(Dollars in Thousands)
Cash Flows From Operating Activities
Net income $ (547) $ 43
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 43 16
Net securities losses 866 --
Provision for loan losses 7 --
Deferred income taxes (173) 3
Stock dividend income (7) (7)
Net change in:
Loans held for sale 363 350
Accrued interest receivable and other assets (112) (41)
Accrued interest payable and other liabilities (13) (19)
------- -------
Net cash provided by operating activities 427 345
------- -------
Cash Flows From Investing Activities
Activity in available-for-sale securities:
Sales 15,201 --
Maturities and prepayments 352 215
Purchases -- (225)
Activity in held-to-maturity securities:
Maturities and prepayments -- 947
Purchases -- (4,854)
Loan originations and collections - net (1,002) 581
Capital expenditures (6) (19)
------- -------
Net cash provided by (used in) investing activities 14,545 (3,355)
------- -------
Cash Flows From Financing Activities
Net change in deposits (1,922) 909
Proceeds of Federal Home Loan Bank advances -- 4,000
Repayment of Federal Home Loan Bank advances (235) --
------- -------
Net cash provided by (used in) financing activities (2,157) 4,909
------- -------
Net increase in cash and cash equivalents 12,815 1,899
Cash and cash equivalents - beginning of period 2,253 2,950
------- -------
Cash and cash equivalents - end of period $15,068 $ 4,849
======= =======
See Notes to Unaudited Consolidated Financial Statements.
F-28
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Unaudited Consolidated Financial Statements
1. General
The accounting and reporting policies of Community Bank of Central Texas, Inc.
(Bank) and its wholly-owned subsidiary, Central State Service Corporation,
conform to generally accepted accounting principles and to general practices
within the banking industry. The Bank has not changed its accounting and
reporting policies from those disclosed in its December 31, 1999 audited
financial statements and footnotes, and these consolidated financial statements
should be read in conjunction with those financial statements and footnotes.
In the opinion of the Bank's management, all adjustments necessary to fairly
present the consolidated financial position of the Bank at March 31, 2000 and
its consolidated income, changes in equity, and cash flows for the three months
then ended, all of which are of a normal and recurring nature, have been
included. The consolidated income and cash flows for the three months ended
March 31, 2000 should not be considered indicative of the results to be expected
for the full year.
During the quarter ended March 31, 2000, the Bank was actively proceeding with
its plan of conversion from a mutual savings bank to a capital stock bank. If
approved by the various banking and other regulatory agencies, the Bank intends
to conduct a stock offering during the second quarter of 2000.
2. Investment Securities
During the quarter ended March 31, 2000, the Bank sold a substantial amount of
its investment securities. At March 31, 2000, investment securities consisted of
the following (dollars in thousands):
Amortized Unrealized Approximate
Cost Gain (Loss) Fair Value
------- ------- -------
Debt securities:
State and municipal $ 145 $ 3 $ 148
Mortgage-backed 33 -- 33
Marketable equity securities 5 212 217
------- ------- -------
$ 183 $ 215 $ 398
======= ======= =======
F-29
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(Continued)
3. Loans and Allowance for Loan Losses
A summary of the balances of loans follows (dollars in thousands):
March 31, December 31,
2000 1999
-------------- --------------
Mortgage loans on real estate:
Residential 1-4 family $ 12,444 $ 11,764
Commercial 3,486 4,122
Construction 1,543 1,125
Consumer loans 5,468 4,923
------------ ------------
Gross loans 22,941 21,934
Unearned loan fees (47) (42)
Allowance for loan losses (206) (199)
------------ ------------
Net loans $ 22,688 $ 21,693
============ ============
The Bank did not have any loans classified as impaired or on non-accrual status
as of March 31, 2000.
4. Other Cash Flow Information
Other cash flow information for the quarters ended March 31, 2000 and 1999 is as
follows (dollars in thousands):
2000 1999
------ ------
Interest paid in cash $440 $440
==== ====
Income taxes paid in cash $ -- $ 21
==== ====
F-30
<PAGE>
Community Bank of Central Texas and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(Continued)
5. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
federal and state banking agencies. Management believes, as of March 31, 2000,
that the Bank met all capital adequacy requirements to which it is subject.
Amounts of capital and capital ratios are as follows (dollars in thousands):
March 31, December 31,
2000 1999
------------ ---------------
Equity capital per financial statement $ 2,809 $ 2,999
Tier 1 regulatory capital $ 2,660 $ 3,214
Total regulatory capital $ 2,961 $ 3,412
Equity capital to ending assets 6.91% 7.00%
Tier 1 regulatory capital to ending
adjusted total assets 6.57% 7.47%
Tier 1 regulatory capital to ending
risk-weighted assets 12.54% 14.99%
Total regulatory capital to ending
risk-weighted assets 13.96% 15.92%
F-31
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No person has been authorized to give any information or to make
any representation other than as contained in this prospectus in
connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as
having been authorized by CBCT Bancshares, Inc., Community
Bank or Keefe, Bruyette & Woods, Inc. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person in any jurisdiction in
which such offer or solicitation is not authorized or in which the UP TO
person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or 281,031 SHARES
solicitation in such jurisdiction. Neither the delivery of this
prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs
of CBCT Bancshares, Inc. or Community Bank since any of the
dates as of which information is furnished herein or since the date
hereof.
-------------- CBCT BANCSHARES, INC.
(Proposed Holding Company for
TABLE OF CONTENTS Community Bank of Central Texas, ssb)
Page
Summary............................................................... 3
Selected Financial and Other Data..................................... 9
Risk Factors.......................................................... 11
CBCT Bancshares, Inc.................................................. 13
Community Bank of Central Texas, ssb.................................. 14 COMMON STOCK
How We Intend to Use the Proceeds..................................... 14
Market for the Common Stock........................................... 16
Our Policy Regarding Dividends........................................ 17
Pro Forma Data........................................................ 18
Capitalization........................................................ 24 --------------
Community Bank Exceeds All Regulatory Capital PROSPECTUS
Requirements....................................................... 26 --------------
Community Bank's Conversion........................................... 27
Proposed Purchases by Management...................................... 47
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 49
Business of CBCT Bancshares, Inc...................................... 62 KEEFE, BRUYETTE & WOODS, INC.
Business of Community Bank............................................ 62
Management ........................................................... 83
How We Are Regulated.................................................. 90
Taxation.............................................................. 97 August 4, 2000
Restrictions on Acquisition of CBCT Bancshares, Inc.
and Community Bank................................................. 99
Description of Capital Stock of CBCT Bancshares, Inc.................. 103
Transfer Agent and Registrar.......................................... 105
Experts............................................................... 105
Legal and Tax Opinions................................................ 105
Additional Information................................................ 106
Index to Consolidated Financial Statements............................ F-1
Until the later of September 6, 2000 or 25 days after the
commencement of the public offering, if any, all dealers effecting
transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
</TABLE>
